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APPENDIX 1

BACKGROUND NOTE: THE CHARGING REGIME FOR DISCHARGES TO THE SHIP CANAL

1 Introduction

1.1 This note explains the charging regime for discharges to the (MSC). It first summarises relevant history in relation to the finances of The Manchester Ship Canal Company Limited (MSCCL) (section 2), outlines the capital costs (section 3) and then outlines the current income in respect of the operation of the MSC (section 4).

1.2 MSCCL operates a system of discharge agreements with third parties wishing to discharge into the MSC. The basis of this regime is set out in section 5 and the calculation of its application to Eccles Wastewater Treatment Works (WwTW) is found at section 7.

1.3 In its Statement of Case1, United Utilities Water Limited (UUWL) refers to the fact that MSCCL demands the payment of money for a right to discharge into the MSC, describing this as a ‘ransom’. This note sets out MSCCL’s position by reference to the commercial market for discharge agreements, and explains the approach adopted to the appropriate charge to apply to the right to discharge that UUWL wishes to acquire.

2 History of the Manchester Ship Canal Company Limited

2.1 It is of relevance to this matter that the Inspector understands the historic context of the financial model of the MSCCL and how this now operates as a commercial entity in the 21st Century despite the framework in which it exists. To that end, this note sets out some of the history to the finances and management of MSCCL which form the background to the current operations.

2.2 MSCCL is a statutory company, incorporated by the Manchester Ship Canal Act 1885 (the 1885 Act). As such all of its rights, powers and duties are derived from that and subsequent Acts and Orders (and general legislation which applies to all companies). For example, MSCCL’s ability to borrow money was limited to any specific money raising powers in its constitution and subject to limits set by that and subsequent Acts.

2.3 Under the 1885 Act, MSCCL was given a specific power to borrow up to £2M to help fund the construction of the Canal. In reality, due to the scale and size of the project this money soon ran out and further borrowing powers were passed in later acts of 1890, 1891, 1893, 1904, 1913, 1925,

1 Paragraph 10.12 of CD/CPO/7

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1949 and 1956. Money was particularly needed during the construction phase of the Canal which went on until 1894. MSCCL created various debentures and these were largely supported by the then Manchester Corporation (which later became Manchester City Council).

2.4 The Manchester Corporation had long supported the proposed Ship Canal and the Corporation lent at first £3M and then a further £2M during the construction phase. This loan of £5M became permanent and irredeemable by virtue of the Manchester Ship Canal (Finance) Act 1904 (the 1904 Act) which also provided for the issue of £1.06M preference stock to the Corporation in satisfaction of unpaid interest on existing stock.

2.5 From a constitution and management perspective, the 1904 Act also made permanent the Corporation’s power, first conferred in 1893, to appoint a majority of the directors of MSCCL including the Deputy Chairman. Therefore although MSCCL remained listed on the Stock Exchange, its Board of Directors were not appointed solely by shareholders but a majority appointed by the Manchester Corporation giving MSCCL a quasi-public body outlook. Its role therefore encompassed, in addition to its commercial interests, consideration of the greater good for the prosperity of the North West in attracting businesses to the area and improving public services such as the drainage network.

2.6 Over the years, the Manchester Corporation continued to provide significant financial aid to MSCCL. In 1914 they lent a further £0.7M and in 1951 lent support to interest payments on £5M borrowed to fund the construction of the QE II Dock at Ellesmere Port at that time.

2.7 In the late 1980s, after the Peel Group had become the majority shareholder in MSCCL, discussions were held with Manchester City Council and agreement reached for all of its debentures to be repaid at par which amounted to £7M, and the City Council gave up its powers to appoint directors to MSCCL. This was enshrined in a Harbour Revision Order passed in 1990. In many ways, therefore, MSCCL only began to take on a fully commercial outlook from this time onwards and particularly after all the minority shareholders has been bought out in 1993.

