Interest rates

Under certain provisions of the Water Industry Act 1991 (‘WIA91’), as set out below, we have the power to approve or determine interest rates relating to charges for new connections and the relocation of mains and sewers.

Water and sewerage companies can charge customers for connecting properties to their water and sewerage services, or for relocating pipes or other apparatus. The charges generally relate to the cost of the works required to be carried out. For some works, water companies can ask customers to deposit a sum with them as a security payment before the water company commences the works. The WIA91 requires that where such a security payment is made interest is payable by the water company upon any amounts held by it for longer than three months (based on a deposit rate that we have approved or determined).

Some charges are calculated as if the water or sewerage company had borrowed the money required to carry out the works (‘hypothetical loan basis’). This means that the total costs used to calculate the charge include both capital costs, and interest (based on a borrowing rate that we have approved or determined).

Water and sewerage companies have the right to set these interest rates, but only with our approval.

Infrastructure charges

A water or sewerage company may raise infrastructure charges when premises are connected for the first time. Infrastructure charges contribute to the costs of improving and developing the water or sewerage company’s network so it can meet general increases in demand from new connections.

If the building (or part of the building) is occupied as a dwelling immediately before connection, the customer (who could be an individual or a developer) can pay the infrastructure charge either in one lump sum or in instalments over a 12-year period.

If the customer chooses to pay in instalments, the company will calculate the charge as if the company had borrowed the money required to carry out the works over 12 years (a hypothetical loan basis). This means that the charge includes both the capital costs and interest. The interest is charged at the borrowing rate.

Connection charges

A connection charge is a charge reflecting a water company’s reasonable costs for connecting a premises to a water main. The water company can ask for a sum to be deposited with it as security payment before it commences the works.

The amount requested as security should not be larger than the estimated total cost of the works. The water company must pay interest on any sum held as a security payment of 50p or more that it holds for at least three months. The interest must be paid at the deposit rate.

There is no equivalent provision on interest rates for sums deposited with sewerage companies as security where a sewerage company is to make a sewerage connection.

Requisitions and self-lay

A person requiring a water main or public sewer to enable a supply of water or drainage to his premises, can request the provision of a water main or public sewer (a ‘requisition’) from a water company. In certain circumstances, to enable supply or drainage, other infrastructure may also be required. Water companies can charge the reasonable costs it incurs in providing the water main or public sewer and certain other infrastructure required as a result.

Alternatively, a person may decide to lay the water main, public sewer or other related infrastructure itself (‘self-lay’). This will usually involve the use of accredited contractors.

A self-lay adoption agreement is required between the water company and the person constructing or proposing to construct the water main and other related infrastructure. A person constructing or proposing to construct a new public sewer and other related infrastructure is required to enter into an adoption agreement with the sewerage company where it operates wholly or mainly in Wales, but can choose whether to for sewerage companies operating wholly or mainly in England.

Where the water main, public sewer or other related infrastructure is constructed in accordance with the agreement, the water or sewerage company must adopt the infrastructure on the agreed date. The person constructing the water main, public sewer or other related infrastructure is the person who incurs the costs. However for self-laid water mains, the water company must pay to the person an “asset value payment”, which is the lesser of the estimated revenue from the bill payers to be connected to that water main of that premises or the costs the water company considers it would incurred in providing the water main on a hypothetical loan basis over a defined period.

In calculating the charges for requisitions or self-lay, the water or sewerage company will calculate the charge as if it had borrowed the money (a hypothetical loan) to enable it to carry out the work. This means that the charge includes both the capital costs of the work, and interest.

For requisitions, where the water or sewerage company estimates that there will be an amount for the developer to pay towards the costs of the works (the developer contribution), it can ask for an amount to be deposited with it as security payment before starting work. The company should not ask for an amount greater than the estimated developer contribution.

For self-lay, the water company may sometimes be required to provide certain infrastructure to enable the water supply or drainage which the person constructing the water main, public sewer or infrastructure cannot provide itself. Where the water company incurs a cost as a result of carrying out this work, it can ask for an amount to be deposited with it as security payment before starting the work. The company should not ask for an amount greater than the estimated total cost of the works.

