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Advice and (Terms) Guidance
Note - the following advice and guidance only remains valid until April 2018 when water companies are due to introduce local Charging Arrangements based on Charging Rules issued by Ofwat. Once details of future charging arrangements are known this page will be updated. Link to (what information there is) on the (future) new charging arrangements.The basis of the advice available to Fair Water Connections members covers the areas outlined below (use link to go direct to each section).•Legislative provision•Contestable and Non-contestable Works•New mains - differences between water company and competitive provision•Cost apportionment and phasing•Service connections•Surety requirements•Allowable charges•Market regulation and disputing unfair terms and conditions•Infrastructure chargesDrawing on this generic advice FWC members are provided, on a site specific basis, assistance and support to help them challenge the concerns they have about the terms and conditions many water companies impose on self-lay work.This information has been updated following the publication, in early 2016, by Ofwat of relevant determinations (see Regulation page).Legislative ProvisionThe primary legislation covering the provision of new water supplies (mains and services) is the Water Industry Act (WIA). This legislation, originally enacted in 1991, has a number of supplementary amendments which include the 1994 legislation which introduced the statutory arrangements for self-lay.Water companies, assuming that they have a dominant position in their local water connections market, need to also ensure that they comply with competition legislation. This means that their self-lay terms and conditions should not be worse than those being offered for water company provision. There is also a need for water companies to ensure that their terms only contain fees that they are entitled to charge.Whilst water companies can recover some of their costs from developers, and SLPs, other activities linked to providing new mains and services are funding through their regulatory settlement. Hence water companies need to recognise which activities are chargeable and where they should be absorbing costs themselves.The key WIA sections of interest to SLPs are:-•Sections 37 - covering the general duty on water companies to maintain their water supply systems (so as to for making supplies available to those who demand them)•Sections 41 to 43 - covering mains requisitioning•Sections 45 to 47 - covering service connections•Section 51A to 51C - covering self-lay mains and services•Section 146 - which gives the entitlement to charge an Infrastructure Charge on each new connectionThe Water Services Regulation Authority (Ofwat) has powers to determine disputes and appeals about terms imposed under various WIA sections. These include challenges made under Section 51B (covering terms to which a self-layer objects) and Section 51C (payments required to be made or security requirements). Additionally Ofwat may, using their concurrent powers, enforce and apply the Competition Act 1998 (CA98). Using these powers Ofwat can open a formal investigation into the conduct of a party, or parties, where it has reasonable grounds for suspecting that competition law has been breached. Such an investigation into the practices of Bristol Water, relating to their alleged abuse of a dominant position in the competitive connections market, was opened in March 2013 and led to Ofwat accepting binding commitments from Bristol Water. Link to Ofwat briefing on Bristol Water CA98 case.Ofwat have stated that is not their intention to publish any guidance on self-lay financial arrangements. However they have published relevant determinations and, in September 2014, published an Information Note (IN-14/16) covering 'Improving Services for Customers on New Connections' which outlines how water companies should provide, and charge, for new mains and services. [Link to IN-14/16].In response to the recognition across water companies that the way that many of them were charging for new mains a Water UK Task Group was set-up. This group published, in November 2014, a best practice guidance note (IGN 4-05-01) which covers the allocation and calculation of costs for self-lay water mains. [Link to Water UK IGN 4-05-01].Further water legislation was passed in 2014. This legislation provides for introducing a regulatory framework covering terms for new mains and service work. This legislation will come into effect in April 2018 when the new charging arrangements are introduced.Back to topContestable and Non-contestable WorksWater companies classify the work activities that they permit SLPs to do as being 'contestable'. Whilst most use the contestable work classifications detailed in the National Code of Practice there are local variations. Activities which water companies restrict to being done by themselves being classified as 'non-contestable'.Typically, as a minimum, non-contestable activities include:-•responding to applications and agreeing a self-lay agreement•gaining approval of infrastructure designs, so that they meet required quality standards•adopting the infrastructure that the SLP provides, including paying the SLP and/or developer whatever asset value is dueSelf-lay delivery needs access and use of a range of non-contestable activities which only the