3 Capital costs

3.1 There are substantial capital costs associated with the MSC’s long term maintenance and upkeep. As set out in Steve Gavin’s evidence (section 5 of MP/6/A), the canal banks and Barton Lock are significant and sensitive assets.

3.2 Over the period March 2012 to March 2017, the average cost of maintenance excluding labour has been £1.4M. Annual running costs were, broadly speaking, c£12M per annum from 2014 to 2017 with additional capital expenditure on assets owned by the MSCCL ranging from £2M to £5M in the same time period.

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3.3 Details of dredging requirements and maintenance are set out in Joe Blythe’s evidence (section D of MP/7/A). The costs associated with dredging and maintenance are variable year on year however, they can be summarised as follows:

3.3.1 Dredging varies from £1.2M to £1.9M per annum in the main due to variations in weather and traffic. These costs include related costs (in the region of £20,000 to £50,000 per annum) such as licences and permits for landfill at Frodsham / Woolston for disposal of dredgings and discharge consents for run off from the deposit grounds and related surveying.

3.3.2 Over the period March 2012 to March 2017, the average cost of dredging has been £1.5M per annum.

3.3.3 Maintenance work ranges from £1.3M to £1.5M per annum. This excludes engineers’ salaries and any apportionment of overhead costs and relates to direct maintenance expenditure only i.e. spare parts, tools and consumables. The labour cost averages approximately a further £1.3M per annum.

3.3.4 Other costs associated with operating the MSC are largely in the form of third party labour. This includes Pilotage at c£1.6M per annum, Towage at c£1.2M per annum and operation of the various locks along the canal at c£1.2M per annum.

4 Other income

4.1 As set out in the MSCCL Schedule of Port Charges 2018 at MP/8/C.1.1, a number of considerations affect the setting of port charge rates levied upon canal users (including rates for the utilisation of the MSC, available services and associated infrastructure):

4.1.1 MSCCL cannot charge commercial traffic using the MSC more than a competitive, commercial rate (as such traffic would go elsewhere).

4.1.2 In respect of Ship Dues, Good Dues and Passenger Dues (the latter two being called Canal Tolls by MSCCL), persons having a substantial interest in those charges may object to the Secretary of State if they believe that the charges should (in general) not be levied at all or should be levied at a lower rate. Section 31 of the Harbours Act 1964 (the 1964 Act) details the process which is followed in respect of such objections.

4.1.3 Pilotage charges have to be reasonable and are subject to the same right of objection to the Secretary of State as Ship Dues, Good Dues and Passenger Dues. Sections 10(1) and 10(6) of the Pilotage Act 1987 refer respectively.

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4.1.4 Charges other than those in respect of Ship Dues, Good Dues, Passenger Dues, Pilotage, operating ferries and certain water licensing charges issued by a Statutory Harbour Authority must be reasonable in accordance with s.27 the 1964 Act.

4.1.5 In respect of MSCCL and the Harbour and Port of Manchester, s.178 of the 1885 Act states that MSCCL may make reasonable charges for work done, services rendered and facilities afforded.

4.2 MSCCL publishes its Port charges annually, subject to a right to review the charges more often if necessary. Charges are generally increased on an annual basis in line with inflation (RPI all items). However, if for example MSCCL assesses that costs are increasing or are likely to increase at a level exceeding inflation, then charges may increase by a percentage exceeding that of the current rate of inflation.

4.3 Pilotage charges are assessed in the same way. By way of example, the cost of providing the underlying Pilotage service generally increases in line with inflation, albeit that is kept under review. However, MSCCL now has additional liabilities in terms of contributing towards the Pilots National Pension Fund (PNPF) shortfall. As such, since 2013, Pilotage charges have increased by more than the prevailing rate of inflation and more than the underlying increase in the cost of providing the day-to-day service to take account of the additional PNPF liabilities.

