Significant changes in our charges for 2016/17

Transcription

1 Significant changes in our charges for 20 Severn Trent Water 11 January 2016

2 1. Key changes in our scheme of charges This year, we have split our Scheme of Charges, creating separate Household and Non-Household schemes in preparation for market opening in 2017/18. Retail competition and many other business requirements are not relevant to household customers, so we have looked to simplify domestic charges where we can. 1.1 Changes affecting households Under our combined scheme, we presented the full range of charges that would have applied to any customer, from small households to large business customers. Given the split between the household and non-household schemes, standing charges for the full range of meters up to 300mm is not necessary. This change will not drive any significant incidence effects. Around 97 of our metered household customers previously paid the lowest standing charge (15mm) and almost all of the remainder fell into the next smallest size band (22mm). We have therefore simplified our household scheme so that there is only a single standing charge for water and a single charge for sewerage. There are no other significant changes to the household scheme, with only minor changes in wording which bring the text in line with existing policy. In line with Ofwat charging rule 25, we have provided an explanation of our policy on partial reductions in surface water drainage for households Changes affecting non-households For non-households we have made a number of changes to our charges this year, primarily in order to prepare for market opening in 2017/ Fixed charges We have introduced a new fixed charge component for each customer. This is primarily to cover the fixed element of retail costs for each of our 18 non-household Average Revenue Controls (ARCs). In the first year of operation, the small wholesale component is designed to cover Open Water costs. The bands align to our existing tariff structure, with a fixed charge for each service provided: Water Waste Water Foul Surface Trade Effluent Unmeasured Unmeasured Unmeasured - Measured 0-10 Measured 0-50 Measured 0-50 Measured 0-50 Measured Measured Measured Measured Measured 50+ Measured 250+ Measured 250+ Measured 250+ Special Agreements Special Agreements - Special Agreements Surface water is part of the waste water service and customers that do not receive full sewerage will have a lower fixed charge. We aim to keep our charges as simple as possible. Having introduced a new fixed element, we have looked at areas where we can streamline our existing charges particularly standing charges based on meter size and minimum charges which have a fixed value. In addition, we recognise that fixed charges will tend to be proportionally higher for smaller customers, so reducing or withdrawing other fixed components of the bill can help to moderate the impact of the new charge. 1 There is no equivalent change in the non-household scheme as surface water charges for measured customers are based on a measurement of site area rather than a property type charge. We assess customers banding based on a reduced area if the customer can demonstrate that more than 10 of the site does not drain to the public sewer.

3 1.2.2 Minimum charges In 2015/16, we applied minimum charges to: Rateable Value charges for water - this applied where the RV of the property would have generated a bill lower than Trade effluent - this took effect where regular tariffs would have generated a bill of less than In 20 we will withdraw these minimum charges so that non-households do not receive both a fixed and a minimum charge (note that, since we are not introducing fixed charges for households, minimum charges will continue to be used for unmetered water). This change affects around 2,400 customers that would have been charged the minimum rate for unmeasured water and around 400 likely to be charged the minimum for trade effluent Standing charges Last charging year we split these charges between retail and wholesale, but the new fixed charge means it is no longer necessary to split retail service costs out of standing charges. This year, the retail component relates only to meter reading. Last year s retail / wholesale split left a residual charge for wholesale. With smaller meters, allowing for a full retail charge left only a token amount. We have therefore looked at the underlying wholesale costs of providing meters and aim to reflect these in our charges. We aim to transition towards this level, taking account of the need for bill stability and other impacts on customer bills. In broad terms, wholesale charges for smaller meters will increase and those for larger meters will reduce over time. The wholesale cost of metering sits with water. Since we now have fixed charges to cover retail costs associated with sewerage, we have decided to drop standing charges for waste water. This helps to simplify our scheme for customers who will be seeing the new fixed charges for the first time. Again, it should be noted that the old structure remains in place for metered households, which will continue to have standing charges for water and waste Alignment of wholesale tariffs with household In 2015/16 we created a retail and wholesale component for each of our charges, but did not change the underlying structure of our tariffs. We set different levels for households and non-households at the end-user level, which reflects the difference in the allowed retail margin for these customers. There were also differences at the wholesale level, for two reasons: Non-households will be eligible to switch their retail supplier from 2017/18, so their wholesale charges included an additional element to cover the administration costs of the market operator. This is in line with Government and Ofwat guidance; as households will not benefit from competition from 17/18, it is not reasonable for them to bear these costs. In some instances we balanced the creation of higher non-household retail margins by lowering wholesale charges in order to avoid high bill increases for customers. The creation of fixed charges means that we can avoid these measures and align wholesale tariffs for households and non-households wherever appropriate. For example, at the wholesale level the rateable value charges are the same across both types of customer. Open Water (market operator) costs are included in the wholesale component of the fixed charge.