water company can provide. With self-lay, SLPs are water company customers for a range of non-contestable activities. Hence, for CA98 compliance, water companies need to ensure that the way in which they deliver non-contestable activities is not more expensive or difficult for SLPs to access than it is for the water company's own business operation to use the same service.Back to topNew Mains - differences between water company and competitive provisionDevelopers have the choice of either asking the host water company to provide new supplies to their sites or to request that the work is done by a SLP. (It is also possible, though not considered in the information provided here, for greenfield sites to be supplied by an inset company using the 'new appointment and variation' provisions). Whilst there are many similarities between water company and SLP provision there are some differences in the legislation. In either case, where the water is required for domestic purposes, the cost of the new mains is offset by the income that the water company will receive from the connected properties.Water company provision is through requisitioning and with the contribution paid by developers based on:-•the amount the water company says it will cost to provide the new mains (this may include off-site works and previously provided capacity); and,•the cost of financing the works through (a fictitious) 12 year loan (with equal annual repayments); and,•the interest rates (set to Ofwat Guidelines IN 11/05 [Link]) when the work is done; and,•the income that will be received from the newly connected properties.Notes:-1.Although the income figure will be an assessment the legislation states the purpose of calculating estimated revenue a thing is expected to be the case if, at the time the calculation is made, it is reasonably likely to occur:2.Income should include all elements of the charge, i.e. measured water and standing charge. (For consumption is 2016/17 Ofwat indicate that this, based on the average measured household water bill per premises figure for that company, should be ₤167.85 for Anglian Water).3.The income stream for each premise (as per an Ofwat determination) should be based on consumption starting in the first full month after that premise is sold.There are a number of ways that developers can pay for mains a water company provides and what usually happens is that water companies offer terms based on a Discounted Aggregate Deficit (DAD) calculation (which is usually known as the 'commuted sum'). With this method the developer pays the differences between the cost of the loan in each of the 12 years following commissioning less the water charge income that will be received (from those properties that are, or become, occupied) in that year. The sum of the 12 annual payments being rolled, as a present day valuation, into a single up-front (commuted) payment. This may be zero if the income exceeds the loan payments in each of the 12 years.Technically the commuted sum should be re-worked when the actual cost of the work is known but often water companies do not revisit their initial calculation.With requisitioning all the necessary elements of work shown in the following diagram are combined to determine the total scheme cost which is then used in the developer contribution calculation.Whilst self-lay legislation seeks to replicate the requisitioning arrangements the statutory provisions deal differently with the various main laying components that may be required to supply a development. These are:-•on-site mains (Element A in the diagram)•work the water company does at and downstream of the point of connection (Element B)•off-site enhancements and charging for previously installed capacity (Element C)Although equivalence between the self-lay and requisitioning alternatives is expected there is a need, as outlined below, to understand differences in the underlying legislation.For self-laid on-site mains (Element A) there is a direct correlation with the requisitioning arrangements. This results in any shortfall from the income from the connected properties not being sufficient to fund the (fictitious) 12 year loan (as per the commuted sum) effectively being deduced from the value assigned to providing the asset. However care is needed to ensure that:-•the asset value is based on the full cost of providing the new main (as some water companies base their rates on the developer doing the excavation and thereby subsidising construction costs and others only use construction rates rather than including any design, supervision and management fee uplift); and,•the cost of any contestable work, such as design, (done by the water company) is included in the costs used in the asset value calculation; and,•water companies are not charging for activities, such as administrative and inspection tasks, which Water UK best practice advice indicates are not recoverable. (See Water UK IGN-4-05-01 [Link] for the guidance available to water companies) or the charging is being done in a way where self-lay and requisitioning provision is not equivalent; and,•the asset value calculation starts on the date the main is 'vested' (whilst this should be the date the main becomes live some companies delay formally accepting the new main which results in vesting happening later when income from the new properties has commenced); and,•contestable work and other charges represent 'costs