We make sure companies stick to the price limits we set by approving their charges every year. We also check that all charges meet certain conditions.

This section provides information on:

• approving companies’ charges schemes
• our approach to approving charges schemes
• the balance between water and sewerage charges
• the balance between unmetered and metered charges
• the unmetered/metered tariff differential

Approving companies’ charges schemes

The Water Industry Act 1999 (WIA99) requires all companies to have a charges scheme, which we approve. Household customers can only be charged under an approved charges scheme. (This does not affect agreements made between the companies and customers before the WIA99 took effect.) A charges scheme sets out all the charges a company makes to its customers under the WIA99.

Our approach to approving charges schemes

The companies are responsible for deciding individual charges. Each year, we check their proposed charges schemes to make sure that they are consistent with:

• licence condition B, which requires that overall changes in charges comply with the overall price limits we set
• licence condition E, which requires that charges should not be unduly preferential or unduly discriminatory. We interpret this to mean that there should be no unnecessary cross-subsidy between different types of customer
• guidance on charging matters from the Secretary of State and the Welsh Assembly Government
• our duties to protect customers and to contribute to sustainable development

We approve each company’s charges scheme once we are satisfied that they meet all our requirements. The companies can then use them to bill their customers. A company cannot bill its customers if we have not approved its charges scheme.

The Consumer Council for Water (CCWater) represents water consumers. CCWater’s regional committees play an important role in the process of approving charges schemes. CCWater:

• participate in the tariffs meetings with the companies to discuss charging issues in summer each year; and •
• comment on the companies’ draft charges schemes during Autumn each year.

The balance between water and sewerage charges

The water and sewerage sectors comprise:

• companies which provide both water and sewerage services
• and water only companies, which do not provide sewerage services

Charges for water delivered and sewage taken away should separately recover the costs of providing each service. This is particularly important if you receive water and sewerage services from different suppliers.

We think the balance between water and sewerage charges will be fair if the share of total revenue that the companies gain from each service is the same as the share of total costs of providing each service.

For 2010-15, we set single price limits for water and sewerage companies rather than separate limits for water and sewerage services. However, in our final determinations in November 2009, we published an indicative split showing separate price limits for water and for sewerage for each water and sewerage company.

Actual expenditure on water and sewerage services in any particular year may be different from the forecasts the companies made at the price review. The companies should follow their indicative price limits for the five-year period as a whole, rather than make adjustments each year based on actual expenditure.

The balance between unmetered and metered charges

Since the Water Industry Act 1999 gave household customers the right to ask for a free meter, many customers have opted for one. In order to treat all household customers fairly, each company has to adjust the balance between unmetered and metered charges. This is to take account of the impact of customers switching to meters and is called tariff re-balancing.

Your company’s income can be affected in three ways when you switch to a meter, because your:

• rateable value differed from the average rateable value for unmetered households
• water use before differed from the average for unmetered households
• water use changes

The mechanism we use to control prices allows each company to adjust charges to take account of the first two factors when household customers switch to a meter. When they do this, they must stay within their price limits, and meet our targets on the metered/unmetered household tariff differential.

We use this calculation to make sure that each company maintains a fair balance between charges for unmetered and metered customers. As more customers choose to have meters, the companies tend to increase unmetered charges. This is fair because, on average, the remaining unmetered customers have previously paid less than it costs to supply them with the water they use. The effect will continue as the number of metered customers increases.

If a household that switches to a meter uses less water than the unmetered average, or if it reduces its usage, the companies cannot directly recover these lost charges. We allowed for this by setting price limits in 2004 consistent with the projected rate of meter switching for each company.

Unmetered/metered tariff differential

We expect any difference, on average, between average unmetered and metered household bills to be no greater than the extra costs of providing a metered service. These additional costs comprise the:

• cost of the meter and its installation
• cost of creating a space for the meter
• customer-related costs, such as meter reading, billing and account management
• the value of benefits that metered customers receive but unmetered customers do not, such as paying bills in arrears and receiving rebates on leaked water

Every year, each company must estimate the amount of these additional costs. We set out how they should do this in RD18/08, 'Resetting metered and unmetered tariff differential targets' (September 2008). Each company must treat these estimates as targets for the difference between their unmetered and metered household bills. We check to make sure that it has done this by:

• applying a company’s metered household charges to the average amount of water it has delivered to an unmetered household; and
• comparing the resulting metered household bill with a forecast of that company’s average unmetered household bill.

The difference between these two bills is the unmetered/metered tariff differential. While we expect the companies to meet their differential targets, we allow them some flexibility (£1 each for water and sewerage). On this basis, most companies have met their combined differential targets for water and sewerage.

The average amount of water that each company delivers to unmetered customers fluctuates from year to year. This is because changing weather conditions affect how much water people use. We do not think this should lead to unnecessary changes in unmetered and metered bills. So, we allow the companies extra flexibility around their differential targets if they can show that unusual weather conditions have affected the amount of water that unmetered customers use. We deal with this issue on a case-by-case basis.