Ofwat has told the water companies that competition concerns should not be a barrier to greater collaboration between companies on charging for new connections, saying “it is wrong for companies to use competition law as a reason not to collaborate to the benefit of customers.”

The regulator's comment was among the conclusions Ofwat has reached following its consultation in May 2020 on analysis carried out on English companies’ charging arrangements for new connection services and its proposed reforms of charging arrangements.

Responses to the consultation from water companies highlighted that they had competition law concerns related to Ofwat’s proposals, with particular concern expressed about working on harmonising charging methodologies. Most respondents suggested having a form of regulatory requirement for the work or for Ofwat to lead it.

The New Connections Charges Consultation – Conclusions document sets out Ofwat’s consideration of the responses it received and what its next steps will be.

According to the report, the regulator received a range of views, with most respondents expressing concern about the risk of infringing competition law by working together. Most respondents were in favour of some form of requirement to collaborate, to mitigate the risk.

In response to the New Connection Charges working group proposed by Ofwat, at individual company level one company said it would not take part in a working group unless Ofwat mandated it. Wessex Water had serious competition law concerns to the extent that it would not participate in such a group unless it was a regulatory requirement.

Other company responses included:

• Affinity Water said that it would have some concerns over sharing sensitive information and requested assurances that competition risks would be mitigated appropriately.
• Yorkshire Water, South East Water and Northumbrian Water all stated that it was difficult to comment on the variances in charging levels without understanding how companies have structured their charges.
• Northumbrian Water added that competition law acts as a barrier to it knowing how other companies have charged.
• Severn Trent referred to the experience in the energy market, where Ofgem’s past reforms that limited the number of tariffs in the market was criticised, saying that reducing differences in tariffs also reduced choice and had a negative impact on competition
• South Staffs Water, Portsmouth Water, South East Water and Water UK all explicitly disagreed with the idea that companies should adopt a common charging methodology, because of competition law concerns
• Portsmouth Water - collaborative work in this area could reveal too much commercial information, such as how companies make contractual arrangements.
• South Staffs Water - a common methodology could have impacts on D-MeX performance and impose significant implementation costs

 Comments on the potential benefits for a possible common charging methodology included:

• benefits to developer customers who operate at a national level;
• more transparency and less ambiguity;
• positive effects on competition through greater transparency; and
• increased confidence in comparability of charges and that differences are based on costs rather than methodological variations.

Other comment on disbenefits put forward included:

• competition law concerns;
• innovation could be stifled;
• could inhibit competition and affect D-MeX5;
• smaller developer customers may be alienated if benefits are targeted at developers operating at national level

Ofwat - "we believe industry collaboration is both necessary and desirable"

Ofwat concludes in the report:

“After careful consideration of the feedback we have received, including strong support for further work, and taking account of our view that “common charging methodology” covers a wide range of issues, we believe industry collaboration is both necessary and desirable. Furthermore, we think some form of working group is an effective way to proceed.”

“We also acknowledge companies’ concerns about joint working and the strong feedback for Ofwat to be involved in any group, particularly if the scope included consideration of contractors’ rates and cost allocation.”

“ We would like to reiterate our message from the RISE conclusions – in our view it is wrong for companies to use competition law as a reason not to collaborate to the benefit of customers. However, while it is for companies to manage their risks, we are willing to work with companies and relevant stakeholders to facilitate a working group, including supporting discussions about the scope of the work.”

“We are willing to discuss with companies how they might wish to work more closely to support the developer services market, while maintaining ownership of their own charges and charging structures.”

The regulator also said it did not believe joint working to improve consistency would undermine incentives under D-MeX.

Next steps - two substantive workstreams

In terms of taking the work forward, at this stage Ofwat envisages two substantive workstreams :

• a working group to provide a suitable environment for joint working which Ofwat would also be willing to facilitate by contributing to the working group framework so all stakeholders “can operate productively”
• further analysis of companies’ published costs and charges to address Ofwat’s concern that variation between companies’ charges may in part be due to endogenous factors e.g. allocation of costs, recovery of overheads and cost-reflectivity of contractors’ rates

The decision paper says the regulator will consider how it might facilitate joint working and appropriate governance, involving CCW, stakeholders and customers, with the expectation that the industry concludes the process in summer 2021, in time for 2022-23 charges.

Ofwat has already published an information notice on charges for 2021-22, with further guidance for companies on the use of worked examples. The intention is to incorporate the requirements into the charging rules for 2022-23 charges.

The regulator also intends to prepare a change to the charging rules to include a principle which explicitly requires cost-reflectivity in charges which will come into effect for 2022-23 charges. Ofwat is proposing to carry out further analysis of companies’ published costs and charges, saying it is “likely to commission external support to help” with this work.

In the meantime, Ofwat is encouraging companies to:

• review their contractor rates
• demonstrate how they apply appropriate scrutiny to assure customers that rates reflect the appropriate costs.
• show more clearly how they allocate costs and overheads in their published charges

Ofwat received 21 responses to the May consultation, including 15 water companies, statutory consumer body Consumer Council for Water, Water UK, the body which represents all the UK water companies and Fair Water Connections, an association that supports self-lay providers (SLPs).

Click here to download Comparative analysis and reforms of charging arrangements for new connection services for English companies – decision document