reasonably incurred'; and,•income is taken back to the first full month after each property is sold.With the connection and any connecting 'spur' (Element B) the self-lay legislation states "the agreement may include terms (at the expense of the person constructing the main) for the provision of associated infrastructure at or downstream of the point of connection". Clearly this requires interpretation but to be Competition Act compliant there is a substantive argument that where such 'associated infrastructure' is provided by the water company that the cost of the work needs to be including in the terms offered in a way that is broadly aligned with those that apply had the main been requisitioned i.e. where the cost is offset by the income from the connected properties.However off-site enhancements (Element C), which is work done on the existing network by way of general up rating that is not site specific (note feeders laid parallel to an existing main fall within Element B), is covered by a different legislative provision. This states that the water company "may require the person constructing the main to pay the costs associated with any up sizing or use of previously installed capacity".To outline how asset values should be calculated a FWC information sheet [Link] is available. Water UK, in conjunction with the HBF have also produced their own best practice guidelines for the production of quotations/Estimates for the provision of water mains on new developments. These guidelines include a template which should be issued by water companies whenever they provide a quote or estimate. [Link to guidelines and template]Water companies are entitled to charge both a requisition/self-lay charge (that may include all or a proportion of the costs of off-site works where these are incurred in consequence of supplying a site) and infrastructure charges for premises that are being connected to their network for the first time. Companies' ability to recover these two charges are provided by two legislative provisions (sections 42/51 and 146 of the WIA) between which there is currently no interaction.The two charges are intended to serve distinct purposes:•the requisition/self-lay charge is to cover costs incurred in works directly attributed to meeting the requirements of supplying the site; and•infrastructure charges (see below) is for general wider network enhancements that arise as a result of increasing demand from new developments generally.The timing of any payments can also be a differentiator between self-lay and requisitioning, hence any such differences merit reviewing to ensure that, from a cash flow perspective, the terms are not worse than offered for the water company provision alternative.Notes1.The self-lay asset payment calculation should be based on the 12 years following the vesting of the new mains. This means that if mains are commissioned, but not vested, and properties started to be connected the income side of the calculation in the offer may need adjusting to reflect the actual income level in each of the years after formal vesting.2.The asset value offered in advance of the work is an estimate, with the actual amount determined once the water company costs are known. SLOs therefore need to be aware that when the asset payment calculation is reviewing it also provides an opportunity (if housing is not sold as quickly as envisaged) for the income side of the calculation to be updated.3.Where new mains are being used to supply water for non-domestic purposes water companies can recover the full cost of the work. However most new water supplies, even to commercial properties, are to supply water for staff welfare so can be classified as being for domestic use. For mains supplying water for both domestic and non-domestic purposes costs should be equitably shared, on the basis of mains capacity utilized, between the uses.4.Water companies can only 'clawback' previous upsizing where the main concerned has either been requisitioned or vested within the previous 12 years. As the self-lay process, done under the standard self-lay agreement template, only leads to the vesting of on-site mains and associated works (at and downstream of the connection) there are circumstances where water companies appear to not have a valid means to recover the cost of all other off-site work which the self-lay main draws upon.Back to topCost apportionment and phasingBecause supplies to a new development can be done, as far as feeder mains and support works are concerned, in conjunction with other works it is important that costs are equitably shared between the various parties. Typically the parties can be the development itself, other adjacent developments (either at the same time or in the future), diversion works and enhancements required by the water company to improve their system.WIA provisions allow for a water company to require mains to be up sized to supply future developments. Where this occurs the SLP is to be paid the cost of the up sizing with the water company clawing back that cost when the subsequent development happens.There are 2 approaches to apportioning costs between the various parties. One method involves determining both the cost of the main needed just to supply the development and then the main needed for the total design capacity. The lead development then funds the smaller main with the other parties paying for the upsizing. The