"PAYING FOR WATER SERVICES 2006-2010"
ANALYSIS OF WHETHER THERE ARE SIGNIFICANT CROSS-SUBSIDIES BETWEEN THE DIFFERENT CUSTOMER GROUPS SERVED BY SCOTTISH WATER: FINAL REPORT
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Scottish Executive, February 2005
If you would like further copies of this report please contact:
Scottish Executive Water Services Division
Area 1-H (north)
Victoria Quay
Edinburgh
EH6 6QQ
Telephone: 0131 244 5099
Email: waterservices@scotland.gsi.gov.uk
Further information is also available on the Scottish Executive website at: www.scotland.gov.uk/Topics/Environment/Water
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Contents
Executive summary
1 Introduction
1.1 Terms of reference
1.2 The policy context
1.3 Peer review
1.4 Structure of this report
2 Definitions and approaches
2.1 The analysis of cross subsidy in theory
2.2 Approaches to cost allocation and the measurement of cross subsidy
2.3 The appropriate methodology for Scottish Water
2.4 The analysis of cross-subsidy in practice - the England & Wales experience
3 Cost, income and customer data
3.1 Scottish Water's costs and income for 2003-04
3.2 Scottish Water's customers and their characteristics
4 Costs drivers for cost allocation
4.1 Water supply
4.2 Sewerage service
4.3 Overview of the cost allocation methodology
5 Assessment of cross-subsidy
5.1 Taking account of uncertainties
5.2 The balance between water and sewerage services
5.3 Water supply
5.4 Sewerage services
5.5 The overall balance between household and non-household charges
5.6 Interpretation of the findings
6 Conclusions and recommendations
6.1 Main findings
6.2 Parallels with England & Wales
6.3 Recommendations
7 References
Annex 1 Scottish Water's costs and income for 2003-04
Annex 2 Analysis of the WIC22 non-household revenue database
Annex 3 The cost allocation methodology in detail
Annex 4 Modelling of data uncertainties
Annex 5 Expert review by Professor Catherine Waddams, Professor in the School of Management and Director of the ESRC Centre for Competition Policy at the University of East Anglia
Table 1: The balance between household and non-household water charges and costs
Table 2: The balance between household and non-household sewerage charges and costs
Table 3: Scottish Water's Expenditure for 2003-04
Table 4: Reconciliation of ABC costs and the statutory accounts for 2003-04
Table 5: Scottish Water's core business - total costs for 2003-04
Table 6: Water service costs for 2003-04
Table 7: Sewerage service costs for 2003-04
Table 8: Water supply mapping for ABC activities to wholesale function
Table 9: Sewerage service mapping for ABC activities to wholesale function
Table 10: Comparisons with allocation of capital costs and charges in England & Wales
Table 11: Adjusted allocation of total costs by service
Table 12: Scottish Water's tariff income for 2003-04
Table 13: Volume used by measured customers, by operating area (total volume Ml/day)
Table 14: Distribution of metered and un-metered water customers by Sector
Table 15: Distribution of metered and un-metered sewerage customers by Sector
Table 16: Distribution of metered water customers by connection size (%)
Table 17: Surface drainage and sewage service
Table 18: Industry sector distribution of duplicate records deleted
Table 19: Mappings for non-household customer locations
Table 20: Customer shares in water delivered and distribution input
Table 21: Index of R&T functional expenditure by operating area
Table 22: Peak demand profiles by non-household economic sector
Table 23: Peak demand profiles by non-household customer group
Table 24: Network location of non-household customers
Table 25: Share in distribution opex
Table 26: Shares in standardised connections
Table 27: Opex and capex shares of distribution costs by network location
Table 28: Estimated shares in surface areas
Table 29: Central estimates of allocated cost shares from the FDC methodology
Table 30: Assumption set for simulation modelling of cross-subsidies
Figure 1: Structure of the cost allocation model
Figure 2: The balance between service revenues and costs
Figure 3: Estimated range for the water - sewerage charges imbalance
Figure 4: Estimated range for the household vs. non-household water customer imbalance
Figure 5: Estimated range for the balance between charges and costs for un-metered and metered non-household customers
Figure 6: Estimated range for the balance between charges and costs for un-metered non-household customers
Figure 7: Estimated range for the balance between charges and costs for metered non-household customers
Figure 8: Estimated range for the household vs. non-household sewerage customer imbalance
Figure 9: Estimated range for the total household vs. non-household imbalance
Figure 10: The implications for household charges if the central estimate cross-subsidy is rebalanced
Figure 11: The implications for household charges if the lower bound cross-subsidy is rebalanced
Figure 12: Scottish Water's ABC System
Figure 13: Distribution of non-household customers by operating area
Figure 14: Measured/Unmeasured water customers, by operating area (%)
Figure 15: Volume band by operating area (%)
Figure 16: Total Gross rateable value, by operating area (£m)
Figure 17: Distribution of water customers, by WIC Sector
Figure 18: Example of triangular distribution: water supply share of total costs
Figure 19: Example of uniform distribution: peak demand to average demand for food & drink sector