Increases to Heating and Water Service Charges for States Tenants.

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A decision made (18/09/2006) regarding Proposed increases to Heating and Water Service Charges for States Tenants.

Subject:	Proposed increases to heating and water service charges for States tenants.
Decision Reference:	MD-TR-2006-0086	Exempt clause(s):		n/a
Type of Report: (oral or written)	Oral	Person Giving Report (if oral):		Kevin Hemmings – Head of Decision Support
Telephone or e-mail Meeting?	n/a	Report File ref:		KH/01/24/07/06
Written Report – Title	To consider proposed increases to heating and water service charges.	Written report - author		Carl Mavity – Director of Estates Services – Housing Department
Decision(s): In accordance with paragraphs 5.11 to 5.17 of financial direction 4.1 – “Increases in States Fees and Charges” - to approve increases of: · 22% for systems fuelled by Gas & Oil; and. · 30% for systems fuelled by Electricity with effect from 1st September 2006. · To approve an increase in water service charges of 10% for all tenants with effect from 1st September 2006. · To approve that the heating, hot water and water service charges should, in future, be maintained in line with any changes in the cost of providing these service, to ensure that the Housing Department can recover the full cost from States Tenants.
Reason(s) for decision To comply with financial direction 4.1 which requires charge increases in excess of 2.5% and which may be contentious to be approved by the Minister for Treasury and Resources.
Action required: To notify the Housing Department that the proposed increases in charges have been approved.
Signature: (Minister/ Assistant Minister)			Date of Decision: 18th September 2006

Increases to Heating and Water Service Charges for States Tenants.

Report to the Housing Minister

Date of report: - 23rd June 2006

To consider proposed increases to heating and water service charges

Background

The department provides heating and hot water in the form of district heating systems to 3,006 of its tenants. The provision of heating and hot water is based on a 52 week cycle, with 26 weeks of heating and hot water and 26 weeks of hot water only, being provided. In respect of this service, those tenants being provided with heating and hot water are charged a service charge supplementary to their rent which is dictated by the type of heating they have installed and the size of their accommodation.

The department provides all of it’s tenants with water, the vast majority of which is mains water supplied by Jersey Water. The department pays Jersey Water the full cost of the water supplied and then recovers those costs from tenants by way of a service charge which again is supplemental to the rent payment. The water service charge is set according to accommodation size.

The standard service charges are as follows:-

Unit Size	Oil & Gas Heating & Hot Water	Electric Standard Heating & Hot Water	Enhanced Electric Heating & Hot Water	Water

BEDSIT	£ 6.49	N/A	N/A	£ 3.50
1 BED FLAT	£ 8.43	£ 4.40	£ 6.45	£ 3.73
2 BED FLAT	£ 9.71	£ 4.85	£ 8.43	£ 4.02
3 BED FLAT	£ 8.43	N/A	N/A	£ 3.73
2 BED BUNGALOW	£ 9.71	N/A	N/A	£ 4.02
3 BED FLAT	£ 10.36	£ 4.85	N/A	£ 4.59
4 BED FLAT	N/A	N/A	N/A	£ 5.34
1 BED MAISONETTE	£ 8.43	N/A	N/A	£ 3.73
2 BED MAISONETTE	£ 9.71	N/A	N/A	£ 4.02
3 BED MAISONETTE	£ 10.36	N/A	N/A	£ 4.59
4 BED MAISONETTE	£ 11.67	N/A	N/A	£ 5.34
1 BED HOUSE	£ 9.08	N/A	N/A	£ 3.73
2 BED HOUSE	£ 10.36	N/A	N/A	£ 4.02
3 BED HOUSE	£ 11.02	N/A	N/A	£ 4.59
4 BED HOUSE	£ 11.67	N/A	N/A	£ 5.34
5 BED HOUSE	£ 11.67	N/A	N/A	£ 6.28
6 BED HOUSE	£ 11.67	N/A	N/A	£ 6.28

Heating and Hot Water

The cost of oil, gas and electricity has risen over the past 2 years, where increases have been in excess of 40% for gas and oil. Whilst electricity has only risen moderately to date, the JEC have made it clear that an increase of between 15% and 25% will be imposed by the end of the year.

The cost of providing heating and hot water in 2005 was £1,508,700. However, due to the volatility of the market, particularly in gas and oil the price paid by the department has risen significantly, whilst charges to tenants have failed to keep up. In 2005 this led to an under recovery of £239,000 in heating service charges.

The cost of providing heating and hot water for 2006 is predicted to be £1,564,390. At the current service charge level it is predicted that an under recovery of around £248,000 will be experienced. This figure assumes full occupancy of all accommodation receiving heating and hot water and no bad debt, arrears etc… On that basis the level of under recovery is likely to be higher.

