RD27/00
TO THE REGULATORY DIRECTORS OF ALL
WATER ONLY COMPANIES AND ALL WATER
AND SEWERAGE COMPANIES
13 December 2000
Dear Regulatory Director
2001-02 PRINCIPAL STATEMENT
This letter contains guidance on how to prepare the 2001-02 Principal Statement, Special Agreement and Large User Information Capture Systems.
Separately named letters on Ofwat's requirements for the content of final Charges Schemes for 2001-02 have been sent to Regulatory Directors.
Arrangements for Receipt
As you are aware, under the existing licence arrangements, the deadline for receipt of your Principal Statement is 31 January each year. However, if you submit your 2001-02 Principal Statement and Charges Scheme after 15 January 2001 it may not be possible for the Director to give approval to your Charges Scheme and to agree your Principal Statement by 15 February 2001.
Accordingly, we expect receipt of your Principal Statement, Special Agreement and Large User Information Capture Systems, and your Charges Scheme for 2001-02, by no later than 5pm on Monday 15 January 2001.
Your completed Information Capture Systems should be submitted both in hard copy and on the enclosed diskette. It would be helpful if you could provide us with four hard copies (unbound) of your submission. Please address your submissions to Ms Bianca Mahoney, Executive Support Manager.
Your Auditor's Report and, where appropriate, Reporter's Report should reach Ms Bianca Mahoney by no later than 5pm on Monday 22 January 2001.
Retail Price Index
The relevant values of the All Items Retail Price Index, Licence Condition B (paragraph 3/4), are as follows:
November 1999 166.7
November 2000 172.1
giving an entered annual increase of 3.24%, correct to 2 decimal places. The RPI values have been incorporated on the diskette copy of the Principal Statement.
Removal of Large Users from the Tariff Basket
As you are aware regulations laid by DETR Ministers on 20 July 2000 came into force on 17 August 2000. These lowered the threshold for inset appointments, contained in Section 7(5)(a) of the Water Industry Act 1991, from the previous limit of not less than 250 megalitres (Ml) per year to not less than 100 megalitres per year, for companies in England.
The wording of the amended licence condition accepted by all other companies in 1999 and by Sutton and East Surrey Water in July 2000 allows for an automatic amendment upon the coming into effect of any regulation made under Section 7(6) of Water Industry Act 1991, redefining the inset threshold. Therefore, from the Charging Year 2001-02 any charges made for large users (premises supplied with not less than 100Ml of water per year) will be treated as "Excluded Charges" and so be excluded from the tariff basket. For companies in Wales (Dwr Cymru and Dee Valley Water), the threshold has remained unchanged at not less than 250Ml per year.
The procedure to be followed for the removal of large users from the tariff basket is set out in the attached Annex G.
Assessed Charge
The prior year charge multiplier (1 December 1999) for the assessed charge has been downloaded from last year's Principal Statement. For companies that introduced an assessed charge in 2000-01, this figure should not be revised to reflect actual take-up during the year.
You should enter actual take-up as at 1 December 2000 for the charging year charge multiplier, consistent with the rules set out in Condition B of the licence for the working of the unmeasured basket.
New Optional Measured Tariffs (introduced on or after 1 April 2000)
Last year's Principal Statement RD letter (RD 25/99) set out a requirement for companies to re-enter the charges and weights for the vulnerable group tariff and the surface water drainage rebate for measured customers in the 2001-02 Principal Statement in order to correct for any over or underestimates of take-up in the 2000-01 Principal Statement.
However, in order to address concerns raised by some water and sewerage companies regarding likely revenue losses resulting from forecast take-up in 2001-02, companies will additionally be permitted to enter a take-up estimate for the charging year in their 2001-02 Principal Statement. Guidance on this is set out in Annex C(ii).
Companies will also be permitted to enter a take-up estimate in the 2002-03 Principal Statement (and for subsequent years) if take-up is expected to increase further.
The procedure for entering an estimate for the charging year is optional. Companies may choose to follow the guidance set out in last year's Principal Statement RD letter (RD 25/99) ie correct for any over or underestimates of take-up only.
