IB 01/17 Ofwat publishes report into the market for new appointments and variations (NAVs)

Today, Ofwat has published a report into the market for new appointments and variations (NAVs).

The NAV regime is set out in the sector legislation that applies in England and Wales.  It has been in place since the 1990s and enables a company to apply to Ofwat to replace the incumbent as the monopoly provider of water and/or wastewater services for a specific site. Typically, an NAV takes wholesale water and wastewater services up to the boundary of its site from the incumbent in whose area it sits.

The NAV market has the potential to deliver significant benefits for developers, end-customers and society by enabling sites to be served at lower cost, facilitating multi-utility developer services and by encouraging innovation in how water and waste water services are provided. Ofwat commissioned the study to investigate how the market is working and to consider the extent to which any factors currently act to prevent, restrict, or distort prevent the market for achieving its full potential. The study also sets out options to address any issues identified.

The report, which drew on published information and extensive stakeholder engagement, identified a number of potential barriers to faced by NAVs wishing to participate in the market. These barriers include:

  • Process – regulatory, policy and administrative issues faced by applicants for a new appointment or variation;
  • Behavioural – the transparency of information and the timeliness of the provision of input services by incumbents to NAVs; and,
  • Pricing – the impact of incumbents’ charges on the margin that NAVs are able to earn.

Having considered the findings, Ofwat is today outlining a number of actions to address the concerns raised by stakeholders and cited in the report. These include:

  • Reviewing policies and processes to minimise regulatory and administrative barriers;
  • Consulting on changes to rules on new connection charging and on updating our guidance on bulk supply charging; and,
  • Challenging the water sector to improve access to information and the delivery of services to NAVs.

In addition to the above, Ofwat will also be considering what further steps are needed to raise awareness about the NAV regime among developers and other regulators involved in the application process.

The report also touched upon a number of other, longer-term issues and impacts that will require further consideration. Therefore over the coming months Ofwat will be giving further consideration to the strategic role that we anticipate NAVs playing in the sector in future years. This includes consideration of the benefits that a successfully functioning NAV market could deliver to developers, customers and society, consideration of the way the sector is regulated to ensure an appropriate balance between enabling the market to function effectively and protecting customers.

The full report is available here.

The paper setting out our next steps is available here.

Background

The New Appointments and Variations regime was introduced under the Water Industry Act 1991 (WIA91) to provide a mechanism to facilitate new entry into the water and wastewater sector and to allow appointed undertakers (incumbents) to expand outside of their geographical area of appointment.

Under section 7(4) of WIA91 Ofwat can appoint a company in place of the incumbent only where one of the following criteria is met:

  • the incumbent agrees to transfer part of its area of appointment to a different company (a transfer by “consent”);
  • the area is “unserved” (it does not contain any premises that are served by an incumbent) or;
  • the new appointment or variation only relates to an area where each of the premises are (or are likely to be) supplied with at least 50 megalitres of water a year (by an undertaker operating wholly or mainly in England) or 250 megalitres a year (by an undertaker operating wholly or mainly in Wales) and the relevant customer wants to change its suppliers (a “large user”).

To date, the vast majority of NAV applications have been granted under the unserved criterion and relate to the provision of water and/or wastewater services to new residential and mixed used developments.

Further details of the NAV market are available here.