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Letters to Managing Directors
MD 196 26 August 2004 PROPOSED LICENCE MODIFICATION: TARIFF BASKET HEADROOM EFFECT In MD189 we consulted on various proposals to modify companies' licences. We received responses from WaterVoice, Water UK and most of the water companies. We reviewed these responses and summarised our conclusions in MD194. We said that we intended to write separately on the proposed modification to licence Condition B in respect of the tariff basket headroom effect. This letter sets out our conclusions on this issue. We explained in MD189 that licence Condition B operates in such a way that companies are able to increase charges to other customers when they introduce new, below average charges that add to the number of chargeable supplies. This is because price increases in the unmeasured basket are assessed according to changes in the 'average charge per chargeable supply'. We referred to this as the 'tariff basket headroom effect'. We proposed modifying licence Condition B to remove the headroom effect under these circumstances. Our proposal would not impact on the headroom effect that, for example, allows companies to increase charges when unmeasured customers with above average bills opt for a meter. Our proposal was to replace the definition of 'average charge per chargeable supply' with a new definition – the average charge per chargeable premises. Under the proposed new definition, the numerator, 'R', in the average charge calculation remained unchanged from the present definition. But we excluded from the denominator: 1) premises for which the appointee could charge only for surface water drainage; and 2) unoccupied premises for which the standard charge was less than that for occupied premises. Responses to the consultation All respondents who commented on this issue accepted the objective of our proposal. Most respondents also accepted our proposed approach to achieving that objective. However, two respondents identified problems with the detail of the proposed definition, including problems with defining what constitutes 'unoccupied premises'. Another respondent questioned whether the proposal would achieve Ofwat's objective without generating unintended consequences. Our conclusion We agree that the proposal in MD189 could have had unintended consequences. In particular, it would have generated a headroom effect if companies replaced a below-average charge to unoccupied premises with a charge equal to that for occupied premises. In order to address this problem, we propose a different modification. This would remove the headroom effect by treating the number of chargeable supplies consistently as between charging years and prior years. In effect, it would recognise that supplies subject to the new charge did exist previously, but were not subject to any charges previously. It is appropriate, therefore, to include such supplies in the average charge calculation for both the charging year and the prior year. Our proposed text is set out in the annex. Since the proposal differs from the one in MD189, the annex also provides two worked examples to illustrate its effect. The second worked example shows the effect of abolishing a charge for unmeasured unoccupied properties. In this case, a company would, in principle, be able to rebalance its charges to recover from other customers the revenue previously recovered from customers who have unoccupied properties. However, if any company were to consider abolishing charges to unoccupied properties, we would ask it to consider how such a proposal could be justified under Condition E, which requires that companies' charges are neither unduly preferential nor unduly discriminatory We are conscious that companies' existing policies in relation to charging unoccupied properties vary greatly. We think that it is appropriate to review this area of charging, in consultation with the industry and with customer groups. We will take this work forward in due course. As with our earlier proposal, this revised proposal would not impact on the headroom effect that, for example, allows companies to increase charges when unmeasured customers with above average bills opt for a meter. We do not intend to make this modification to the licences of Albion Water or Cholderton Water. Next steps MD189 did not cover the revised tariff basket headroom modification. We do not expect this modification to be controversial. However, if companies do have any further comments, they should raise them by 30 September 2004, addressing them to: Paul Hope Head of Tariffs Office of Water Services Centre City Tower 7 Hill Street Birmingham B5 4UA e-mail: paul.hope@ofwat.gsi.gov.uk We will then write to companies individually to confirm the specific changes we intend to make to their licences (in the light of both this letter and MD194), and to obtain their formal consent to those changes. We will then issue section 13 WIA91 notices, formally notifying companies of the changes. The modifications will take effect from 1 April 2005. PHILIP FLETCHER  |
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