Ofwat’s current proposals to implement new charging rules could put Self Lay Providers’ businesses at risk, according to their trade association Fair Water Connections (FWC).

A briefing note on the issue by FWC said that its members are alarmed by the way the regulator is proposing that ‘new charging rules’ are to implement the rules and that its approach is of “great concern” to Self-Lay Providers (SLPs).

The changes involve moving from charging arrangements which are specified in legislation to locally defined arrangements based on new ‘rules’ set by Ofwat. According to the FWC, it is not known whether the various ‘Local Arrangements’ each water company will need to have in place by February 2017 will protect the viability of self-lay provision.

The briefing note also says that although self-lay should, for the last 12 years, have been available to every developer it has been easier for independent water connection provision to become established in some water company areas than in others, commenting:

“Whilst nearly all sites in the north-west are now handled by independent providers, and take-up in other areas is advancing, there is still limited self-lay activity in south-east and southern England.”

“Where it has been possible for them to function Self-Lay Providers have become well established in local competitive water connections markets.”

Ofwat's push for new arrangements by next February gives "little time for any meaningful consultations to take place"

The SLPs are concerned that while Ofwat is not due to publish their new charging rule framework until well into the autumn, the regulator is pushing water companies to introduce their new local charging arrangements by next February. This gives little time for any meaningful consultations to take place or opportunities to work on structuring charges in ways which deliver the benefits envisaged when the charging rule based approach was being promoted, according to the FWC. The SLPs are warning that rushed implementation, and the absence of a consultation governance structure, will greatly disrupt the connections market and could mean that they have to stop working while the issues are worked through.

The paper says:

“There is scepticism that those water companies who have not been to the fore in promoting self-lay are unlikely to be open to fresh ways of thinking when they develop their local ‘charging arrangements’. Provider concerns being heightened because many water companies are not sufficiently transparent or customer focused in their connection charging, an ideal which underpins the new arrangements and is necessary for meaningful consultations to take place.”

The SLPs are concerned that after next February, they could have “no choice but to stop working (as they cannot take on projects which are not financially viable to them) until Ofwat gets around to intervening. Something they know is not automatic and rarely happens quickly.” the paper says.

"Ofwat has not scrutinised financial provision for new connections work in AMP6 Plans with rigour applied to other regulated activities"

FWC is calling for Ofwat to rethink deployment in order to better safeguard Self-Lay Providers. The organisation is also critical of Ofwat’s overall approach to the issue, saying:

“It can be argued that Ofwat has not scrutinised the financial provision made by water companies for new connections work in their Business Plans with the rigour that has been applied to other regulated activities. This apparently weak historic regulatory oversight means that, without additional data, it is not possible for Providers to do any meaningful analysis of the figures in each company Business Plan for new connection related income and expenditure.”

Understanding the ‘income offset’ provision which represents the costs which are not funded by developers is key to analysing the financial arrangements - however, the historical basis used for the ‘income offset’ calculation ( it currently takes all income over a 12 year loan period) has been lost over time, the briefing paper says. Instead, as recently defined in the 2014 legislation, the costs are defrayed by future revenue from the connected properties.

“Yet the cost to serve new customers must be less than those who are supplied through old systems which require much higher maintenance. So, assuming that newly connected customers are supplied on the same tariff as other customers, it is reasonable to retain the principle by which future income is used to subsidise mains installation costs.”

The briefing paper sets out in some detail a range of uncertainties about the financial provision each water company has made in their Business Plans for new water supply work, saying it is not known how Ofwat will manage to achieve ensuring that the current balance between developer payments and the subsidy that arises from future income is maintained.

Another Self-Lay Provider criticism levelled at Ofwat’s proposal to retain the current funding balance is that there “does not appear to be a mechanism by which the anticipated administrative savings, or cost transfer savings as (hopefully) greater numbers of self-lay connections get laid, are able to be shared back with developers.”

