April 2000

Under section 150 of the Water Industry Act 1991 the Director General of Water Services (the Director) may make an order specifying a maximum resale price for water or sewerage services or setting out how such a maximum resale price should be calculated. Resale occurs when a water supply or sewerage service supplied to a customer by a licensed water or sewerage undertaker is resold by that person to a third party.

In 1999 Ofwat consulted on the form of a possible resale order. These proposals received wide support except in respect of the recovery of administration costs. This paper, therefore, summarises the comments made and Ofwat's conclusions in light of the consultation and includes in Appendix 1 a draft formal Water Resale Order.

The intention of these proposals is to protect resale customers from being overcharged by resale suppliers of water without unduly constraining the activities of suppliers trying to deal fairly with purchasers.

The Director welcomes comments on the draft Order. These should be sent to:

Mary Pottinger
Service and Performance
Centre City Tower
7 Hill Street
Birmingham B5 4UA

or by fax on 0121 625 1359.

Responses should reach Ofwat by 30 May 2000 and should be clearly marked Resale of Water. Unless otherwise requested, responses will be placed in the Ofwat library and made available to the public.

If you wish to clarify any points in this paper, please contact Julia Havard, Head of External Relations (0121 625 1450) in the first instance and she will ensure your query is dealt with.

SUMMARY OF CONCLUSIONS ON KEY ISSUES

The key conclusions on the issues consulted on are summarised below. The views of respondents and Ofwat's conclusions are discussed in greater detail in sections 1 to 6 of this paper. A draft of the formal Order is attached at Appendix 1.

Scope of the proposed order

The scope of the proposed order should be limited to domestic dwellings.

Maintenance of pipework should be dealt with through rent or pitch fees rather than covered in a maximum resale price order.

Basis of charges

Total charges to purchasers should be based on those paid by the reseller to the water and sewerage supplier, plus reasonable administration costs.

Metered purchasers should pay the same volumetric rate as is paid by the reseller to the supplier.

Bills to unmeasured resale purchasers should exceed the average household bill that is paid by direct household customers of the water and sewerage supplier only where the reseller demonstrates that they are justified on the basis of the principles set out.

Occupancy should be added to the proposed methods of apportioning unmeasured charges.

Administration charges

Resellers should be able to recover the standing and volumetric charges paid by them to the water or sewerage company. In addition they should be permitted to charge a fee for administration and metering costs up to a fixed limit.

Background to the proposed draft Order

Water resale

Water resale occurs when water (or a sewerage service) provided to a customer by a licensed undertaker (a supplier) is sold by that customer to a third party. Such arrangements are most commonly found on mobile home parks, in flats and apartments and other rented or leasehold accommodation. In addition, there are occasionally arrangements between adjoining owner-occupiers. In the absence of a maximum resale order, the price, which can be charged, is governed only by any contractual arrangements existing between the parties. Cases raised with Ofwat suggest that misunderstandings or disputes often arise because such contractual arrangements are either insufficiently clear or allow the reseller too much freedom.

The Water Industry Act 1991 provides for the making of an order, which would either specify a maximum resale price or set out the basis for calculating such a maximum. Once an order is made, the purchaser through the civil courts may enforce the maximum resale price.

The key objectives, on which the proposed draft Order is based, are as follows:

• An order should prevent overcharging by resellers without unduly constraining the activities of those trying to deal fairly with purchasers.
• An order should be as simple and transparent as possible so that it can be readily applied by those who might need to apply its provisions.
• An order should be as fair to both purchasers and resellers as is possible given the need for a relatively simple approach.

Section 150 of the Water Industry Act 1991 does not at present explicitly allow a resale order to cover access by the purchaser to relevant information from the reseller. Ofwat considers that the effectiveness of an order would be increased if section 150 were amended to allow the Director to specify in an order the information, which the reseller should furnish to the purchaser. An order might also set the rate at which interest should be paid when excessive charges are recovered.

Many respondents to Ofwat's consultation felt strongly that purchasers should have the right to information about the basis of their bill from the reseller. Ofwat has asked the DETR to consider including amendments to achieve this and to allow for the recovery of interest on overpayment in the proposed Water Bill.

