Ofwat has ruled against Southern Water in a dispute with a customer about the reasonableness of connection costs to a residential premises – the water company has been ordered to pay a refund plus interest.

The regulator investigated a complaint it received about the charge levied by Southern Water for making a new water supply connection to a residential premises, to determine whether the expenses incurred in making the connection under Section 45 of the Water Industry Act 1991 were reasonable.

On 25 September 2014, the complainant submitted an application to Southern Water for the connection and paid a £336 application fee. Mr. O'Connor then received an initial quotation from Southern Water for £4,837.40 on 5 November 2014 made up of £3,900.33 for the works, an £82.00 trench inspection fee, a post construction administration fee of £48.84 and VAT of £806.23.

On 7 November 2014, Mr. O’Connor paid the amount set out in the quotation in full.

Southern Water subsequently made the connection on 26 January 2015 which involved excavating and reinstating a single trench of 2.6m in the footway and 4.5m in the carriageway, laying a 25mm pipe and installing a meter. The Connection was from Southern Water's water main in the road along the property boundary and the water company required the road to be closed.

In Mr. O’Connor’s view the work could have been carried out completely in the footway, which would not have then required the road to be closed. Road-closure costs constituted a large proportion of Southern Water's quoted costs and the water company’s contractor, Clancy Docwra, had told him the connection could easily be made in the pavement.

He also considered that a connection could have been made off the existing connection to the other two flats. However, Southern Water considered that the existing supply was not sufficient to enable an additional connection without an unacceptable loss in water pressure to the existing properties.

Mr. O’Connor was not offered a refund, and as he considered the expenses incurred by Southern Water to be unreasonable, on 8 October 2015 he referred the dispute to Ofwat.

Southern Water’s more detailed breakdown of the costs involved provided to Ofwat were as follows:

• The works (construction cost) - £1,386.46
• Road closure permit - £1,312.32
• Road closure signage - £449.95
• Construction management fee - £751.60
• Trench inspection fee - £82.00
• Post construction admin fee - £48.84
• VAT - £806.23

Ofwat has ordered to Southern Water to refund Mr O'Connor of £1,209.81 (plus interest) based on the  following calculations:

On the works fee, in its draft determination Ofwat compared the cost of the works with the median cost of £981.79 set out in a report prepared for the regulator by Hyder in 2010 - A Comparative Study: Cost of new water supply connections work. Ofwat commented:  

“Southern Water has not provided any evidence to us to suggest that the Connection was particularly onerous or to support its claim that that there were circumstances which made the Connection costlier than usual for a single connection of this type in its other areas of operation.”

“Given this lack of evidence and taking into account, amongst other things, the length of the service pipe that was laid, the types of ground that were excavated and the time taken to complete the work, we consider that construction costs should be compared to at the median costs recommended in the Hyder report for connections of this nature.”

On the construction management fee, Ofwat said it can be inferred that the construction management fee constitutes 18% of the total costs for the connection. The regulator said:

“It is not clear to us which underlying activities (and their associated costs) relate to this management fee. Therefore, we are unable to take a view as to whether or not this 18% fairly reflects costs that have been reasonably incurred. For this reason, we do not consider it appropriate for the construction management fee to be included as part of the reasonably incurred expenses for the connection.”

If the complainant and Southern Water are unable to agree the amount of interest payable, the matter can then be referred to the Courts for a determination.

Commenting on wider lessons for companies and customers from the case, Ofwat said:

“We reiterate that we do not find it reasonable for companies to charge multiple management and administration fees, beyond that charged in the initial application fee.”

Click here to read Ofwat’s Final Determination in full