4 1.2.5 Transitional scheme for surface water drainage concessions In 1990, we were the first company to introduce site area charges for new customers, and extended it to cover almost all non-household properties between 1997 and Before this change, most customers paid a charge based on the Rateable Value (RV) of their property. Our experience of this transfer showed that some customers might have suffered very large bill increases - for example, scout huts use little water but have large areas to drain. Historically, some other customers had charges based on very low RVs (for example churches and other places of worship have RVs of zero). To avoid large increases, we continued to charge some community groups on the basis of RV. Others were put on a notional Area Band 3 charge (usually for properties less than 200m2 in size). The groups to which we currently give concessions are: 1. Places of worship, village halls, community centres, scout, guide and cadet huts. 2. Schools, hospitals, nursing homes, care homes and day care centres. In 2010, the Government issued new guidance on charging. This supported concessions for places of worship and community premises, but not for the 2nd group of customers. Government stated that companies should not bring forward any concessionary schemes for these except on a transitional basis. During the course of this year, we have discussed whether these concessions can continue with our regulators, Ofwat and the Consumer Council for Water. The Government also launched a consultation on its charging guidance to Ofwat. In response to this, there was strong representation on the issue of surface water drainage from schools and other public sector organisations. The Government has now signalled that it will review its position on the definition of community premises next year. Until the Government has concluded its review, the 2010 guidance remains in force. It is possible that there will be a change for community premises in the public sector (schools and hospitals), so we are not making any changes for these groups in 20. However, most nursing homes, care homes and day care centres are private sector and we see no prospect of guidance being amended to include them. We have therefore decided to introduce a transitional scheme for these customers. Customers in this group will be moved to a new notional site area band ( Band T ) in 20. In the first year of operation, their surface water charges this will be set at exactly the same rate as Band 3. This will give us an opportunity to contact these customers, check the measurement of their properties and provide advice as to how they can mitigate the impact of the change (for example, by altering their drainage arrangements and water efficiency). In following years, we will progressively increase the charge for Band T. We will transfer customers to regular site area charges as and when they would save money by doing so (i.e. when the Band T charge is higher than the band for their actual area). 1.3 Changes affecting all customers Surface water drainage overall level of charges We have, separately, looked at the costs attributable to surface water drainage. On the basis of this work, we think that the proportion of our overall income we get from surface water charges needs to be reduced. Since we operate under a revenue cap, we will charge the same amount for our sewerage service in total. This means that all else equal - if we reduce surface water charges, other tariffs for sewerage will increase.

5 Most customers will see the benefit of the reduction as well as the increase, but the overall effect on each customer will differ: Unmeasured customers paying full sewerage will see no impact the reduction in the surface water element of their charge will be fully offset by the increase in element that covers foul water. The impact on measured customers paying full sewerage will depend on the size of their property compared to their usage. Customers that are not connected for surface water will see an increase in their charge, as there is no offsetting reduction. Because we are aware of the impact that this change will have on customers, we are implementing this change in a progressive way. The transition will take several years and we will judge the pace of change in an holistic way, depending on other effects that are impacting on customer bills. This year we have reduced surface water charges by 6.7 in real terms. A side effect of this change is that it will mitigate the overall increase in charges for customers on Band T. 2. Significant changes in customer bills We have looked at the impact of our new charges on sample bills for 60 services (water, waste and trade effluent) representing a broad cross-section of customer base. Our sample includes customers who do not pay for surface water as they are likely to see an impact from the change described in section above. Our analysis then looks at the combined effect where customers take more than one service. 2.1 Household bills increasing by more than 5 No household bills in our cross section should increase by more than 5. The highest impact on any service is 4.9, for some unmeasured waste water customers that are not connected for surface water. But if these customers also take water from Severn Trent, their combined bill will increase by only , because changes in their water charge will be much smaller. Average household bills are essentially flat, being expected to increase by around 1 penny. 2.2 Non-household bills increasing by more than 5 The changes we have made this year will tend to increase charges for smaller non-households Water service The introduction of a fixed charge impacts most heavily on small and very small businesses. These are customers using similar volumes to a semi-detached household and a single occupier respectively. Sample with increases over 5 Measured Usage 15/16 m 3 Very small business Small business NA 1 Ml/a business 1,000 1, , NA 5 Ml/a business 5,000 7, , NA Av Bill