SUMMARY OF RESPONSES TO KEY ISSUES FOR CONSULTATION

Responses to the key issues consulted on and Ofwat's conclusions are detailed below.

1  Proposed scope of the order

Initial proposal

Although water resale can occur in commercial situations, the cases raised with Ofwat relate almost entirely to domestic cases. It was proposed that only properties used as domestic dwellings should fall within the scope of the order. This would deal with those cases where protection for the purchaser is most needed.

Ofwat's experience is that the most significant disputes are likely to arise with and be pursued by those in long-term arrangements. However, it did not seem appropriate to limit the protection of the order to those cases. If short-term lets were to be excluded, an order would need to define the difference between long and short-term.

The maintenance and improvement of water supply pipes and sewerage systems raise many varied and complicated issues. Ofwat considered that attempting to address the range of possible circumstances and issues related to maintaining or improving the infrastructure would be impracticable and would unnecessarily complicate any maximum resale price order. Ofwat therefore argued that such issues were best dealt with as part of the normal rent or pitch fee or agreed and charged for separately.

Responses

A number of Customer Service Committees felt that commercial customers should be covered by the Order. However no commercial customers argued for this.

Of those commenting on the issue of short/long term letting all supported Ofwat's proposal. A number of respondents argued that holiday lets should be excluded.

The majority of respondents agreed that a resale order should not attempt to deal with charges associated with the maintenance or improvement of infrastructure although some concern was expressed that this might leave customers vulnerable to over charging in this area.

Conclusion

The Water Resale Order should apply only to the domestic situation, at least in the first place. No distinction would be made between long and shorter term lets but holiday lets would be excluded. The order should not include costs associated with the maintenance or improvement of infrastructure.

2  Proposed basis of charging

Initial proposal

The issue of most concern to those people contacting Ofwat was that resellers of water should not be permitted to profit by charging unreasonable prices to purchasers who may have little option but to pay. Ofwat proposed that, as a general principle, any reseller of water should be allowed to recover no more in total than he pays to the supplier for the service received, plus reasonable administration charges. Furthermore, a purchaser should be charged no higher a volumetric rate for the water they use than they would pay if they were direct customers of the supplier.

Because many household supplies are unmeasured and various different combinations of metered and unmeasured supplies may arise in resale situations, Ofwat proposed that an order should set out the principles on which charges should be based rather than simply set a specific maximum resale price.

Responses and Conclusion

Ofwat's general approach was widely accepted and will therefore be implemented. The specific proposals were as set out below.

3  Proposed charging principles

3.1  All purchasers metered

Initial Proposal

Where all resale purchasers are metered, bills should be based on metered consumption charged at the rate paid by the reseller to the Water Company, which should not exceed the relevant supplier's standard domestic tariff.

Responses and Ofwat conclusion

This was widely accepted by those who responded and will be implemented.

3.2  Some or all purchasers unmeasured

Initial proposal

To provide a basic, transparent test which will address particularly high charges, it was proposed that annual charges for unmeasured resale purchasers should not exceed the average unmeasured household water or sewerage bill for the relevant supplier unless the landlord provides evidence that application of the principles below warrants a higher charge.

Where no resale purchasers are metered, the supplier's bill to the reseller (excluding the standing charge) should be either shared equally or apportioned on the basis of the ratable value, square footage or number of bedrooms in the tenant's dwellings. Charges should be pro rata to the period during which the tenant has right of occupation.

Where only some purchasers are metered, volumetric charges for those with meters should be based on their measured consumption as described above and the balance of the bill (excluding standing charge) apportioned between the remaining purchasers.

Responses

Ofwat's general approach commanded wide support. There were however two general themes on which a number of respondents commented.

First, a number of respondents were concerned that resellers should be able to recover charges which exceed the average unmeasured household bill where that reflects legitimate costs. Others were concerned that a cap set at that level would not offer sufficient protection eg to those in mobile homes where water consumption might be expected to be below average. There was also some concern that resellers might simply charge all purchasers up to that average charge.

