Wholesale tariff structure principles and next steps

Transcription

1 Wholesale tariff structure principles and next steps Briefing for Water Industry Commission for Scotland April 30, 2012 Frontier Economics Ltd, London.

2 Strategic Framework The Commission sets wholesale charges on the basis of: Ministers Output Objectives; and Ministers Principles of Charging. Any charges scheme that is: agreed with Scottish Water; or determined by the Commission, must be consistent with Ministers Principles of Charging. Annual obligations Once competition develops, neither the Executive nor the Commission will be able to determine retail tariff structures i.e. the tariffs that customers pay (beyond default tariffs). The Commission has statutory obligation to ensure that there is no detriment to Scottish Water s core (wholesale) business. 2 Frontier Economics April 30, 2012

3 Approach Frontier Economics has been asked to review the appropriate structure for wholesale water and wastewater tariffs in Scotland. The aim of this interim report, and presentation to the Commission, is for the Commission to consider: 1. the assessment criteria being used; 2. initial thinking on the factors that are expected to underpin the tariff structure; and 3. proposed outputs and next steps. 3 Frontier Economics April 30, 2012

4 1. The assessment criteria being used Frontier proposes designing tariffs which meet the following criteria: reflect material impacts on costs; are consistent with competition law; provide incentives for rational customer behaviour are practical (measurable); are simple; are proportionate (i.e. affect a reasonable number of relevant customers); are consistent with the Final Determination and Ministers Principles of Charging. An initial list of factors that may affect tariff structure will be refined against these criteria. Frontier proposes the following criteria are not considered as part of the assessment of the appropriate principles for the tariff structure: incidence effects (e.g. the effects on different customer groups of changing tariffs); phasing and/or timescale for implementation; payment mechanisms and other matters covered by a market code. Nevertheless, any concerns relating to these factors that are identified during the work programme will be highlighted during the project. Are the Commission happy with these criteria? 4 Frontier Economics April 30, 2012

5 2. Initial thinking on the factors that are expected to affect tariff structure Based on evidence from England & Wales and Australia, and discussions with the Commission, our preliminary view is that tariffs should reflect the following factors Water: network connection / meter sizes; volume of water consumed; extent of service provided (potable / non potable etc.); peak demand (seasonal / daily(?)). Waste water: foul sewage charges should relate to volume; trade effluent charges that reflect the factors that have the material impacts on costs will be consistent with the polluter pays principle the starting point will be the Mogden formula; surface drainage charges should be based on surface area (consistent with Ministers Principles of Charging). Are the Commission happy with this initial thinking? 5 Frontier Economics April 30, 2012

6 3. Proposed outputs and next steps Get views from Commission on methodology and preliminary findings (May 2006). Meet with Scottish Water (without Commission staff) general aim to get them engaged in the process (May 2006). Review tariff structure based on these discussions and assessment of available Scottish data (May 2006). Assess available Scottish data to determine appropriate number of tariff bands (proportionality) (May 2006). Design data return for Scottish Water (May 2006). Assess structure and level given data provided by Scottish Water (August 2006). Are the Commission happy with these next steps note change in end dates Present indicative findings / draft wholesale charges scheme to Commission (September 2006). Present final wholesale charges scheme to Commission (with Scottish Water?) (November 2006). Progress reports for each Commission meeting in the form of Information Papers, unless specific judgments or decisions required. 6 Frontier Economics April 30, 2012

7 Frontier Economics Limited in Europe is a member of the Frontier Economics network, which consists of separate companies based in Europe (London & Cologne) and Australia (Melbourne & Sydney). The companies are independently owned, and legal commitments entered into by any one company do not impose any obligations on other companies in the network. All views expressed in this document are the views of Frontier Economics Limited. THE FRONTIER ECONOMICS NETWORK LONDON COLOGNE MELBOURNE SYDNEY 7 Frontier Economics April 30, 2012 Frontier Economics Ltd, 71 High Holborn, London, WC1V 6DA Tel. +44 (0) Fax. +44 (0)