alternative is for the cost of the full sized main to be split between the various parties such that each party pays for the proportion of the main they need to be provided (i.e. if the lead development is for 100 properties and the main is being designed to supply 300 properties only 1/3 of the cost will be assigned to the first development).Ofwat have determined that the most appropriate approach to calculating the proportion of the costs attributable to a site is to apportion the costs on the basis of the percentage of the capacity provided that will be used supplying the site. They support this by saying that doing otherwise would disincentivise development and distorting competition between developers since the first developer on a site would face much higher charges than subsequent developers who, at a later point, share use of the newly installed infrastructure.This apportionment principle should also be applied to phased developments where (although the work is for the same developer) front loading the first phase, with all the cost of the mains etc. needed for the complete development without allocating the income from the subsequent phases which will use that capacity, can distort the asset value calculation to the detriment of the developer/SLP. It also means that funding the installed (feeder) capacity remains with the water company until the development needs to use that capacity.Back to topService ConnectionsAlthough arrangements for service connections are often discussed with main laying they are a separate activity and SLOs can connect services to mains that a water company, or other SLO, has provided.Service connections should only be made when a water company has confirmed that the private (plumbing) pipework complies with Water Regulations. Depending on local arrangements this maybe through the work being done by an 'approved plumber' or by the pipes being inspected by the water company.Some water companies apply a range of charges to self-lay service connections, typically these are said to cover some or all of administration, regulation inspections, meter fitting and account set-up. Even when these tasks are done by the water company they are not actually activities which are covered by the legislation or need to be performed by the water company. Therefore there does not look to be a legitimate basis for water companies raising many of their service connection related charges.Notes1.To defend charging administrative fees some water companies argue that Ofwat permits them, based on a former threshold they used, to charge £80 per connection. This was never the case and a more recent independent review (published in April 2014) which is used by Ofwat when they determine the reasonableness of charges when the water company does the work shows that administrative allowances should not exceed (where there is not a stand-alone application stage) £33 on the first connection and £21 on subsequent connections. (Note - these costs include for activities, such as scheduling the work and making the connection, which are done by the SLO when the connection is self-laid!).2.Because the legislation does not give them the necessary powers it is not possible to dispute with Ofwat service connection charges after an agreement has been signed. There can therefore be merit in excluding service connections from a mains agreement and thereby provide an opportunity for the service connection charges to be disputed in advance of the connections needing to be made.3.The charging guidance produced by Water UK, although it excludes service connections, states that the cost of setting up new customer accounts or verifying billing addresses is not recoverable.Back to topSurety RequirementsThe legislation only provides for surety deposits to be payable when water companies are doing work themselves (i.e. to protect against them doing work and then not being paid). So that any such charges applying on self-lay projects are kept comparable with those on requisitioning it is reasonable for water companies to restrict up front surety payments to the amount of any commuted sum the developer would otherwise have paid.In addition to surety on work they do many companies seek to retain 10% of the asset payment for a 12 month (or longer) maintenance period and some require an amount to be provided for each self-lay service connection.Given that SLPs need to hold WIRS, and be subjected to independent Lloyd's Register auditing, along with any water company checks, the workmanship on new pipework should not give rise to maintenance issues other than those which occur when the water company does the work, namely subsequent developer damage. Hence it should be difficult for water companies to justify taking a 10% retention.NoteAlthough maintenance sureties should not be imposed if they are required by a water company then they should be limited to the work a SLP does and not be extended to cover any work the water company does themselves, such as a mains connection.Back to topAllowable ChargesWhilst water companies may argue that they are entitled to charge for all the activities they do the WIA provisions are sufficiently prescriptive for the view to be taken that only those costs that can specifically be recovered under the WIA sections covering self-lay, mains requisitioning and service connections can be charged to SLOs/developers.On this basis, it has been argued, that