Water

The cost of water to the department in 2005 was £916,050. This is the net figure after the department’s bulk purchase discount has been applied. In real terms the market cost of this water is actually £1,017,800. The discount awarded reflects the full cost of administration, vacant properties and bad debt risk that the department incurs instead of Jersey Water. The net cost currently charged to tenants does not reflect the full cost of providing water to their homes.

At present levels the water service charge paid by tenants will recover £929,123.

It can be seen that the full amount of the discount is being passed on to tenants and this is viewed as unacceptable as it inevitably results in a loss to the department.

User Pays Principle

Financial Direction 4.1 Increases in States Fees and Charges states that:-

‘It is recognised that there are instances where one particular group receives a valuable service from a States department at a charge which is below cost and they are, therefore, being subsidised by taxpayers generally. In these circumstances it is expected that departments carefully consider whether there is a case for the user to meet either the full cost of a service or a greater proportion of the cost of service provision. (When assessing the cost of providing a service departments should ensure that all direct costs as well as overhead costs are taken into account – see financial direction “Accounting for overheads” for further information on which costs may be included).’

In order to comply with the Financial Directions the department needs to consider whether to pass on the full cost of providing heating, hot water and water service charges. Failure to do so, will inevitably mean that the loss be met from within the department’s own cash limit. In essence the maintenance budget will have to be reduced accordingly.

Necessary Increases

Heating and Hot Water

Predicting the necessary increases in heating and hot water service charges is not a straightforward process, to some extent the full cost of providing these services annually will be dictated by the weather, the cost of energy and the demand for heat and hot water from tenants. Whilst there is no desire to profit from any charge increases, indeed this would be prohibited under the Finance Law, the department cannot sustain the significant losses projected for 2006 and beyond.

The nature of the heating and hot water delivery systems are such that there is no means of reducing fuel consumption or cost, other than by reducing operating times or heating levels. Both of these options are unrealistic, heating and hot water delivery systems already operate at pre-defined times and significant effort has been put into the introduction of control mechanisms which allow the department to manage these. Any reduction in heating levels or operating times would have a negative impact on tenants, particularly the elderly or immobile.

Wherever there is a means for the tenant to be accurately metered for energy consumption, responsibility for heating and hot water costs is being transferred to the tenants and service charges cancelled. This process will be complete by August 2006. This will provide those tenants with a direct incentive to manage their consumption as they will only be paying the energy provider for the energy that they consume in order to generate their heating and hot water.

All new developments and refurbishment’s being undertaken by the department, such as the recently completed flats at Le Selliere Court and the refurbished homes at Clos de Roncier, as well as other schemes either in progress or in the planning stages, deliver buildings which are well insulated and heating and hot water systems that are efficient and wherever possible rely upon the tenants paying for the running costs direct to the energy provider.

Water

Water charges are more stable, it simply being the case that the department has not sought to retain any of the discount it receives from Jersey Water for collecting charges to offset its administration and to cater for vacant properties and bad debt.

This needs to be addressed and it is proposed that the heating and hot water service charges must be increased with effect from 1st August 2006 by 31% and water charges by 10% also with effect from 1st August. So doing will have the effect of increasing charges as follows:-

Unit Size	Oil & Gas Heating & Hot Water	Electric Standard Heating & Hot Water	Enhanced Electric Heating & Hot Water	Water

BEDSIT	£ 8.50	N/A	N/A	£3.85
1 BED FLAT	£ 11.04	£ 5.76	£ 8.45	£4.10
2 BED FLAT	£ 12.72	£ 6.35	£ 11.04	£4.42
3 BED FLAT	£ 11.04	N/A	N/A	£4.10
2 BED BUNGALOW	£ 12.72	N/A	N/A	£4.42
3 BED FLAT	£ 13.57	£ 6.35	N/A	£5.05
4 BED FLAT	N/A	N/A	N/A	£5.87
1 BED MAISONETTE	£ 11.04	N/A	N/A	£4.10
2 BED MAISONETTE	£ 12.72	N/A	N/A	£4.42
3 BED MAISONETTE	£ 13.57	N/A	N/A	£5.05
4 BED MAISONETTE	£ 15.29	N/A	N/A	£5.87
1 BED HOUSE	£ 11.89	N/A	N/A	£4.10
2 BED HOUSE	£ 13.57	N/A	N/A	£4.42
3 BED HOUSE	£ 14.44	N/A	N/A	£5.05
4 BED HOUSE	£ 15.29	N/A	N/A	£5.87
5 BED HOUSE	£ 15.29	N/A	N/A	£6.91
6 BED HOUSE	£ 15.29	N/A	N/A	£6.91

If introduced for all tenants receiving the service, with effect from 1st August 2006, this will increase the department’s recovery in 2006 to £2,339,870 and in 2007 to £2,612,981. The Housing Department will still experience an under recovery in 2006 of £154,000 due to the charges being too low from January to July 2006, however the introduction of the new rates will prevent the under recovery becoming worse.