4.4 Ship Dues, Good Dues and Passenger Dues are in effect a form of taxation and the charges issued do not have to be in proportion to the service/facility which a particular customer enjoys directly. In essence, the general costs of managing, maintaining and improving the Port are spread amongst all port users on the basis of size of vessel entering the Port and tonnage of cargo imported/exported.

4.5 Where the cost of providing a particular service (for example waste reception) has increased by more than the general inflation figure, the particular charge associated with that service may increase by a greater percentage than other charges.

4.6 Details of the current rates charged are set out in the MSCCL Schedule of Port Charges (MP/8/C.1.1).

5 Discharge agreements

5.1 The statutory requirements set out in Joe Blythe’s evidence (section D of MP/7/A) impose on MSCCL a substantial financial liability both in relation to ongoing maintenance and dredging and also from time to time capital expenditure on repairing and replacing machinery used on the MSC. As a result of these financial obligations, the Peel Group has, since it became majority shareholder in 1993, sought to recoup some of these costs from the users of the MSC.

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5.2 An area identified as being a potential source of income generation to offset the costs identified above was in relation to companies which abstract water from the MSC for use in their business operations and those who wish to discharge water into the MSC including surface water discharge from their land holdings where they do not discharge into UUWL’s network.

5.3 In the mid to late 1990s, some thought was given to discharges into the MSC and the sums MSCCL was receiving for these and whether there was an ability to charge more both to existing users and new users. A number of historic agreements had given away rights of discharge for nothing or small amounts of money as an incentive for new canal business or simply because the greater good for the area would see new factories and development bringing jobs and prosperity to the neighbourhood. MSCCL in its quasi-public role saw the greater good and charged well below a commercial rate for taking away wastewater. Some new agreements were entered into in the late 1990s and a market began to develop, particularly for new discharges.

5.4 This market further opened up after the Court of Appeal ruling in British Waterways Board v Severn Trent Water [2001] EWCA Civ 2762. The effect of the decision in BWB has been scaled back for statutory undertakers who can rely on implied provisions into the Water Industry Act 1991 for existing outfalls which were in situ prior to 1 December 1991, but it remains the case that they may only discharge from outfalls created after that date with the agreement with the canal or other private watercourse owner. Over time this has become a valuable source of income for entities such as Canals and Rivers Trust, the , The Duchy of Lancaster and the Port of London Authority.

5.5 In 2004 Peel Utilities was set up as a dedicated division of the Peel Group to cover all sorts of business opportunities that were emerging from the opening up through competition of the water industry and also to seek to increased revenues from the MSC, the and other water assets within the Group including Port of , Clydeport, Heysham Harbour and Port of Sheerness, which the Group acquired around that time in order to increase revenues generally on water matters.

5.6 In order to formalise the arrangement, an agreement was put in place between Peel Ports Group and Peel Utilities in 2006 in order that Peel Utilities could act as the Ports agent with regard to the development and implementation of business opportunities within the various canal and docks networks. This agreement was novated over to Peel Water Services Limited (PWSL) in 2011.

5.7 PWSL was tasked with establishing who had rights of discharge to and abstraction from Peel’s various water assets including the MSC, the terms on which they had those rights and whether parties were discharging and

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abstracting without rights and seeking to put them on a formal footing. The agreements put in place sought to better align the charges with those which a statutory water and sewerage undertaker would charge for the grant of similar rights into their own networks. In effect and over time PWSL sought to create a market where it could benchmark rights for drainage and abstraction based on quantities, pipe size and size of areas being drained in order to produce its own dedicated scale of charges.

5.8 This has been achieved over the last eleven years and charges are competitive against the equivalent rate the local statutory undertaker would charge for the grant of a similar right into their own network.

5.9 As agent to MSCCL, PWSL is bound by section 178 of the 1885 Act and section 27 of the 1964 Act. Both sections require charges levied by harbour authorities to be reasonable.