The second theme was the apportionment of unmeasured charges. Views varied with some respondents arguing that charges should be shared equally, some arguing that apportionment based on RV or square footage were unfair and a number suggesting that occupancy should also be an accepted means of apportionment. One respondent asked why any method which was agreed by all purchasers should not be acceptable.

Ofwat's Conclusions

Ofwat believes that its proposals remain reasonable and should be implemented. However, it is worth confirming that it was never Ofwat's intention that resellers should not be able to recover charges which exceed the average household charge, nor that the existence of this safety cap should override the general principle that the reseller should not recover more than he pays to the supplier (plus an administration charge). The concept of a safety cap for unmeasured purchasers is to supply a degree of protection from serious exploitation by putting the burden of proof on to the reseller to demonstrate that a higher charge is justified. Ofwat believes this is appropriate given the information imbalance which can currently exist between the reseller and purchaser.

On the issue of apportionment Ofwat accepts that although potentially difficult in practice occupancy might offer an alternative means of apportionment where occupancy is relatively stable. However, no particular method of apportionment will please all purchasers. It therefore seems reasonable to set out a range of methods which Ofwat considers to be reasonable for a reseller to employ. It is difficult to see what other means of apportionment might be employed and it could be difficult for purchasers to tell whether others had really agreed to other approaches, with the risk that undue pressure might be brought to bear. Ofwat therefore proposes to retain the list of reasonable means of apportionment but to add occupancy to the list.

3.3  Reseller's own supply

Initial proposal

Where the reseller shares a supply with his purchasers, he should pay either for his own measured consumption or for a share of the total bill (as if he were another purchaser).

Responses and conclusions

This proposal was supported by respondents, including those representing mobile home park owners. It will therefore be implemented.

4  Administration charges

Initial proposal

Ofwat considered that it was reasonable for a reseller of water to make an additional charge to cover the cost of maintaining any meters fitted and the administrative costs of billing all purchasers.

Ofwat initially proposed that a reseller should be permitted to charge each metered purchaser up to the equivalent of the full metered household standing charge as set out in the supplier's standard domestic tariff. This would be taken as covering all costs associated with maintaining and reading meters and issuing bills. For unmeasured purchasers, up to half of the metered standing charge could be applied to cover the costs of billing alone. In both cases these amounts would be applied in the form of a daily rate.

Responses

This proposal was opposed by a significant number of respondents including those representing purchasers and resellers and some, but not all individuals. Customer representatives generally felt that the proposal would allow for charges which were excessive in relation to the costs incurred and that the costs of administration and meter maintenance were likely to be already included in the rent. Resellers' representatives were concerned that the proposals might not allow for adequate recovery of costs.

Conclusions

Ofwat has concluded that its proposals should be amended. It is now proposed that resellers should recover from purchasers any standing charges incurred from the water or sewerage supplier. In addition, Ofwat believes that it is reasonable for resellers to recover a sum to cover administration costs and the maintenance of meters where fitted. The effect of this slightly different approach on the overall charge recovered will vary from one reseller to another, and may, in practice, make little difference for some. It should however address the concerns about potential over-recovery expressed by respondents. Such an explicit allowance should also help to remove any cost disincentive to the installation on of sub-meters by resellers.

The sum recoverable each year should be limited to around £5 per purchaser whose service is provided on an unmeasured basis and £10 for each metered purchaser. These charges to be calculated on the basis of a daily rate of 1.5p for unmeasured and 2.5p for metered services.

APPENDIX 1:

2  The Order shall come into effect on             2000.

Definitions

3  In this Order -

"Dwelling" means any of the descriptions in paragraph 1(2) and 2 of schedule 4A to the Act, which is occupied by a person as his only or principal home, namely -
(a) a private dwelling-house (which may be a building or part of a building),

(b) a caravan within the meaning of Part I of the Caravan Sites and Control of Development Act 1960 (disregarding the amendment made by section 13(2) of the Caravan Sites Act 1968),

(c) a boat or similar structure designed or adapted for use as a place of permanent habitation, or

(d) any house in multiple occupation (as defined in section 345(1) of the Housing Act 1985, which does not constitute a dwelling within any of the three preceding subparagraphs.

"Relevant undertaker" means a water undertaker or a sewerage undertaker.