6 With very small bills, the increase appears very large in percentile terms, so it is useful to compare the average household water bill ( last year). In context, the increase of for measured customers would remain significant, but represent an increase of 13.5 on an average bill. And, even after this change, this group of customers would pay just over half (56) of the average household bill for water Waste water service There has been a movement in the measured differential 2 which has led to an increase in the measured sewerage charge. As discussed in section 1.3.1, there is also an impact for customers that have no connection for surface water drainage. Combined with these factors, the introduction of the fixed charge has an impact which is proportionally greater for smaller customers. There is also a significant impact on very small unmeasured properties with an RV of 60 or less; this is the level at which a minimum charge would have applied on the water service in 15/16 (there was no minimum charge for sewerage). Set against last year s average household sewerage bill (154.54) the increases for some of the smaller customers would fall below the threshold and others appear less significant (and Severn Trent s average household bills are the lowest in the country). After this change, the sewerage charge for the smallest unmeasured customer in this sample would be around 66 of Severn Trent s average household sewerage bill. Assuming that there is no change in other water company charges from , the bill for this type of customer would also remain one of the three lowest in the country. The vast majority of our customers are also connected for surface water. When the impact of the reduction in surface water charges is taken into account, the impact on most measured customers is reduced to less than the 5 threshold or only marginally above it. Sample with increases over 5 Unmeasured (full) Usage m3 15/16 on Av Bill Very small (RV 60) Average (RV 300) NA Measured (no surface) Very small business Small business Ml/a 1, NA 5 Ml/a 5,000 4, , NA 25 Ml/a 25,000 22, , , NA With surface connection Very small business, Band NA Small business, Band NA Combined water and sewerage reases in the rates for water are generally lower than for sewerage. Customers taking both services particularly the majority who are connected for surface water will see changes in their other charges which largely offset the impact on the sewerage service. In percentile terms, small unmeasured customers will still see a significant increase, but again this is on a very low starting bill. The average combined bill for a household in 15/16 was 329, nearly double the amount that 2 The measured differential is the difference between the amount charged to an average measured and unmeasured household. Under Licence Condition E, we must ensure that this is no greater than the additional cost of serving a metered property. We continue to use the methodology laid out by Ofwat in Regulatory Director Letter 02/04. This calculation includes the cost of providing the meter and is influenced by other factors such as volume and property numbers, which vary from year to year.

7 would have been paid by the smallest unmeasured customer in this sample. After these changes, these customers would pay around 61 of the average household bill. Sample with increases over 5 Unmeasured Usage m3 15/16 on Av Bill Very small (RV 60) Measured (no surface) Very small business Small business NA 1 Ml/a 1,000 2, , NA 5 Ml/a 5,000 11, , NA With surface connection Very small business, Band Small business, Band NA Trade effluent The increase in the volumetric rate for sewerage (as described in s2.2.2) also has an impact on charges for trade effluent. Charges for regular sewerage are equivalent to trade effluent at a standard strength, so any factors which drive an increase in charges for foul water (such as the reduction in surface water charges) will also have an effect on trade effluent. The increases for some TE customers on this element of their service are therefore above the nominal 5 threshold. There is an impact on smaller customers from the introduction of fixed charges and the withdrawal of the minimum charge. Between 400 and 500 customers previously paid this charge. Typically, the smallest customers will see a significant reduction in their bill as a result of these changes, but there are a very small number of customers who previously fell near the borderline between a minimum and a regular TE charge. These customers will see a significant increase in the TE element of their bill. However, trade effluent is only part of the sewerage service; customers that also pay for surface water will see an offsetting reduction. Most customers also receive water, so the overall change in their bill will be reduced. Assuming a site area band 4 for surface water, the overall change in the bill for a marginal customer would reduce to 8.3 and for moderate users they would fall to just over the 5 threshold. Sample with increases over 5 Trade effluent only Usage m3 15/16 Borderline minimum Ml/a Ml/a , , Combined bill Borderline minimum Ml/a , ,