5.10 PWSL’s scheme of charges was examined by the High Court in the recent case General Motors (UK) Limited v The Manchester Ship Canal Company Limited [2016] EWHC 29603 and the Court accepted the scheme as being the market rate to acquire such rights.

5.11 PWSL offers a range of services to third parties that may wish to make use of the canal. These include:

5.11.1 abstraction and discharge of canal water for process use;

5.11.2 abstraction and discharge of canal water for heating and cooling;

5.11.3 discharge of surface water;

5.11.4 discharge of treated trade effluent;

5.11.5 discharge of final effluent; and

5.11.6 water for firefighting.

5.12 Furthermore, with the anticipated opening up of the water market with upstream competition, canal water could be utilised as a raw water source for treatment up to potable water standards. This source could be developed by UUWL or other potential competitors in the emerging market.

5.13 Table 1 below sets out illustrative information on agreements that have been entered into with third parties abstracting and/or discharging into the MSC. The differing sums reflect the differing services provided and the volumes abstracted discharged and surface wares drained. The payee names have been redacted due to commercial confidentiality.

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Table 1 – Existing discharge agreements

Customer Service Annual Commence Volume Pollutant loads Type charge ment Date 4 (per (as set by the (2017/18) m3) EA)

Paper Abstraction £510,000 31/3/2009 7,000m3 BOD – 16mg/l; Manufacturer / discharge /day total suspended solids (24 hour sample) 30mg/l; suspended solids (spot sample) 45mg/l; ammonia no limit set; temp 30 degrees

Chemical Abstraction £330,772 1/4/2009 n/a n/a Manufacturer Chemical Abstraction £1,178,429 17/9/2010 5,000m3 Complex set of Manufacturer / /day permit Discharge arrangements for difficult pollutants – not immediately comparable

Power Abstraction £325,000 3/9/2009 10,700 Temperature 35 Station / discharge m3/day degrees; temperature increase +9 degrees; free chlorine 0.2mg/l; total mercury 0.005mg/l

Warehouse Surface £68,367 18/5/2011 Minimal Water Discharge Shopping Surface £477,917 31/7/2011 Minimal Centre water discharge Waste Surface £24,928 24/8/2011 Minimal Facility water discharge

4 Maximum permitted in EA permit

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Commercial Surface £15,329 30/6/2014 Minimal Offices water discharge Logistics Surface £72,515 1/4/2016 Minimal Warehouse water discharge and treated domestic effluent Sewerage Surface £65,000 11/11/2016 Minimal Undertaker water discharge

5.14 The approach taken by PWSL is broadly in-line with what other watercourse owners such as the Crown Estate, Canal and Rivers Trust and the Port of London Authority were doing in order to optimise the commercial opportunities from discharge and abstraction rights.

5.15 For the financial year 2016/17 the Canal and River Trust received £27M from utilities and water development by third parties that used canal assets for the routing of cables and for the abstraction and discharge of water5. This would have included income received from UUWL for discharges into its canal assets.

5.16 For the financial year 2016/17 the Port of London Authority received £9.573M from River Licences and other rents6. This would have included income received from third parties for discharges into the river including Thames Water the local water and sewerage undertaker.

6 Process of setting charging levels

6.1 In order to establish its own commercial charging regime, PWSL considered a number of factors and from these set indicative charging rates. These are applied to the volume of the discharge on a stepped basis with the first 50,000m3 charged at the first rate and charges scaled for each increment in volume thereafter. Each discharge agreement is the subject of commercial negotiations and as such the ‘tariff’ discharge charges are seen as a starting point for such discussions.