Impact on the elderly

Any increase in service charges should be considered with care, and in respect of the increases being suggested here particular consideration is being given to the elderly, who consistently have the lowest income amongst States tenants. The ability of pensioners (those over 60 years of age) to meet such significant increases is of concern and it is suggested that the Minister could elect to stage increases for those over 60 years of age with two equal increases in August 2006 and August 2007.

For illustrative purposes, this would have the effect of increasing weekly service charges for a pensioner living in a 1 bedroom flat with electric heating and hot water by £0.87 per week or £45.32 per annum. There would be another equal increase in August 2007.

Assuming no further increases, this would reduce the recovery in 2006 to £2,253,415 and in 2007 to £2,490,963, maintaining an over all under recovery of £240,974 in 2006 and £60,000 in 2007.

It is anticipated that by 2008 and subject to minimal significant increases in energy prices in the interim the department should be in a position to break even in this area.

This arrangement is set out below.

Unit Size	Oil & Gas Heating & Hot Water AUGUST 2006	Oil & Gas Heating & Hot Water AUGUST 2007	Electric Standard Heating & Hot Water AUGUST 2006	Electric Standard Heating & Hot Water AUGUST 2007	Enhanced Electric Heating & Hot Water AUGUST 2006	Enhanced Electric Heating & Hot Water AUGUST 2007	Water AUGUST 2006	Water AUGUST 2007

BEDSIT	£ 7.50	£ 8.50	N/A	N/A	N/A	N/A	£ 3.68	£ 3.85
1 BED FLAT	£ 9.74	£ 11.04	£ 5.08	£ 5.76	£ 7.45	£ 8.45	£ 3.92	£ 4.10
2 BED FLAT	£ 11.22	£ 12.72	£ 5.60	£ 6.35	£ 9.74	£ 11.04	£ 4.22	£ 4.42
3 BED FLAT	£ 9.74	£ 11.04	N/A	N/A	N/A	N/A	£ 3.92	£ 4.10
2 BED BUNGALOW	£ 11.22	£ 12.72	N/A	N/A	N/A	N/A	£ 4.22	£ 4.42
3 BED FLAT	£ 11.97	£ 13.57	£ 5.60	£ 6.35	N/A	N/A	£ 4.82	£ 5.05
4 BED FLAT	N/A	N/A	N/A	N/A	N/A	N/A	£ 5.61	£ 5.87
1 BED MAISONETTE	£ 9.74	£ 11.04	N/A	N/A	N/A	N/A	£ 3.92	£ 4.10
2 BED MAISONETTE	£ 11.22	£ 12.72	N/A	N/A	N/A	N/A	£ 4.22	£ 4.42
3 BED MAISONETTE	£ 11.97	£ 13.57	N/A	N/A	N/A	N/A	£ 4.82	£ 5.05
4 BED MAISONETTE	£ 13.48	£ 15.29	N/A	N/A	N/A	N/A	£ 5.61	£ 5.87
1 BED HOUSE	£ 10.49	£ 11.89	N/A	N/A	N/A	N/A	£ 3.92	£ 4.10
2 BED HOUSE	£ 11.97	£ 13.57	N/A	N/A	N/A	N/A	£ 4.22	£ 4.42
3 BED HOUSE	£ 12.73	£ 14.44	N/A	N/A	N/A	N/A	£ 4.82	£ 5.05
4 BED HOUSE	£ 13.48	£ 15.29	N/A	N/A	N/A	N/A	£ 5.61	£ 5.87
5 BED HOUSE	£ 13.48	£ 15.29	N/A	N/A	N/A	N/A	£ 6.59	£ 6.91
6 BED HOUSE	£ 13.48	£ 15.29	N/A	N/A	N/A	N/A	£ 6.59	£ 6.91

Irrespective of whether the increase in service charges are introduced as a one off increase or staged as suggested for the over 60’s, what must be acknowledged, is that if in the intervening period energy or water prices increase, service charges should be increased immediately in line with those costs.

Recommendation

That the Minister approves the following:-

1. That the heating, hot water and water service charges should be maintained in line with any changes in the cost of providing these services, to ensure that the Housing department can recover the full cost from States tenants.

2. To approve an increase in heating and hot water charges of:-

31% for all tenants under the age of 60 years with effect from 1 August 2006, and

15.5% for all tenants over 60 years of age with effect from 1st August 2006 with the remaining balance of 15.5% to be introduced on 1st August 2007.

3. To approve an increase in water service charges of:-

10% for all tenants under the age of 60 years with effect from 1 August 2006, and

5% for all tenants over 60 years of age with effect from 1st August 2006 with the remaining balance of 5% to be introduced on 1st August 2007.

Written By:-

C B Mavity

Director of Estate Services

Authorised by:-

I K Gallichan

Chief Officer