The market for new appointments and variations (NAVs) may have some way to go in order to reach its potential according to a new study published by Ofwat.

The NAV regime set out in the water sector legislation that applies in England and Wales has been in place since the 1990s and enables a company to apply to Ofwat to replace the incumbent as the monopoly provider of water and/or wastewater services for a specific site.

Typically, a NAV takes wholesale water and wastewater services up to the boundary of its site from the incumbent in whose area it sits.

However, although the NAV regime has been in place since the 1990s the scale of the market is still relatively modest. As of September 2017, 8 new appointees had entered the market and NAV licences had been granted for 69 sites, to serve approximately 61,000 residential customers.

NAV applicants have suggested that this is because of the difficulties they face in entering the market and competing with incumbent providers on a level playing field.

The NAV market has the potential to deliver significant benefits for developers, end-customers and society by enabling sites to be served at lower cost, facilitating multi-utility developer services and by encouraging innovation in how water and waste water services are provided.

Ofwat commissioned the study to investigate how the market is working and to consider the extent to which any factors currently act to prevent, restrict, or distort prevent the market for achieving its full potential. The study also sets out options to address any issues identified.

The study, which drew on published information and extensive stakeholder engagement, identified a number of potential barriers faced by NAVs wishing to participate in the market. The barriers include:

Process – regulatory, policy and administrative issues faced by applicants for a new appointment or variation;

Behavioural – the transparency of information and the timeliness of the provision of input services by incumbents to NAVs; and,

Pricing – the impact of incumbents’ charges on the margins that NAVs are able to earn.

Ofwat has outlined a number of actions to address the concerns raised by stakeholders and those cited in the study. These include:

• Reviewing policies and processes to minimise regulatory and administrative barriers;
• Consulting on changes to rules on new connection charging and on updating guidance on bulk supply charging; and,
• Challenging the water sector to improve access to information and the delivery of services to NAVs.

Ofwat will also be considering what further steps are needed to raise awareness of NAVs among developers and other regulators involved in the application process.

The study also touched upon a number of other, longer-term issues and impacts that Ofwat said will require further consideration. Over the coming months the regulator will be considering the strategic role it anticipates NAVs playing in the sector in future years.

This includes consideration of the benefits that a successfully functioning NAV market could deliver to developers, customers and society, consideration of the way the sector is regulated to ensure an appropriate balance between enabling the market to function effectively and protecting customers.

Click here to download Study of the NAV market