Ofwat publishes summary of independent review of section 45 administration fee and overhead costs

We commissioned an independent review of the overhead costs and administration fees that water companies charge for making a new water supply connection for domestic purposes under section 45 of the Water Industry Act (WIA91).

Why has Ofwat commissioned this report?

The purpose of this review was to:

  • establish the overheads and administration fees that companies charge when undertaking a new connection
  • set a benchmark for what would constitute a reasonable charge.

We have published a summary, rather than the full report, because the report contains commercially sensitive information about companies’ costs.

What were the conclusions?

The key conclusions of the review are as follows.

  • There are a standard set of tasks that can be directly attributed to providing a new water supply connection and that a company can recover as reasonable expenses incurred in providing the supply. These include construction and non-construction (administrative and technical) tasks.
  • As well as costs directly associated with the making the new connection (direct on-costs), some companies seek to recover an additional payment that contributes to the cost of operating the company (company on-costs).
  • The companies experience these company on-costs whether or not new connections are requested and so they cannot be directly attributed to a specific new connection.
  • The tasks the company carries out to prepare and issue a quotation are essential to the process of providing a new supply, and so the company reasonably incurs the costs of these activities whether or not the customer continues with the application.
  • When the same developer makes two or more applications for the same site the company will make a cost saving on technical but not administrative tasks.

The review made the following recommendations to Ofwat.

  • We should not allow contributions to the cost of operating the company within the expenses reasonably incurred and recovered under section 45(6) of the WIA91. This is a legal and policy consideration for Ofwat.
  • The acceptable overall direct on-cost for a section 45 new connection is £105.30.
  • Companies should charge an application fee of £72.14, which is included within the overall direct on-costs of the new connection.
  • The application fee should be non-refundable if the customer decides not to continue with the application.
  • When a developer requests two or more connections at the same location the application fee for the second and subsequent connections should be reduced to £43.75 and the full direct on-costs to £64.29 to reflect the savings the company makes from technical tasks in the process.
  • All costs directly associated with the making the new connection should be reviewed annually and adjusted in line with the consumer price index (CPI).

How will we use the report findings?

We will use this review to inform our consideration of administration and overhead costs when determining current and future disputes under section 45 (water supply connections) of the Water Industry Act 1991.

Further information

Independent review of section 45 administration fee and overhead costs on behalf of the Water Services Regulation Authority (Ofwat) – summary