RD26/00

TO THE REGULATORY DIRECTORS OF ALL

WATER AND SEWERAGE COMPANIES AND

WATER ONLY COMPANIES

4 December 2000

Dear Regulatory Director

THE HOUSEHOLD SEWERAGE/TRADE EFFLUENT DIFFERENTIAL: CONFIRMATION OF ADJUSTMENTS TO OFWAT METHODOLOGY.

Following my letter to the Regulation departments of all water and sewerage companies on 20 September 2000 I am now writing to confirm Ofwat's revisions to the methodology for calculating the measured household sewerage/trade effluent differential for 2001-02. All companies have now responded to the issues set out in my letter (either in writing or orally) and I am grateful for these responses.

Background

The revisions being made are set out in the following paragraphs. I wish to re-emphasise, however, that there is no change in the basic Ofwat approach to the use and purpose of the sewerage/trade effluent differential. This remains as set out in Scott Reid's letters to the companies in May/June 1997 and as restated in this year's Tariffs Report. The purpose of the differential test is to assess a fair balance between household sewerage and trade effluent charges.

For 2000-01 Ofwat assessed the achievement of balance by reference to a level of the differential that falls between ±5p/m³. This test was set out in MD152 in September 1999 and is confirmed for 2001-02. The test was applied in the assessment of the companies' average treatment differentials as set out in the 2000-01 Tariffs Report (Table 25).

Summary of proposed adjustments

This letter adjusts the methodology for calculating the differential by making changes to take account of the following:

• the incorporation of any non-return to sewer allowances;
• the appropriate assessment of any highway drainage charges in the measured domestic sewerage volumetric rate;
• the use of forecast treatment weights rather than historic treatment weights in the parity calculation; and
• an upward adjustment of the assumed COD and SS strengths of average household wastewater to levels of 650 and 450 mg/l respectively.

I confirm that Ofwat will continue to use the gross domestic sewerage volumetric rate to calculate the differential. I confirm that Ofwat will expect, from 2001-02, companies which make an allowance for non return to sewer to add this allowance back to their domestic sewerage volumetric rate for purposes of the calculation.

Treatment of highway drainage charges

I confirm that Ofwat will expect companies to ensure that an appropriate adjustment is made to the domestic sewerage volumetric rate to account for the cost of highway drainage. In most cases this will require companies to remove the highway drainage element from the volumetric rate; in other cases it will require companies to ensure that where highway drainage costs are recovered in the reception element of trade effluent charges and in foul drainage costs that such a recovery of costs in a way which is consistent as between trade effluent and domestic sewerage customers.

Revised assumed average treatment weights

The average treatment weights X, Y and Z (see Annex 1 to this letter) used in the 2000-01 calculation are obtained from Table 17 of companies' June returns and are therefore historic weights. I confirm that, from 2001-2002, Ofwat will expect companies to use forecast treatment levels. The forecast should be based on treatment levels expected to be achieved at the middle of the charging year. (For next year, therefore, the weights should reflect the situation at 1 October 2001.) Ofwat will expect companies to provide the forecast weights as part of the charges scheme approval process.

Dwr Cymru (Welsh Water) has argued in its response to the June 20000 tariffs consultation that the forecast treatment level weights used should reflect the position at the end of the charging year, ie 31 March 2002. We have considered this, but believe that the forecast treatment levels should be based on the average treatment levels achieved for the year, and that a forecast weighting as at 1 October remains appropriate.

Revised assumed average strength of domestic wastewater

I confirm the proposal to revise upwards the current assumed strengths for Chemical Oxygen Demand (COD) and for Suspended Solids (SS) for average household sewerage. This will increase the average COD strength assumed from 600 to 650 mg/l and the average assumed SS strength from 400 to 450 mg/l (see Table 25 of this year's Tariffs Report). Ofwat's view is that the current assumed strengths underestimate the typical average strength of household sewage. A detailed explanation of the basis of the revision for these assumed strengths is set out in Annex 1. This adjustment will affect all companies.

One company argued that companies should be free to set treatment strengths in line with estimated regional averages. Ofwat considers, however, that the flexibility within the differential range (±5p/m³) allows for any regional differences.

Implementation of changes

Ofwat has already had discussions with all companies as to how these changes may impact on the way companies set trade effluent charges for 2001-02. The letters to companies on draft charges schemes will indicate where we are prepared to accept some phasing in the adjustment to balance. This will meet concerns expressed by companies that immediate movement to bring the balance within the Ofwat range could result in charges being increased in one year only to be reduced next year.

These decisions will reflect likely changes in average treatment weights over the next 18 months or so, and so ensure that any necessary increases in trade effluent charges are phased in acceptably over the next two years. This letter serves, therefore, to confirm the revised methodology against which these decisions will be communicated.

Yours sincerely 

Charles H Whitworth
Head ofTariffs

Annex 1

Revisions to Ofwat methodology for 2001-02

1. The calculation of the differential

D = differential

H = measured domestic sewerage volumetric rate (full)

characteristics to the average domestic sewage

=(R+M)*X+(R+V+S'*S_t)*Y+(R+V+B_V+B'*O_t+S^,*S_t)*Z
R, M, V, B_V, B = B'*O_t and S = S'*S_t are the unit charges for the Mogden elements (see Table 22 of the 2000-01 Tariffs Report for definitions), and
X = proportion of a company's total sewerage load that receives no or partial treatment with discharge via sea outfalls

Y = proportion of a company's total sewerage load that receives primary treatment

Z = proportion of a company's total sewerage load that receives secondary treatment

2. Revision to the assumed strength of the average domestic wastewater

A current reference work on UK wastewater treatment states that average per capita BOD production ranges from 45 grams per person per day for an area which is entirely residential to 77 grams per person per day for a large industrial city which may include high strength trade effluents. We are therefore revising upwards the assumed level of domestic BOD production to 45 grams per person per day. This is equivalent to a COD of around 85 grams per person per day.

Using a slightly lower per capita wastewater production of 130 litres per person per day - and an assumed COD/SS production of 85/60 grams per person per day, average household COD/SS production is around 650/460 mg/l.

On the basis of the above Ofwat is increasing the current assumed COD and SS strengths of average household wastewater to 650 and 450mg/l respectively. 

Ofwat
December 2000