Water industry regulator Ofwat has set out its framework for resolving pricing disputes involving bulk supplies of water or sewerage services. In the run-up to the introduction of non-retail competition in 2017, the issue is of increasingly strategic importance to the wider water sector, not simply the parties concerned.

The framework covers the supply from one water and/or sewerage company to another or to a non-household customer - usually a large business user. The companies concerned can draw up a bulk supply agreement contract that sets out the terms and conditions of a bulk supply, including the price.

Under the Water Industry Act 1991, if companies fail to reach agreement on a bulk supply, they can ask Ofwat  to make a decision on the price and other contractual terms and conditions.

Ofwat’s framework for resolving pricing disputes covers:

• objectives in making bulk supply price determinations
• the framework for assessing costs to resolve bulk supply pricing disputes
• how Ofwat will minimise inconsistencies with future approaches to pricing in making such decisions
• Bulk supply pricing disputes under the Water Industry Act 1991 can cover a range of issues, including:
• water trading between incumbent water companies;
• a supply to a new entrant (commonly known as a new appointment and variation (NAV)) that serves a new development; and
• a supply to a NAV for onward supply to a large user.
• pricing disputes in relation to any terms, conditions or ‘special agreements’ between non-household customers and a supplier where the supply is not covered by the supplier’s charges scheme.
• pricing disputes in relation to supply to a water supply licensee.
• pricing disputes in relation to cross boundary sewers.
• pricing disputes with regard to new connections with public sewers – including sewerage trading between incumbent sewerage companies, a discharge from a new development served by a new entrant and a discharge from a new entrant serving a large user.

Ofwat said its objective in resolving bulk supply pricing disputes is to ensure its approach for setting charges is consistent for different customers, which would avoid adverse impacts on other customers as a result of resolving individual pricing disputes.

Among the issues the regulator said it will address in each individual dispute, is the need to take into account the need to further the interest of consumers, wherever appropriate by promoting competition.

Basis of assessing costs will consider risk of competition concerns

On cost assessment, Ofwat considers that the best approach for resolving current bulk supply pricing disputes is to use the price being disputed as the starting point for any investigation – beginning with looking at the relevant costs that underlie the price being disputed.

The regulator said that in all cases it would  require evidence that the price being disputed is based on robust information on the relevant costs.

Describing this the ‘business-as-usual’ approach, Ofwat said this would typically, but not necessarily, involve setting charges on the basis of average accounting costs which to date, is the mode of cost assessment in the water sector. 

However, Ofwat has flagged up the fact that it would depart from this approach where testing shows that this approach would cause material adverse effects. In particular, this would cover whether the use of average accounting costs:

• is appropriate given the geographic nature of supply
• would give rise to competition concerns
• would give rise to efficiency concerns.

Minimising inconsistencies with future approaches to pricing

The Water Bill 2013-14 currently going through Parliament provides for Defra and Welsh Ministers to issue guidance on charging and Ofwat in turn to issue charging rules for charges imposed by companies – including bulk supplies, connection charges, and charges schemes.

However, Ofwat currently  determines charges to resolve various pricing disputes under the current legislation, which could result in charging terms for current decisions being set on a different basis if and when the Water Bill becomes law.

To minimise the risk that this inconsistency of approach could potentially result in harm being caused to customers, Ofwat now intends  to make provision for the ability to revisit its decisions on price disputes  in the future as necessary, which could be achieved by either:

• limiting the term of the agreement to a pre-determined date in the future, so that there is a natural opportunity for the parties to renegotiate the price or – if agreement cannot be reached – make a reference to Ofwat ; or
• including a ‘trigger’ mechanism in the supply agreement that would allow the parties to renegotiate the price.  If no agreement can be reached, either party could then refer the matter to Ofwat  for a new determination.

Bulk supply pricing disputes of increasingly strategic importance to water sector

In the run-up to the introduction of non-retail competition in 2017, resolving bulk supply pricing disputes is of increasingly strategic importance to the wider water sector, not simply the parties concerned. Ofwat ‘s decisions on individual cases can set significant precedents and send signals to all companies across the sector.

For example, new companies entering the market can purchase bulk supplies to supply retail water and sewerage services to customers. In Ofwat’s view  new entrants will  provide a source of challenge to existing companies, drive efficiency and stimulate innovation.

The regulator’s decisions on what a monopoly company can charge for the bulk supply will affect both:

• the revenue that the monopoly company can collect from all of its customers – and the charges that those customers pay; and
• whether potential new entrants decide to enter the market in 2017 to supply business and other  non-household customers.

Ofwat said that this will in turn affect the number of retailers that customers can choose from and, ultimately, the benefits that competition between competing suppliers will deliver.

The regulator is currently working on a number of bulk supply pricing disputes which it intends to begin publishing in 2014.