The water company must pay interest on any sum held as security payment of 50p or more that it holds for at least three months. The interest must be paid at the deposit rate.

Relocating water mains and sewers

A water or sewerage company may have installed pipes or other apparatus which are on, under or over a person’s land. Anyone with an interest in this or adjacent land (a landowner) can, in certain circumstances, ask the water or sewerage company to alter or remove the pipe or apparatus affecting their land.

The water company will charge the landowner for carrying out this work.

The water or sewerage company can ask for an amount to be deposited with it as security before carrying out the relocation work. The water or sewerage company must pay interest on any sum held as a security payment of 50p or more that it holds for at least three months

How interest rates are determined

The interest rates are determined either by:

  • the water or sewerage company with our approval or, in default of this,
  • us directly.

We do not have to determine interest rates on a case-by-case basis, but can approve or determine interest rates generally.

The interest rates that we will approve or determine will be calculated using the methodology set out below. This does not prevent a company from approaching us to seek approval for a different rate where there may appear to be exceptional circumstances.

Our methodology uses the Yield from British Government Securities, 10-year Nominal Par Yield (‘GIR’), a statistic that is produced daily by the Bank of England.

In order to achieve an appropriate balance between administrative convenience and responsiveness to market conditions, the interest rate changes every six months, on 1 April and 1 October each year.

  • For the period from 1 April to 30 September in any year, the applicable rate is the simple average of the daily GIR for the preceding March (rounded to the nearest 0.25%).
  • For the period from 1 October to 31 March in any year, the applicable rate is the simple average of the daily GIR for the preceding September (rounded to the nearest 0.25%).

For borrowing, we add a margin to the reference rate (which is the applicable average GIR rounded to the nearest 0.25%) to reflect the additional cost of borrowing for water companies. These margins are currently 1.75 and 1.5 percentage points for water only and water and sewerage companies respectively.

For deposits, we subtract 0.75 percentage points from the reference rate (which is the applicable average GIR rounded to the nearest 0.25%).

Where the result is a negative interest rate, it should be adjusted so that the rate is 0%.

Methodology for calculating interest rates

Applicable average GIR = T%

Reference rate = applicable average GIR rounded to the nearest 0.25 = TR%

Deposit rate = TR% – 0.75%

Borrowing rate for water only companies = TR%+ 1.75%

Borrowing rate for water and sewerage companies = TR% + 1.5%

(The different borrowing rates reflect the additional cost of borrowing for water only companies.)

 

Worked example of

Using the above methodology, the interest rates applicable from 1 October to 31 March 2012 are the following.

Applicable average GIR (for September 2011) = 2.469%

Applicable average GIR rounded to the nearest 0.25 = 2.5%

Deposit rate = 2.5% – 0.75% = 1.75%

Borrowing rate for water-only companies = 2.5% + 1.75% = 4.25%

Borrowing rate for water and sewerage companies = 2.5% + 1.5% = 4.00%

(The different borrowing rates reflect the additional cost of borrowing for water only companies.)

Borrowing rate or deposit rate?

The borrowing rate applies to:

  • section 43(3) WIA91 (water main requisitions – relevant deficit)
  • section 43A(3) WIA91 (water main requisitions – discounted aggregate deficit)
  • section 51C(8) WIA91 (water main self-lay)
  • section 100(3) WIA91 (sewer requisitions – relevant deficit)
  • section 100A(3) WIA91 (sewer requisitions – discounted aggregate deficit)
  • Condition D of a water or sewerage company’s instrument of appointment, paragraph 1 (payment of infrastructure charges in instalments)

The deposit rate applies to:

  • section 42(4) WIA91 (security for water main requisitions)
  • section 48(1) WIA91 (security for connections to a water main)
  • section 51C(4) WIA91 (security for self-lay of water mains)
  • section 99(4) WIA91 (security deposits for sewer requisitions)
  • section 185(6) WIA91 (security deposits for the alteration or removal of pipes or apparatus)