MD150

TO MANAGING DIRECTORS OF ALL
WATER AND SEWERAGE COMPANIES AND
WATER ONLY COMPANIES

3 August 1999

INVESTMENT ON QUALITY AND TRADE EFFLUENT CHARGING

Continuing Quality Improvements

Water and sewerage companies are continuing to invest significantly to introduce a higher standard of wastewater treatment across England and Wales. These investments are required to comply with various legislation, most notably the Urban Wastewater Treatment Directive (UWWTD) and the Bathing Water Directive (BWD). In inland areas additional investments are also required to meet local River Quality Objectives (RQOs). These improvements in quality will continue after the 1999 Periodic Review.

In setting prices at the 1999 Periodic Review I will be making allowance in price limits for these investments in the wastewater service. However, these investments may limit the scope for reductions in trade effluent charges for many customers in the next quinquennium, as customers are required to meet the additional costs of treatment through the charges they pay.

In addition to this, there may be large step increases in trade effluent charges for some industrial customers as secondary and tertiary treatment capacity is added to their local works. Inevitably, the impact of such charge increases will differ across the country because of regional differences in programme costs, the timing of the resulting investments and the structure of local industry.

Evidence received by Ofwat suggests that some trade effluent customers are not being adequately forewarned by companies of future increases in their trade effluent bills – particularly where they are receiving treatment for the first time. Recently, I have seen several examples of largely unannounced increases (sometimes exceeding five-fold) in trade effluent bills when new/upgraded wastewater treatment works come on stream. In a number of these cases customers may have found it more cost effective to (pre)treat their own effluents – rather than continuing with their existing policy of discharging their high strength effluents direct to sewer.

Trade Effluent Charging Policy

I have a duty to ensure that trade effluent charges are not unduly discriminatory or unduly preferential. I take this to mean that trade effluent charges should be broadly cost reflective. In the consultation paper, Approval of Companies Charges Schemes in 2000-2001 issued in June 1999, I said that I intend to continue with such an approach. I am concerned, however, about the process through which higher charges – as a result of the rising standards of treatment already referred to - are signalled to existing and potential industrial customers.

In many cases it appears that these customers have not been prepared - either financially or technically - for these sudden and substantial bill increases. It seems to me that some water and sewerage companies may not be taking potential customer responses into account when designing the new/upgraded works. This is not acceptable – especially when the scale of these major investments and their likely impact on customers' bills should be known by companies well in advance.

All water and sewerage companies need to manage better the process of signalling to customers potential increases in trade effluent charges, and to continue to improve their understanding of customers' responses to these price signals. In particular, companies need to make better forecasts of future volumes and strengths of trade effluent to be treated – taking account of the impact of higher charges - as I am particularly concerned about the possible over-sizing of these new treatment facilities.

There appear to be significant regional differences in the processes used to introduce increases in trade effluent bills. I am therefore setting out my views on best practice.

Handling Trade Effluent Bill Increases

Appropriate price signals should be sent well in advance of the commissioning of any new/upgraded wastewater treatment works. I believe there are at least two points at which companies should do this:

• first, when the need for a new/upgraded wastewater treatment works is identified - but prior to detailed design; and
• secondly, at least 12 months prior to commissioning the new/upgraded works.

Companies could also undertake a demand survey to gauge the potential impact of charge increases on the nature and scale of future trade effluent discharges. Companies should then incorporate the results of the survey into their estimates of future demand, which will aid in the correct sizing of the new/upgraded works.

Many companies have introduced customer liaison staff to improve the exchange of information with their larger trade effluent customers. Some companies are also training their trade effluent officers so that they can double up as customer liaison officers for small and medium sized enterprises. Companies are also offering advice on pre-treatment to ensure that the trade effluent customer pays the lowest possible bill. I welcome such moves.

Signals at the second point could be given to all trade effluent customers likely to be affected, by companies sending a future indicative bill with an appropriate letter of explanation. This indicative bill should be based on the assumption that the new/upgraded works has been commissioned and is already operational, and incorporate the results of appropriate sampling/monitoring of future trade effluent loads.

If companies do not follow these steps I would expect some form of transitional relief to be offered to affected customers. For example, trade effluent charge increases could be capped for up to two years, following the commissioning of the works, or phased in over a similar period. However, rebalancing against other customers should not occur and any consequent loss of revenue should be borne directly by the water and sewerage companies concerned.

Role of the CSCs

With their regional knowledge of customers, the CSCs can play a significant role. To this end, I will be asking them to monitor:

• the extent to which trade effluent customers have been forewarned of potential bill increases;
• whether such customers have been asked to consider their potential response to the potential bill increases (eg to invest in cleaner technologies, wastewater recycling, pre-treatment etc); and
• whether such customers have been made aware of where they can obtain advice on how they might reduce the size of their future bills through the options noted above.

I C R Byatt