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 1991 Ofwat consulted on the form of a possible resale order. However, because of lack of evidence about the incidence and nature of overcharging, and concerns over the complexity of the proposals and their possible interaction with existing landlord-tenant relations, no order was made.

In recent years Ofwat has received a number of complaints about overcharging. In 1998 Ofwat asked a consultant to re-examine the issues associated with water resale, particularly the interaction with existing arrangements between landlords and tenants. In the light of the consultant's report, Ofwat has concluded that these issues do not give rise to obstacles which need prevent the making of an order. This consultation paper, therefore, sets out proposals for a more transparent approach to setting a maximum resale price similar to that already operating in the electricity sector.

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. For convenience, the resale supplier of water (eg landlord or mobile home park owner) is referred to throughout this paper as the 'reseller' and the purchaser of the water (eg tenant or occupier of mobile home) as the 'purchaser'. The licensed water and sewerage undertaker is referred to as the 'supplier'.

The Director welcomes your views on all of the proposals in this consultation paper. Please send them to:

Alex Meredith
Consumer Affairs Division
Ofwat
Centre City Tower
7 Hill Street
Birmingham
B5 4UA

or by fax on 0121 625 1359.

Responses should reach Ofwat by 19 February 1999 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.

KEY ISSUES FOR CONSULTATION

The key issues for consultation are summarised below and discussed in greater detail in sections 1 to 6 of this paper.

Scope of the proposed order

Is it reasonable to limit the scope of the proposed order to domestic dwellings?

Is it reasonable for maintenance of pipework to be dealt with through rent or pitch fees rather than covered in a maximum resale price order?

Basis of charges

Is it fair that total charges to purchasers should be based on those paid by the reseller to the water and sewerage supplier, plus reasonable administration costs?

Is it reasonable that metered purchasers should pay the same volumetric rate as is paid by the reseller to the supplier?

Is it reasonable that bills to unmeasured resale purchasers should not exceed the average household bill that is paid by direct household customers of the water and sewerage supplier unless the reseller demonstrates that they are justified on the basis of the principles set out?

Apart from the proposed methods of apportioning unmeasured charges, should any others be permitted?

Administration charges

Is it reasonable to follow the approach adopted by the electricity industry and allow landlords to charge metered tenants up to the domestic metered standing charge for the costs of administration and maintaining meters and to charge unmeasured purchasers up to half the metered standing charge?

1 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.

Ofwat has received a small number of complaints and queries from customers who believe they are being overcharged for their water and sewerage services. Although the number of cases is small, it is clear that there can be significant problems for those involved. Ofwat also receives requests for advice from the owners of properties or mobile home parks on what would constitute a fair approach to charging for water supplied to tenants.

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 maximum resale price may be enforced by the purchaser through the civil courts.

The key objectives, on which these proposals for an order are 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.

2 Proposed scope of the order

Although water resale can occur in commercial situations, the cases raised with Ofwat relate almost entirely to domestic cases. It is proposed that only properties used as domestic dwellings should fall within the scope of the order. This is consistent with the electricity sector and 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 does 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.

These proposals address the following issues:

• the rate to be charged for resold water and sewerage services;
• the apportionment of bills where supplies are not metered; and
• the application of other charges.

3 Issues outside the scope of the proposed order

There are issues related to charging for resold supplies which fall outside the scope of a water resale order. These include the right to have a meter installed, the right of the purchaser to receive relevant information from the reseller, recovery of interest on excess charges and the maintenance of pipework. These issues are not addressed in detail in this paper, but are discussed briefly below:

3.1 The Government has recently proposed, in the Water Industry Bill, that all direct water service customers of a licensed undertaker, including those living in rented dwellings, should have the right to have a meter installed free of charge. This proposal does not extend to resale purchasers. For them, the installation of meters and charging for water on a measured basis are issues for agreement between the reseller and the purchaser.

3.2 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 was 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.

3.3 The maintenance and improvement of water supply pipes and sewerage systems raise many varied and complicated issues. Some examples of resale situations are set out in Appendix 1. Ofwat considers 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. Such issues are therefore best dealt with as part of the normal rent or pitch fee or agreed and charged for separately.