The guidance set out in Annex C(ii) explains how companies should correct any previous over or underestimate and also how they may enter an estimate of take-up for the charging year. The worked example set out in Annex C(ii) relates to the vulnerable group tariff, although a similar procedure should be followed for the surface water drainage rebate for measured customers and other new optional measured tariffs.
We do not propose to apply the above to optional measured tariffs already in existence at 1 April 2000, introduced under older tariff basket rules, unless the figures in companies' tariff action plans prove significantly wrong.
If companies require advice on whether a particular tariff constitutes a new optional measured tariff they should contact Anna Hayes or myself.
The procedure set out above will apply to corrections of take-up estimates for 2000-01 and for future years. No materiality or significancy thresholds have been set.
Some companies have asked whether a similar mechanism to that described above should not be applied to new tariffs in the unmeasured basket (in particular surface water rebates).
Although the appropriate weighting year revenue rules set out in Condition B of the licence for the measured basket may be open to interpretation, the licence is quite clear on how the average charge per chargeable supply should be calculated in the unmeasured basket. The licence requires that the average charge per chargeable supply for both the prior year and the charging year should be calculated from the number of chargeable supplies as at 1 December for the prior year and for the charging year.
In addition, due its differing structure, the unmeasured basket contains a built in correction mechanism in order to maintain a constant average charge per chargeable supply. This is also broadly symmetrical. Further, where companies made forecasts in 2000-01 when they introduced new tariffs in the unmeasured basket these are likely to have exceeded actual take-up. This effect is likely to outweigh any one off losses resulting from the use of a 1 December 2000 take-up figure to set charges for 2001-02. For this reason we do not consider that the use of 1 December charge multipliers is likely to give rise to any material issues in 2001-02.
Vulnerable Group Tariff for 2001-02
Level of Tariff
The level of the vulnerable group tariff should be set at the forecast average household bill for 2001-02.
Average Level of Saving
It is unlikely that companies will yet have sufficient information on the actual level of savings achieved by customers paying on the basis of the vulnerable group tariff. Companies should therefore continue to apply the average saving assumptions set out in Ofwat's December 1999 named letters to Regulatory Directors.
Re-entry of the Vulnerable Group Tariff in 2001-02
As set out above, companies will be expected to re-enter the vulnerable group tariff in 2001-02 in order to correct for any over or underestimate of take-up in the 2000-01 Principal Statement.
However, in order to protect companies from revenue losses resulting from additional customers successfully applying for the vulnerable group tariff in 2001-02, companies may, if they wish, enter a take-up estimate for the forthcoming charging year in their 2001-02 Principal Statement.
We would not expect the forecast of take-up for the charging year 2001-02 to exceed the likely take-up for 2000-01.
Further guidance on how to re-enter the vulnerable group tariff is set out in Annex C(ii).
Provision of Surface Water Drainage Rebates
Year of introduction – 2000-01
Measured basket
As set out above, companies will be expected to re-enter the surface water drainage rebate scheme in 2001-02 in order to correct for any over or underestimate of take-up in the 2000-01 Principal Statement.
However, in order to protect companies from revenue losses resulting from additional customers applying for a surface water rebate in 2001-02, companies may, if they wish, enter a take-up estimate for the forthcoming charging year in the 2001-02 Principal Statement. Companies should follow the procedure set out for the vulnerable group tariff in Annex C(ii).
Unmeasured basket
The prior year charge multiplier (1 December 1999) for the surface water drainage rebate scheme has been downloaded from last year's Principal Statement. This figure should not be revised to reflect actual take-up.
Companies should enter actual take-up as at 1 December 2000 for the charging year charge multiplier, consistent with the provisions of the licence as set out in Condition B for the working of the unmeasured basket.
Year of introduction – 2001-02
Where companies are providing, for the first time in 2001-02, surface water drainage rebates, either for household or non-household customers, they should follow the guidance set out below:
Measured basket
Companies should enter the rebate as a new tariff (even if it is offered only as a rebate), following the rules set out in Annex C(ii) for the treatment of new charges.
