OFFICE OF WATER SERVICES Water Industry Act 1991, Section 13

Proposals by the Director General of Water Services for the Amendment of Condition B of the Conditions of Appointment of all Water and Water and Sewerage Companies in England and Wales. Explanation of proposals and the reasons for them. Revision of the Tariff Basket   The tariff basket is used to calculate the average increase in charges which each Company may apply each year. That average, when expressed as a percentage, must not exceed that Company’s charges limit for the year in question. The charges limit has two parts. The first is the annual percentage change in the Retail Price Index. The second, which may be plus or minus, is a number (usually called K) set by the Director for each Company for each year. The charges limit is intended to enable each Company to provide to its customers the services which are required of it as a water and/or sewerage undertaker.   Under current arrangements, some customers can face percentage increases in their bills which significantly exceed the formula RPI ± K. The Director proposes that the workings of the tariff basket should be changed, so that changes in customers’ bills are more closely related to that formula. First proposal—to use the same method of calculating the average charges increase for both measured and unmeasured customers   At present, the average increase in charges is calculated differently for measured and unmeasured customers. The Director proposes to change the arithmetical formula which is used to calculate increases in unmeasured charges, to bring it into line with that used to calculate increases in measured charges.   This proposal will have particular consequences as Companies further extend the metering of water services to households. Generally, domestic customers who opt for a meter do so because they expect to benefit from lower bills. Where they are living in dwellings with a higher-than-average rateable value, the tariff basket currently allows the lost revenue to be recouped by increasing charges to the remaining, unmeasured customers (or even raising charges to customers generally). This proposal would remove those possibilities. Second proposal—to remove some larger user customers from the tariff basket   The Director proposes to remove from the tariff basket customers who are supplied with not less than 250,000 cubic metres of water per year. Their removal from the tariff basket (for both water and sewerage services) will mean that the Companies will no longer be able to recoup from other customers lost revenue resulting from reduced tariffs for these large users.   Large users already have the opportunity to secure water or sewerage services from competitors of the current supplier. Therefore, the Director believes that they do not require the same degree of regulatory protection as other customers who do not have that opportunity, whose charges will continue to be subject to the charges limit and remain within the tariff basket.   The consumption threshold (250,000 cubic metres per year) would be automatically reduced to the amount specified in any order which the Secretary of State might make, reducing the minimum consumption threshold for competition for services to large users. Timing of Periodic Reviews of Price Limits   At the moment, the Director must conduct a review of each Company’s price limit every ten years. Either he or the Company concerned may require such a review after five years. On each occasion, price limits are set for the following ten years.   The Secretaries of State set price limits from 1st April 1990. In 1994, the Director carried out the first Periodic Review, which took effect on 1st April 1995, that is five years after the first price limits were set. He has decided that the next Periodic Review will take effect five years after that, on 1st April 2000. This emerging pattern of five-yearly reviews has commanded general acceptance.   The Director proposes that, instead of the current arrangement, five-yearly reviews should be automatic. Price limits would be set for only five years at a time. (However, existing arrangements for the adjustment of price limits between Periodic Reviews—called interim determinations—would not change.) Implementation   The Director proposes that these changes should take effect on 1st April 2000, at the same time as the new price limits. The following Companies have already consented to the proposed revisions of the tariff basket:   Cambridge Water PLC, Essex & Suffolk Water plc, Mid Southern Water PLC, Northumbrian Water Ltd., South East Water Ltd. and South Staffordshire Water plc.   If a Company does not consent to any proposed modifications of its conditions of appointment, the Director will not be able to make them unless he has first referred that Company’s case to the Monopolies and Mergers Commission and the Commission has reported that the modifications ought to be made, in order that the effects of the current arrangements which are or may be against the public interest could be remedied. The consultation process   Any representation about, or objection to, these proposals must be in writing and sent to Charles Whitworth, Head of Tariffs, Office of Water Services, Centre City Tower, 7 Hill Street, Birmingham B5 4UA (fax. 0121-625 1379) so as to be received by him not later than 5 p.m. on Friday, 3rd July 1998.