Ofwat

WATER INDUSTRY ACT 1991, SECTION 13

PROPOSALS BY THE DIRECTOR GENERAL OF WATER SERVICES FOR THE MODIFICATION OF LICENCE CONDITION B OF DEE VALLEY WATER PLC AND SOUTH WEST WATER LIMITED

The process Any representation about, or objection to, these proposals must be in writing and sent to the Director General of Water Services, Centre City Tower, 7 Hill Street, Birmingham B5 4UA (fax 0121 625 3606), so as to be received by him not later than 5.00 pm on 23 April 2002. Please quote Ref LAG/31/1/2/3. Explanation of the Proposed Modification and the Reasons for them The Licence of each water and water and sewerage undertaker in England and Wales contains a condition B. Amongst other things, that condition provides for the revision of the price limit which that Company must observe each year. Those price limits must be reset at a 5 yearly Periodic Review. In defined circumstances, they may also be changed between 5 yearly reviews, at an Interim Determination. Condition B contains detailed provisions about the circumstances under which an Interim Determination may be made, either on the application of the Company or on the Director’s initiative. This may only happen if a (defined) Relevant Change of Circumstances has happened, or a Notified Item is triggered. A Notified Item is something which the Director said had not been allowed for (either in part or at all) when price limits were last set. As part of the 1999 Periodic Review Final Determination (PR99), Companies’ licences were modified, by inserting a new test of the materiality of changes in operating expenditure and revenue losses attributable to a Relevant Change of Circumstances or a Notified Item, This new test made it more likely that changes in operating expenditure or revenues might trigger an Interim Determination. However, although losses of revenue might be taken into account in this way, in considering whether a material change has occurred, no equivalent provision was made concerning gains in revenues. If circumstances changed in a way that allowed a Company to recover higher revenues than was assumed in setting price limits, the Director could not take it into account in the same way when making Interim Determinations. This is particularly relevant to the issue of optional metering, which is treated as a ‘Notified Item’. Customers who choose to change to a metered supply generally do so because they will enjoy lower measured bills, which usually results in lower revenues for the relevant Company. At PR99, price limits were based on assumptions about the likely uptake of optional meters and the anticipated impact on each Company’s revenues. If the uptake of optional metering is faster than assumed at PR99, this may result in greater revenue losses for that Company. In December 2001, Dee Valley Water plc and South West Water Limited has their price limits reset because the uptake of optional metering had been faster then the Director assumed at PR99. He made revised assumptions about the likely future trends in optional metering. The proposed licence modification will allow the Director to take account of any revenue gains that accrue to Dee Valley Water plc and South West Water Limited, if the uptake of optional metering is slower than assumed in the respective revised Notified Items. The Companies have consented to the change. If implemented, it will enable the Director to make a further Interim Determination, should his assumptions about the rate of take-up of the free optional meter by customers of Dee Valley Water plc and South West Water Limited turn out to be too high. This will protect their customers from having to pay higher prices than justified by the actual uptake of optional meters.