Commenting on the potential impact of the proposals on Self-Lay Providers, the paper says:

“Clearly without any details about what is to be charged it is too early to come to the conclusion about whether the new charging arrangements will disadvantage self-lay provision. It is however clear that what is envisaged is beyond an ‘evolutionary’ transformation and will produce a step change in water connection charging.”

“It is therefore difficult to foresee how this could be introduced without creating sites which are either ‘winners’ or ‘losers’ (i.e. will pay materially more, or less, than currently) which will, in itself, disturb ongoing delivery until the reasons are understood and able to be fully explained to developers.”

FWC: little confidence that any new charging issues will be speedily resolved by Ofwat

Delivery of new mains is a lengthy process with advanced planning and consideration of provision options being done well in advance of work starting on site. The FWC are warning that for sites which should now be entering this preparation phase Self-Lay Providers are not going to be able to offer developers terms until water companies announce their charging intentions.

In the event that the new charging proposals are not clear and fairly constructed, the FWC are warning that the SLP firms cannot be expected to take on projects which are not financially viable, meaning they will have to cease trading until they persuade Ofwat that there is an issue and the regulator decides to intervene. However, “given that currently determinations can take between 2 and 5 years to be processed by Ofwat there is little confidence that any new charging issues will be speedily resolved”, the paper says.

Water company charging proposals "can be implemented without any market/customer testing"

The paper is also highly critical on the consultation rounds already held separately by both Defra and Ofwat on the rules, saying that the SLPs face a significant disparity before the ‘charging rules’ are finalised.There is no requirement for the water companies to go through formalised consultations who can decide for themselves who to have discussions with and whether they should publish drafts in advance of implementing their new charges. The FWC says this means that while input from Providers has been able to “aid shaping what is relatively high level direction”, the charging details, which water companies themselves will specify, can be implemented without any market/customer testing.

The paper also cites Ofwat’s own impact assessment in support of the FWC’s concerns, referring to the regulator’s aim for the companies “to take ownership of their charging structures” and its acknowledgement that “another risk is that greater non-standardisation leads to increased confusion and costs to developers in terms of understanding charges.”

“So Ofwat realise that giving freedom to water companies to act independently, rather than working to standardised frameworks, can be a source of confusion and add costs.”

FWC call for Ofwat to include safeguarding provisions

FWC is calling for a number of safeguards to be incorporated in Ofwat’s implementation plans to provide the SLPs with the protection their businesses need during the transition to operating against new water connection charging rules, including:

• Allowing time in the programme to give opportunity for meaningful dialogues to take place about how charges could be structured in ways which facilitate process delivery improvements;
• For each water company be required to publish their draft local ‘charging arrangements’ prior to implementation and be prevented from implementing any schemes which are not broadly acceptable to both Self-Lay Providers and developers;
• Advance testing of charging proposals against a number of prescribed development scenarios (so that the impact can be seen well in advance of the critical path of getting terms for a specific development); and,
• Ofwat to commit to quickly respond to any issues reported through stakeholder reviews of the draft ‘charging arrangements’ and giving assurances that they will ‘direct’ companies to hold implementation until issues get resolved.

Ofwat should be “much more mindful of the vulnerability to their businesses that rushed through charging proposals could cause"

The paper concludes by saying that Ofwat needs to be “much more mindful of the vulnerability to their businesses that rushed through charging proposals could cause ...and manage implementation in stages which allow the benefits of the changes to be achieved and uncertainties removed.”

“This includes Ofwat positioning themselves to vet water company charges before they get implemented rather than just indicating that they will intervene if they sense water companies are getting it wrong."

Martyn Speight, Fair Water Connections Managing Coordinator who produced the briefing paper, said that Self-Lay Providers would now wait to learn whether Ofwat is prepared to listen to their concerns or simply want to achieve implementation, at whatever cost, by early 2017.

Click here to download the FWC briefing paper in full.