6.2 PWSL’s charges are predicated on the Mogden Formula7. This formula, or variants of it, is widely used in the sewage industry. The Mogden Formula considers the cost of various elements of the treatment process,

5 Annual Report 2016/17 6 Annual Report 2016/17 7 C = R+V+B1+(Ot/Os*B2)+(St/Ss*S) Where: C = Charge per m3; R = Reception and conveyance; V = Preliminary and Primary Treatment; B1 = Biological Treatment (Capital element); Ot = Settled COD of the trade effluent (mg/l); Os = Settled COD of sewage (mg/l); B = Biological Oxidation; St = Suspended Solids of the trade effluent (mg/l); Ss = Suspended Solids of sewage; S = Sludge treatment and disposal. 8

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some of which are not relevant to MSCCL’s role as the recipient of discharges8; irrelevant elements are excluded from consideration. The Mogden Formula includes consideration of the cost of reception and conveyance of trade effluent into the sewage network (referred to within the Mogden Formula as the R factor). In MSCCL’s case it is the R factor which is of most relevance to its operations as the canal represents an alternative route for that reception and conveyance.

6.3 PWSL also considered the existing local market for discharge of treated effluent (wastewater). UUWL retail charges for non-household discharges to the sewer network were considered to provide an appropriate comparison. Details of UUWL’s charges are set out in their annual charges scheme. The charges schemes for the period 2017/18 and 2018/19 are appended9 to this document.

6.4 In 2012/13, UUWL’s charging scheme10 set a rate of £0.2360/m3 for the reception and conveyance of trade effluent into its sewerage network. For volumes over 50,000m3, UUWL offered a reduction in the rate in terms of price per m3. This rate per cubic metre is replicated by PWSL but in terms of a stepped charging mechanism to take account of different scales of discharge into the canal i.e. there is a discount for high volume discharges. This approach also took account of existing agreements negotiated by PWSL for other high volume discharges into the MSC.

6.5 These considerations led to the development of a charging mechanism which took into account the market for this service through both the competitive alternative option and existing agreements with other parties. PWSL has set its charges annually since 2013/14.

6.6 The charges per m3 are updated annually by PWSL to reflect the ratio of increase UUWL has applied to its own charging levels. The increases between years are based on the uplift that UUWL applied to the R factor. The percentage change is then applied to the rates in the PWSL stepped tariff.

6.7 It should be noted that since April 2017 as a result of the opening of the water market, UUWL no longer operates a retail business for non- household discharges to the sewage network and offers this service on a wholesale basis only. Account will therefore be taken of both UUWL’s charges and wholesaler and Water Plus as the default retailer. Due to this change and the fact that the retailer charges going forward are as yet unknown, PSWL has not yet set its own charging rates for 2018/19 or beyond.

6.8 When a commercial discharge agreement is entered the basis of the annual review of the charges will be a matter for negotiation between the parties. In some cases, therefore, the charge is reviewed annually in line

8 For example treatment stages at the wastewater treatment works and the cost of sludge disposal 9 See MP/8/C.1.4, MP/8/C.1.5 and MP/8/C.1.6 10 See MP/8/C.1.3

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with the retail price index and does not therefore directly track the market rate as benchmarked against UUWL’s charges.

6.9 The current level of PWSL’s charges for trade effluent discharges to the MSC are set out below in Table 2.

Table 2 – PWSL trade effluent discharge charges 2017/18

Rate £ per m³ Annual Volume Up £0.3385 from 0 m³ to 50,000 m³ Up £0.2697 from 50,001 m³ to 500,000 m³ Up £0.1434 from 500,001 m³ to 2,000,000 m³ Up £0.1148 from 2,000,001 m³ to 5,000,000 m³ Up £0.0861 from 5,000,001 m³ to 12,000,000 m³ Up £0.0775 from 12,000,001 m³ to 100,000,000 m³ £0.0746 over 100,000,001 m³

6.10 As noted previously, the charge which results from application of these rates is a starting point which acts as a guide to inform negotiations with the third party.

7 Discharge agreement for Eccles Wastewater Treatment Works

7.1 In September 2012 UUWL approached Peel Group to seek to agree terms for a proposed new discharge to the MSC as part of what is now the CPO Scheme. During these discussions, UUWL confirmed11 that the volume to be discharged would be 6,922,128m3 per annum.