In order to give companies some protection against revenue losses from underestimating the take-up of the rebate in 2001-02, companies will be allowed to re-enter the tariff in 2002-03 to correct for any underestimate. The provision for re-entry of the tariff in 2002-03 will, however, be symmetrical in its application. Companies will be required to correct any overestimate for 2001-02.
In the 2002-03 Principal Statement, companies will be allowed to enter a take-up estimate for additional customers expected to claim a rebate in 2002-03.
Unmeasured basket
Companies should enter the surface water rebate as if it were a new charge in the unmeasured basket. The total number of chargeable supplies will not be affected. The charge multiplier for 1 December 2000 should be based on the estimated number of eligible customers that will take up the rebate in 2001-02.
For the 2002-03 Principal Statement the 1 December 2000 charge multiplier entered will be the same as that entered in the 2001-02 Principal Statement. The charging year charge multiplier will be the actual take-up as at 1 December 2001.
Measured/Unmeasured Tariff Differential
The tariff differential should be calculated using the average unmeasured forecast 2001-02 water delivered figures as submitted in Table 3 of your Additional Information.
Where applicable volumetric charges for different charging areas should be weighted together by the respective charge multiplier as per the Principal Statement.
As set out in MD165, the tariff differential limit has been set at £32.00 for 2001-02. Applying a split of two-thirds for water to one-third for sewerage with appropriate rounding gives separate service limits of £21.00 for water and £11.00 for sewerage.
Bulk Supplies
Licence Condition B lists a number of "Excluded Charges" which should not be included in the tariff basket. Section 2 (9) sets out: 'Charges for a supply of water in bulk to another water undertaker' as one of these.
Details of bulk supply agreements should, however, be entered in Table 2 of the Special Agreement Information Capture System.
Principal Statement Information Capture System
The enclosed Principal Statement Information Capture System for 2001-02 is provided in Excel 97 format.
An electronic help file has been included on the enclosed diskette. This provides practical advice on how to complete the Principal Statement, Large User and Special Agreement Information Capture Systems. Guidance on how to access the help file and Information Capture Systems is set out in summary form in Annex H.
The enclosed diskette has been virus checked by Ofwat before despatch. We strongly recommend, however, that you carry out an appropriate virus check prior to exposing your system to the disk.
Links to June Return 2000
Details in your Principal Statement and Additional Information will be checked against your June Return submission. The enclosed capture system contains elements of the water balance information that was submitted in the June Return 2000. We do not expect any changes to the values for 1999-2000 (except for the removal of information for customers supplied with not less than 100Ml of water per year). We recognise that companies may wish to provide revised estimates for 2000-01 and 2001-02.
Your covering letter to the Principal Statement submission must explain any changes to the June Return submission that the data capture will highlight. Additionally, we require a report from your Reporter to follow any changes made.
As you are aware, information submitted in your Additional Information is used by Ofwat to calculate your average household bill. This is published annually in Ofwat's Average Bills Leaflet.
Annexes
In addition to the Principal Statement and Additional Information Capture System, the Special Agreement Capture System and the Large User Capture System, I enclose eight annexes that set out guidance for the preparation of the above. These are as follows:
Annex A Principal Statement requirements
Annex B Treatment of hosepipe/sprinkler charges
Annex C Treatment of new charges (including vulnerable group tariff and level of average household charge)
Annex D Audit requirements
Annex E Additional Information requirements and certification
Annex F Special Agreement requirements
Annex G Large User requirements
Annex H Information Capture System guidance (water companies only)
Ofwat Process after 15 January 2001
Please note that Principal Statements and Charges Schemes will be analysed in order of receipt. Ofwat has made a commitment to approve companies' Charges Schemes and agree Principal Statements by 15 February 2001. Where possible Ofwat will aim to give approval (and agreement) before this date.
Where Principal Statements and final Charges Schemes are not submitted by companies together this will delay checks on both.
If you have any queries regarding the Principal Statement information requirements please contact Anna Hayes on 0121 625 1388.
I am copying this letter to Robert Weeden (Water UK), Rodney Anderson (DETR) and Bob Macey (National Assembly for Wales).
Yours sincerely
Charles H Whitworth
Head of Tariffs
Encs
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Letters to Regulatory Directors
