Ofwat has made its final decision in an appeal by Mullberry Homes following a dispute between the developer and United Utilities over whether the bonds required by the water company in two separate sewer adoption agreements at two development sites wee reasonable.
The water industry regulator has decided that United Utilities' charges for two separate bonds to provide water and sewerage services to customers in Cumbria, where the two sites are located.were reasonable.
Mulberry Homes appealed to Ofwat in January 2017 on the basis that the amount of the bonds required by United Utilities for both sites was excessive.
The bonds required were calculated at 10% of United Utilities' assumed levels of sewer construction costs at the two sites. Estimated construction cost at the developer’s Parkview site was £312,560 with an accompanying bond of £31,256 and at its Thorncliffe site £164,067 and £16,406 respectively.
Mulberry Homes did not dispute that the bonds were calculated at 10% of the assumed level of the sewer construction costs – Ofwat’s final decisions therefore only looked at the reasonableness of United Utilities’ assumed level of the sewer construction costs.
Construction costs based on 2005 rates
The utility said the costs were based on a schedule of construction rates using 2005 prices and included labour, materials and reinstatement. United Utilities uses 2005 prices as since then it has competitively tendered network projects and does not have a more up to date schedule of rates.
United Utilities also noted that using the rates allows it to provide estimates quickly to developers which it considers developers value.
Following on from Ofwat’s initial draft decision Mullberry Homes did not make any further representations apart from noting that it had redesigned some of the drainage runs and it considered this would affect the bonds.
On 28 June 2017, United Utilities confirmed to Ofwat that Mullberry Homes had submitted a further application to amend the design of the sewers for the Parkview site but that the application was rejected as it did not meet United Utilities’ technical requirements.
United Utilities' costs below benchmark pricing model
Ofwat based its final decision on benchmark costs set out in a model that formed part of a report commissioned in 2016 which looks at the reasonableness of sewer construction costs.
The report by Aqua Consulting took into account the actual costs of projects from thousands of water industry projects from around the UK during Asset Management Periods (AMP) 4, 5 and 6 which covers the period 2005 to the present to establish a range of typical costs expected for the development of infrastructure assets.
United Utilities' estimate of costs for the sewer construction works at both sites is below the mean level set out in the sewer connection pricing model for constructing similar sewers.
In light of the evidence provided by both parties to the dispute, Ofwat has concluded that the sewer construction estimates for the two sites are below the mean anticipated prices set out in the sewer connection pricing model.
The regulator also said that in addition, United Utilities based its sewer construction costs on a schedule of rates dating from 2005, which has not been inflated, comenting:
“If United Utilities chose to use current cost estimates, as opposed to those from twelve years ago, we would expect the cost estimates, and therefore the 10% bond figure, to be much higher.”
Taken as a whole, Ofwat said it considered that United Utilities estimated costs were reasonable and that no refund was due to Mulberry Homes.