8 2.3 Handling strategies We try as hard as we can to keep bills stable for our customers. Last year we were able to keep all increases for our sample below the 5 threshold. Where we recognise that some changes will result in very significant changes for some customer groups we will try to phase these in over a period of time. This has been our approach with: Changes to wholesale standing charges (s1.2.3) The transitional scheme for surface water concessions (s1.2.5) The reduction in the overall level of surface water drainage charges (s1.3.1). The other change of policy that is driving an increase in charges for some services is the introduction of the fixed charge. We have also considered whether it is prudent to introduce these changes gradually over a number of years. We believe that the introduction of these charges is essential to cover retail costs and, in the longer term, to ensure compliance with competition law. The new structure also provides greater transparency in retail there is a clear linkage between this charge and the Average Revenue Control. This helps to identify which customers pay retail charges within each band. When looking at phasing we are mindful of the impact that this would have in future years. The non-household retail market opens in 2017/18 and therefore the maximum period over which we could effect this transition is two years. For water customers using more than 5Ml/a, it is already possible to switch so delaying the introduction of the new structure would be problematic for the water service. In addition, any reduction we apply to waste water this year would result in a larger year-on-year increase in 17/18, when it is likely that RPI will be higher than its current rate of 1.1. As discussed in section 2.2, the most significant impacts (in percentage terms) fall on non-household customers with very low bills. In some instances, these charges are less than half of an average household bill, and will continue to be near half after these changes. Percentage increases also look very significant if measured against a single element of our service; customers that receive all services will see offsetting changes in other elements of their overall bill (particularly on surface water). Mindful of the impact that these changes will have, we have looked at the position on the marginal customer for example, with trade effluent we have identified the impact on a customer right at the boundary between a minimum charge and regular volumetric bills, as these will suffer the maximum increase. In the short term, we have set tariffs with these customers in mind. Again, looking at the example of TE customers, this represents a small fraction of the customers who have typically paid a minimum TE charge in previous years. Reducing the impact for the marginal customer results in large reductions for other customers (those whose volume or RV were well below the threshold for a minimum charge). Given the absolute scale of these increases for small customers, and the offsetting reductions for other tariffs, we believe that these changes are reasonable and do not require further measures in the scheme. But with the most significant impacts we will consider what proactive communication we can do to help individual customers understand and manage these changes when bills are generated.

9 Appendix 1: Sample Household bills Sample bills 15/16 1 Water Unmeasured 1 Minimum Charge (1.11) 2 Average RV Zone (6.56) 3 High RV Zone (8.95) Measured 4 Low consumption (1.32) 5 Average consumption High consumption Waste Water Unmeasured 7 Minimum Charge Average RV Zone High RV Zone Measured 10 Low cons foul only Average cons foul only High cons foul only Low cons flat / terrace Average cons semi High cons detached Combined Bills Unmeasured 16 Minimum Charge Average RV Zone High RV Zone Measured 19 Low cons foul only Average cons foul only High cons foul only Low cons flat / terrace Average cons semi High cons detached

10 Appendix 2: Sample Non-Household bills Sample Bills 15/16 As Prop of Av HH Bill 1 Water Unmeasured 1 Low RV Average RV (7.59) 3 High RV (35.07) Measured 4 Very small business Small business Ml/a 1, , Ml/a 7, , Ml/a 31, , , Ml/a 59, , , Ml/a 77, , , Ml/a 113, , , Ml/a 239, , , Waste Water Unmeasured full sewerage 13 Low RV Average RV High RV Measured foul only 16 Very small business Small business Ml/a Ml/a 4, , Ml/a 22, , , Ml/a 65, , , Ml/a 255, , , Measured full sewerage 23 Very small business, Band Small business, Band Ml/a, Band 5 1, , Ml/a, Band 10 6, , Ml/a, Band 12 28, , , Ml/a, Band 15 81, , , Ml/a, Band , , , Ml/a, median school 2, , (286.71)

11 Sample Bills 15/ Ml/a, large school 29, , (3,459.95) Ml/a hospital 124, , (19,149.31) As Prop of Av HH Bill Ml/a hospital 199, , (16,946.29) 3 Trade effluent 34 Small min charge site (107.74) 35 Average min charge site (83.95) 36 Borderline minimum Ml/a Ml/a 3, , Ml/a 17, , , Ml/a 28, , , Ml/a 163, , , Water and Surface Water Drainage 42 50m3, band m3, band m3, band Ml/a, band 5 1, , Combined Bills (Water and Sewerage) Unmeasured 43 Low RV Average RV High RV 1, , (24.49) Measured foul only 46 Very small business Small business Ml/a 2, , Ml/a 11, , Ml/a 53, , , Ml/a 142, , , Ml/a 494, , , Measured full sewerage 53 Very small business, Band Small business, Band Ml/a, Band 5 2, , Ml/a, Band 10 6, , Ml/a, Band 12 59, , , Ml/a, Band , , ,233.99

12 Sample Bills 15/ Ml/a, Band , , , As Prop of Av HH Bill 60 1 Ml/a, median school 3, , (207.64) Ml/a hospital 184, , (16,884.17) Ml/a hospital 313, , (11,859.11) 6 Combined bills for selected TE customers 63 Small min charge site (75.81) 64 Average min charge site (49.38) 65 Borderline minimum Ml/a 2, ,