Where the facility is designed with capacity that is expected to be used to process Third Party Waste,16 the risk of realising income from the sale of such capacity may be allocated in a number of ways. Two common approaches are:
(i) the risk is fully transferred to the Contractor (i.e. the income is included in the base case financial model with no up or downside sharing with the Authority); or
(ii) the risk is shared between the Contractor and the Authority (i.e. income in excess of that included in the base case financial model is subject to a sharing arrangement).
There are other options that combine elements of (i) and (ii).
Where the risk of income from spare capacity is fully transferred to the Contractor the anticipated income is included in the base case financial model. If the income isn't realised then this is the Contractor's risk. However, if more income is realised than modelled then the Contractor is entitled to the full benefit of such income.17 The Authority may choose this approach if it results in greater income being guaranteed in the base case financial model without compromising the financial robustness of the Contractor.
Where the risk of realising income from spare capacity is shared the parties should agree a mechanism for sharing such income if it does arise. Such arrangements may cater for both an element of guaranteed income and upside sharing. In such cases the guaranteed income from the sale of spare capacity should be included in the base case. If income sharing occurs where income from the sale of spare capacity is realised above a certain threshold (this can be a threshold set higher than the level of assumed guaranteed income in the base case to reflect the Contractor's risk position) then this income should not be included in the base case financial model.
For clarity it may be appropriate to include a separate component within the Payment Mechanism, which enables the benefit of the shared income to be deducted from the Unitary Charge on a transparent basis.
Any income not included in the base case financial model that is subject to sharing should be shared after netting off additional marginal costs (i.e. those not shown in the model) incurred by the Contractor in developing the additional income.
An Authority should consider the impact of any incentives to generate Third Party Income through the sale of spare capacity. For example, for some facilities (e.g. an MBT), processing capacity may be increased which results in a reduction in diversion performance.
Where the Authority requires additional diversion capacity in excess of the maximum tonnage of Contract Waste (e.g. because of waste growth, lower levels of recycling or higher calorific value of the Contract Waste leading to increased tonnage requirements) then there are a number of issues which the Authority will need to consider, for example, the impact on the Contractor's returns in the event that spare capacity cannot be sold to third parties.
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16 Such capacity is distinct from any capacity that is expected to be used to process Contract Waste but is not used because Contract Waste is lower than expected. The issues relating to such capacity are addressed in Section 2.1.3.
17 The degree of commitment of capacity to the Authority has a price implication as it constrains the ability to sell the capacity.