the legislation does not support recovery of costs associated with:-•up front application fees•setting up an agreement•designing the on-site works, or checking designs done by SLPs•audit inspections (or supervising) of SLP work•water testing and samplingIf a water company elects to charge for any of these activities it should be done on an equivalent basis to that used when they provide mains themselves. Hence it is reasonable to expect all of the costs to be taken through the asset value calculation (where, it is likely, they will have negligible impact on the outcome!).With regards non-contestable work activities (including the associated connecting spur) the costs associated with design, inspection/supervision and sampling can be included in the funding calculation.Back to topMarket Regulation and Disputing Unfair Terms and ConditionsThe competitive water connections market should be fair with equitable terms and conditions being offered, across both water company in-house and self-lay provision, which represent the full cost of providing new assets and, when there is an entitlement to recover costs, expenses reasonably incurred.Many water companies retain a dominant position in their local water connections market so the terms and conditions they offer, and their charges, should satisfy the requirements of both water industry and competition legislation. Policing the legislation being the responsibility of Ofwat.In 2013 Ofwat started a formal investigation under Chapter II prohibition (abuse of a dominant position) of the Competition Act 1998 into charges made to self-lay operators. This investigation was into Bristol Water and resulted, in March 2015, with Ofwat accepting binding commitments [see Ofwat document] which committed Bristol Water to:-•provide consistency and greater transparency in its treatment of costs when calculating quotations for the requisition charge and self-lay asset payment; and,•ensure that the charges it imposes are fair and non-discriminatory where the service or transaction being undertaken is equivalent, regardless of whether this is for requisition or self-lay works; and,•ensure that its day-to-day interactions with developers and SLOs will not cause undue preference, delay or discrimination in favour of either the requisition or self-lay options; and,•update its internal and external policy and procedural documents to ensure they do not cause any undue preference or discrimination between requisition and self-lay options; and,•make a series of changes to its organisational structure and processes to demonstrate a clearer distinction between the contestable and non-contestable services it provides.Ofwat can be asked, on a site specific basis, to determine the self-lay terms and impose these on a water company. They can do this when any terms are disputed (using powers under WIA Section 51B) or where payments required to be made or security requirements are at issue (using powers under WIA Section 51C). Section 51C can only be used on main laying work and for Section 51B challenges Ofwat require that the dispute is registered before the agreement is entered into.Completed determinations are, once the parties agree, published by Ofwat and can then be used as a reference for allowable practice on future projects. As reported on the page covering Ofwat Conduct the time taken by Ofwat to process determinations is woefully slow and they do not appear to recognise the impact that this is having on the competitive connections market. Nevertheless getting Ofwat to investigate self-lay terms is important as it makes them better aware of the practices SLOs encounter and, when a direct approach to a water company does not produce the desired result, is the only means to get terms modified.FWC works with members to prepare determination requests and regularly lobbies Ofwat about a range of anti-competitive practices.Back to topInfrastructure ChargesWater companies can charge an infrastructure charge on each new connection, except where the supply replaces previous (within the last 5 years) demand. The purpose of infrastructure charges should be to provide water companies with a means to fund any future wider network enhancements necessary to safeguard against the impact of extra (new development) demand adversely reducing the on-going level of service to other customers.Where supplying a development necessitates extensive off-site work, it is likely that when designing such work the water company has already factored into their design the network capacity they deem necessary to supply the site without detriment to existing customers. If this is the case then paying infrastructure charges, in addition to funding off-site reinforcement work, is effectively funding the same provision twice. Ofwat have therefore stated that they only expect infrastructure charges to be levied, in addition to requisition/self-lay charges, where they are being used to fund wider local network improvements beyond those works (and hence costs) already directly attributed to the mains requisition/self-lay terms for supplying a site.Whilst WIA Section 146 provides the basis for levying an Infrastructure Charge on each new connection it is Licence Condition C (which every water company has) which details how the charge should be applied.Back to topFurther information on allowable charging can be gleamed from Ofwat determinations - see Regulation page.