"Re-seller" means any person who is not a Relevant Undertaker but who

(a) provides to any Purchaser a supply of piped water which a water undertaker has supplied, directly or indirectly, to the Re-seller.

(b) provides to any Purchaser a sewerage service which a sewerage undertaker has supplied, directly or indirectly, to the Re-seller. Maximum Charges

(a) what the purchaser would pay for the measured service, charged at the volumetric rate paid by the re-seller to the relevant water or sewerage undertaker. In any case the rate charged may not exceed the relevant undertaker's standard domestic volumetric water or (if appropriate) sewerage service tariff and

(b) an amount representing any standing charge paid by the re-seller to the relevant undertaker, divided by the number of purchasers supplied by the re-seller from the service to which that standing charge applies.

(c) Without prejudice to part (a) of this sub-paragraph if a purchaser's water supply is unmeasured, the maximum charge must be calculated as follows:-
first, any amounts recoverable either under sub-paragraph (1) above or from any other person supplied must be deducted from the amount payable by the re-seller to the relevant undertaker; after which -

the amount still to be recovered may then be either shared -

(i) equally between the purchasers to whom this sub-paragraph applies, or

(ii) in proportion to the respective rateable values, square footages, occupancy or number of bedrooms in each of the affected purchasers' dwellings.

Charges for services which are also used by the re-seller and others

5  If the re-seller (or any other person) receives any water or sewerage service for which charges would be payable under this Order if the re-seller or other person were a purchaser, the provisions in sub-paragraph 4(1) or (2) shall have effect as if the re-seller or other person were a Purchaser.

Administration Charges

6(1)  In addition to the payments recoverable under paragraph 4 of this Order, the re-seller may charge each Purchaser a fee in respect of the re-seller's cost of billing and, in the case of measured supplies, the maintenance of meters.

6(2)  The fee recoverable under sub-paragraph (1) must not exceed 2.5pence per day for each purchaser to whose service sub-paragraph 4(1) applies and 1.5 pence per day for each purchaser to whom sub-paragraph 4(2) applies.

I C R Byatt
Director General of Water Services

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APPENDIX 2: LIST OF RESPONDENTS TO CONSULTATION

Organisations representing resellers and purchasers

British Holiday and Home Parks Association
British Park Home Residents Association
Country Land Owners Association
Holton Heath Park Homes
Independent Park Home Advisory Service
Mullenscote Mobile Home Park Residents Association
National Association for Park Home Residents
National Caravan Council
National Council of Women of Great Britain
National Federation of Consumer Groups
National Federation of Small Businesses
National Union of Residents Associations
Ofwat Customer Service Committees
Public Utilities Access Forum
Rochford City Council
Shelter
Welsh Consumer Council
Welsh Local Government Association
Westwood and Glendene Residents Association

Other government departments and regulators

Office of Gas and Electricity Markets
National Assembly for Wales
Welsh Office

Water Companies

Bristol Water
Essex and Suffolk Water
Thames Water
Three Valley's Water
Water UK
Yorkshire Water

Others

17 Individuals
Chartered Institute of Environmental Health

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APPENDIX 3: LIST OF CONSULTEES

Organisations representing resellers and purchasers

British Holiday and Home Parks Association
British Park Home Residents Association
Confederation of British Industry
Confederation of British Industry, Wales
Consumers' Association
Country Land Owners Association
Independent Park Home Advisory Service
Local Government Association
National Association for Park Home Residents
National Association of Citizens Advice Bureaux
National Association of Local Councils
National Caravan Council
National Consumer Council
National Council of Women of Great Britain
National Federation of Consumer Groups
National Federation of Small Businesses
National Tenants Organisation
National Union of Residents Associations
Ofwat Customer Service Committees
Public Utilities Access Forum
Welsh Consumer Council
Welsh Local Government Association

Other government departments and regulators

Department of the Environment, Transport and the Regions
Ministry of Defence, Defence Estates
Office of Gas and Electricity Markets
National Assembly for Wales
Welsh Office

Water Companies

Bristol Water
Three Valley's Water

Others

As requested in response to initial consultation or in correspondence
Chartered Institute of Environmental Health

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