Water industry regulator Ofwat has published guidance confirming how it expects the water companies to allocate cross-subsidies for social tariffs and surface water drainage concessions to different parts of their business in PR14.
Although Ofwat said it could see “no compelling reason” for companies not to allocate the subsidies in line with existing guidance that the UK and Welsh Governments have issued, the companies have requested further clarification.
In July 2013 the regulator said it would set up to four separate price controls for each company in the following areas:
- household retail services;
- non-household retail services;
- wholesale water services; and
- wholesale wastewater services.
The companies have the option to offer the following
- Social tariffs’, which are reduced charges for individuals who would otherwise have difficulty paying their water bills in full.
- Surface water drainage concessions’, which are reduced charges for community groups that companies are able to offer in certain circumstances.
Other customers pay for the reduced charges via a cross subsidy through the charges that they pay. Under Ofwat’s new price control methodology for PR14, the regulator has said it is now necessary to consider where the cross-subsidies should be allocated in terms of the various different price controls and associated charges.
The UK Government and Welsh Ministers have respectively already issued guidance on company social tariffs under Section 44 of the Flood and Water Management Act 2010 and on concessionary schemes for community groups.
The Flood and Water Management Act 2010 allows companies in England and Wales to use social tariffs and introduce cross-subsidies to pay for them. – but does not compel them to introduce social tariffs.
In its latest guidance, Ofwat said it agreed with the UK Government’s position that companies wholly or mainly in England would need to consider whether a social tariff is the best means for tackling affordability problems and that it would be "inappropriate for non- households to contribute to the funding of social tariffs in the longer term."
In the regulator’s view it would not be feasible for companies to recover costs of any social tariff cross-subsidies through their non-household retail price controls – primarily because under plans set out in the Water Bill, the companies wholly or mainly in England will be competing with other suppliers to provide retail services to non-household customers at some point during 2015-20. Ofwat said that in a competitive market, individual customers would be likely to switch to those suppliers whose tariffs are not as high because they are not subsidising household customers.
Ofwat also concurs with the Welsh Government’s guidance stating that it wants to avoid customers funding a social tariff they are not potentially eligible for and expecting no cross-subsidy between water customers and sewerage customers.
In Ofwat’s view the water companies should allocate the cross-subsidy to their household retail price control – and the associated customer charges.
On concessions for surface water drainage charges normally made by the utilities for the removal and processing of rain water which falls on properties and then flows directly or indirectly into the public drainage systems which may be offered to customers with buildings for community use (e.g. sports clubs and churches), Ofwat says the most appropriate allocation of the subsidy is within wholesale wastewater charges.
Ofwat’s guidance has important implications in terms of the charges the water companies can make to customers in the period 2015-2020. The regulator’s guidance states:
“Although it is now less than a month away from companies submitting their final plans, we expect that companies will have already assumed these allocations given the Governments’ guidance.
“But companies should make sure that their business planning assumptions are consistent with these allocations.”
The way in which the companies allocate cross-subsidies for social tariffs and surface water drainage concessions to different parts of their business will affect the charges that companies will need to develop for 2015-16. The regulator says it is now planning to consult further on charges schemes in due course.
Click here to read Ofwat’s guidance in full.
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