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Letters to Regulatory Directors
RD 35/03 30 September 2003 Dear Regulatory Director SURFACE WATER DRAINAGE – CHARGING POLICY In the Ofwat Forward Programme 2003-04 to 2005-06, we said that we would review companies' approaches to charging for surface water drainage (SWD). This letter reports the outcome of our review. The Alternative Charging Methods Companies adopt a variety of approaches to charging for surface water drainage and there are distinctions between the charges for household and non-household customers. We recognise that there are a number of difficulties associated with estimating and recovering the costs of providing SWD. We have not required companies to adopt any particular approach. Customers are charged either by: · Rateable Value (RV) – measured and unmeasured customers can be charged an amount based on the RV of their property. · Volumetric rate – some measured customers pay for SWD as part of the volumetric rate. SWD charges are thus directly proportional to the amount of water a customer uses. · Fixed charges - measured or unmeasured customers pay for SWD as part of the standing charge, which varies by meter size for non-households. · Property type for households – this is a fixed amount dependent on what type of property the customer lives in: people living in terraced houses will pay less than those living in detached houses, for example. Property type is essentially a proxy for site area. · Site-area for non-households – this is similar to the property type charges for households, but charges are banded according to site-area rather than a proxy for site-area. Analysis of the charging systems In our consultation document MD152 Published September 1999. , we said that charges should: · Be fair and equitable (customers in similar circumstances should pay similar charges). · Offer appropriate incentives for customers. · Be simple to administer and understand. The fairest charging method is one that reflects the costs of SWD. The main cost driver is the drainable surface area of the property, from which surface water is collected and taken to the sewer. We consider that charging by site-area will result in the most cost-reflective charges for individual customers. There may be a relationship between site-area and RVs, water use or meter size. For example, for both households and non-households, the higher the RV, often the larger the site-area the property occupies. However, in individual cases, customers' bills under RV or volume based charges may not always accurately reflect the costs of providing the SWD service. Site-area charging offers the strongest incentives to customers to reduce the surface drainage costs that they impose on companies. By installing a soak-away, for example, customers can reduce the drainable surface area of their property and hence reduce their bills. There are also recognised environmental benefits associated with introducing a soakaway. Volumetric charges and fixed charges that vary with meter size both provide an incentive for customers to reduce their water use and wastewater discharged, but they provide no incentive to reduce the surface drainage costs that customers impose on the company. Fixed charges that do not vary with meter size provide no incentive either to reduce water use or to reduce any of the surface drainage costs imposed on the company. All of the charging methods are simple to understand. Complications can arise, however, when different customers within the same company's region are charged under different approaches. This applies to companies who choose to charge by RV. They have to have several different charging methods because not all properties will have a RV. This could undermine customer support. Customers have generally supported site-area charging in those areas where companies have introduced it. We consider that site-area based charges (for non-households) and property type charges (for households) best meet the criteria set out in MD152. Ofwat policy We recommend that companies consider site-area based charging for non-households because we think that this constitutes best practice. Companies might also wish to consider property-type charging (a proxy for site-area) for households, although the case for doing so is not as clear cut as introducing site-area charging for non-households. Companies who are thinking about site-area based charging will need to consider the following: · Set up and administration costs: Whilst some companies have adopted site-area based charging, others have considered and rejected it on the grounds that it would be too administratively costly to establish. Figures from companies who have adopted site-area charging suggest that set up costs vary from £2 to £14 per property. Site-area charging is often more costly for the reason that it requires companies to visit some customers to measure the site-area of their properties. Companies can reduce these costs by estimating customers' site-areas from information held on their databases, although using estimates may give rise to more disputes over precise site-areas. One way to reduce the potential for disputes is to charge by bands, which can also save companies from re-measuring site-areas following any minor development by the customer. We think that set up costs as a percentage of total opex are negligible, but we recognise that they will vary depending on the nature of the individual water companies' customer bases. We do not make any specific allowance in price limits for companies who wish to implement site-area based charging. It is for the companies to decide if the benefits from implementing site-area charging outweigh the set-up costs. · The impact on individual customers' bills: There may be negative effects associated with charging for 'sensitive' properties (such as schools, hospitals and places of worship) under site-area charging. These properties are often built horizontally rather than vertically, so such customers would see a large increase in their bills if they were charged by site-area. More broadly, companies who are thinking of introducing site-area charging need to assess possible impacts on all customers' bills. In particular, companies will need to take into account the scale and speed of any bill changes to see if they are reasonable and acceptable to customers. Condition E In accordance with licence condition E, companies must ensure that their SWD charges are neither unduly preferential nor unduly discriminatory towards any class of customers. We would like companies to confirm that their current charging arrangements are consistent with condition E. In particular, we request that companies demonstrate that their current household and non-household charges reflect the overall costs imposed by these customer classes. Where companies consider that there is an imbalance, they should seek to address this in their 2005-06 charges schemes. Partial SWD Rebates Previously, Ofwat has supported water companies that have adopted an "all or nothing" rule to surface water drainage charges. So, for example, customers who had some, but not all of their surface water diverted away from the public sewer by whatever means, were seen to be connected and liable to pay the entire charge for SWD. We justified this on several grounds: · Infrastructure costs are difficult to apportion between customers. · It was difficult and costly for companies to ascertain exactly what parts of the service customers benefited from. We have reviewed our position on this issue. We would encourage companies to offer partial rebates for customers who can prove that some of their surface water drains away from the public sewer. We recognise that there may still be difficulties in ascertaining the level of rebates to which a customer is entitled. And we acknowledge that there may be an inconsistency between offering a rebate based on surface area when the customer is charged for SWD by another method (e.g. RV). Indeed, this is a further argument in support of site area based charging. Where companies do not allow customers to gain a partial rebate, they offer no incentive for customers to reduce the surface drainage costs that they impose. We consider that it is more appropriate to offer partial rebates to non-household customers because the unit cost of administering a partial rebate is lower than it is for households. Conclusion We consider that site-area based charges are the most cost-reflective way of charging for SWD. We encourage companies to consider this approach to charging. We have reviewed our approach to partial rebates and we now encourage companies to offer such rebates to non-household customers who can prove that they only receive certain parts of the service. We request that companies demonstrate that their current household and non-household charges are cost-reflective. Where companies consider that there is an imbalance, they should seek to address this in their 2005-06 charges schemes. We will follow these issues up individually with companies during future charges scheme approval rounds. Yours sincerely, Paul Hope Head of Tariffs  |
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