4 Proposed basis of charging

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.

These proposals are based on the general principle that 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.

Water is different from the other utilities in that many household supplies are unmeasured. Various combinations of metered and unmeasured supplies may arise in resale situations. Appendix 1 sets out a number of examples of resale arrangements. Because of these complications, Ofwat proposes to make an order which sets out the principles on which charges should be based rather than simply set a specific maximum resale price. The proposed principles are set out below.

5 Proposed charging principles

5.1 All purchasers metered

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.

5.2 Some or all purchasers unmeasured

To provide a basic, transparent test which will address particularly high charges, it is proposed that annual charges for unmeasured resale purchasers should not exceed the average unmeasured household water and sewerage bill for the relevant supplier (as published each year by Ofwat) 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 shared either 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) be apportioned between the remaining purchasers.

5.3 Reseller's own supply

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).

6 Additional administration charges

Ofwat considers that it is 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. The question then arises as to what is an appropriate additional charge.

Different approaches are currently taken in the gas and electricity sectors. In gas, the reseller is required to share between the purchasers the standing charge which he has been charged by the gas supplier. For electricity, the reseller is permitted to charge each recipient up to a full standing charge.

Ofwat considers that the latter approach is more transparent for purchasers and, therefore, proposes that for water a landlord should be permitted to charge each metered purchaser up to the full metered household standing charge as set out in the supplier's standard domestic tariff. This should 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.

7 Next steps

Following this consultation, and subject to points made by respondents, the next step is for the Director to make and publish a draft maximum resale price order under section 150 of the Water Industry Act 1991. Ofwat will continue to publish a leaflet each year setting out the average unmeasured household water and sewerage charge for each supplier.

APPENDIX 1: EXAMPLES OF WATER RESALE SITUATIONS

Example one

A privately owned cottage has an unmeasured water supply provided from a nearby farm through a very long supply pipe which runs through the farmer's land as well as that belonging to the cottage. A single water bill is received by the farmer and a proportion charged to the owner of the cottage, which is not related to the volume of water consumed. The owner of the cottage is responsible for the maintenance of the supply pipe to his property but may have problems getting access where the pipe crosses the farmer's land.

Example two

A property company or housing association resells water and sewerage services to a group of houses and flats on a shared supply. The dwellings are of different sizes; some occupied by individuals some by families. Water and sewerage charges are apportioned on the basis of square footage. Purchasers need the agreement of the property company, and perhaps the other residents, before they can change to charges based on the volume consumed. Maintenance or improvement of pipework is covered by the service charge.

Example three

The site of a large mobile home park is also occupied by a hairdresser's salon and the park owner's home. Mobile home owners are charged on an unmeasured basis although some have chosen to meter their own consumption to check whether their charges are reasonable. Although the supply to the park is metered, the park owner may choose not to reveal the meter readings or overall water and sewerage bill. The cost of maintaining water and sewerage infrastructure may be included in the pitch fee or identified and charged separately as costs are incurred.

Example four

A house divided into separate rented flats is occupied by the landlord and a number of tenants. The landlord receives one water and sewerage bill for the property, which is shared amongst the occupants. In such circumstances it may be difficult to meter individual flats, which may have more than one supply pipe. Maintenance costs are likely to be included in the rent as specified in the tenancy agreement.

APPENDIX 2: LIST OF CONSULTEES

Organisations representing resellers and purchasers

Age Concern England
Association of British Chambers of Commerce
Brent Private Tenants' Rights Group
British Holiday and Home Parks Association
British Park Home Residents Association
Camden Federation of Private Tenants
Confederation of British Industry
Confederation of British Industry, Wales
Consumers'Association
Help the Aged
Independent Park Home Advisory Service
Local Government Association
Logistic Support Unit RLC
National Association for Park Home Residents
National Association of Citizens Advice Bureaux
National Association of Local Councils
National Caravan Council
National Consumer Council
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
Shelter
Welsh Consumer Council
Welsh Local Government Association

Other government departments and regulators

Department of the Environment, Transport and the Regions
Office of Electricity Regulation
Office of Gas Supply
Welsh Office