7.2 It has subsequently been assessed12 that the likely discharge volume would be in excess of 14,000,000m3 per annum.

7.3 The then-current charging rates applied by PWSL are as set out in Table 3.

11 By email from Jane Barlow of UUWL to Neil Adair of Peel Group dated 7 August 2012 12 This assessment is based on an average Final Effluent (FE) flow from UU’s works over the last five years of 450l/s multiplied by 60, 60, 24, 365 and divided by 1000 which gives an annual FE volume of 14,191,200m3. In addition, there is 591,222 m3 of discharge from the Inlet, Storm Tank and Winton Green combined sewer overflows, giving a total discharge volume of 14,782,422 m3 10

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Table 3. Rates for Discharge of Wastewater into Canals 2012/13

Rate £ per m³ Annual Volume Up £0.2360 from 0 m³ to 50,000 m³ Up £0.1880 from 50,001 m³ to 500,000 m³ Up £0.1000 from 500,001 m³ to 2,000,000 m³ Up £0.0800 from 2,000,001 m³ to 5,000,000 m³ Up £0.0600 from 5,000,001 m³ to 12,000,000 m³ Up £0.0540 from 12,000,001 m³ to 100,000,000 m³

7.4 Applying these charges to a total discharge of 6,922,128m3 per annum results in a charge of £601,727 as follows:

Table 4. Calculation of discharge cost for 2012/13

Annual Volume Rate £ per Charge m³ 11,800 First 50,000 m³ £0.2360 84,599.81 Next 449,999 m³ £0.1880 149,999.90 Next 1,499,999 m³ £0.1000 239,999.92 Next 2,999,999 m³ £0.0800 115,327.65 Remaining 1,922,128 m³ £0.0600 601,727.31 Total

7.5 The total charge of £601,727 was rounded down to £600,000 for the commercial terms that were used in discussions with UUWL.

7.6 Had the same volume been discharged into UUWL’s own network, based on UUWL’s own schedule of charges, there would be an annual charge of £1,370,581.34 (in 2012/13) for an annual volume of 6,922,128m3. In 2017/18 UUWL’s charge would be £1,981,805. This is based on UUWL’s Water Plus Charges Scheme13 and the R factor applied from the Mogden

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Formula based on a discharge greater than 50,000m3 per annum. UUWL’s price per cubic metre in 2017/18 is £0.286314.

7.7 The charge proposed by MSCCL is therefore substantially lower than that which would be levied by UUWL itself for the same volume of discharge.

7.8 Discussions were previously held between UUWL and MSCCL under the remit of an ‘Umbrella Agreement’. This agreement anticipated UUWL undertaking (in effect) the CPO works and sought to put in place appropriate conditions. There were a number of points outstanding between the parties on which agreement had not been reached including, but not limited to, the level of charge to be applied to the new discharge.

7.9 It was recognised by both parties that any annual cost to be applied for the right to discharge would be reviewed annually. Since 2012, and assuming the basis of the annual uplift mirrored the increases in the PWSL Charges Schedule in place that year, itself revised on the basis set out above, the charges that would have been applied had discharge been made into the MSC are set out in Table 5 below.

Table 5. Annual charges for UUWL proposed discharge to MSC from Eccles WwTW

Financial Annual Volume Annual Charge (£) Year (m3)

2012/13 6,922,128 £601,272

2013/14 6,922,128 £642,090

2014/15 6,922,128 £668,691

2015/16 6,922,128 £790,796

2016/17 6,922,128 £822,299

2017/18 6,922,128 £863,285

7.10 This calculation has been undertaken on the basis of the CPO Scheme, however it is anticipated that any of UUWL’s (or MSCCL’s) identified alternatives which incorporate a discharge into the MSC would be likely to result in broadly the same level of charge, save to the extent that flows in

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a greater than 1 in 5 year storm event will continue to discharge to Salteye Brook, these flows would be excluded.

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