The Water Act 2014 introduced changes to the Water Industry Act 1991 (WIA91) requiring Ofwat to issue statutory codes for adoption agreements. These are the agreements that developers or self-lay providers (SLPs) enter into when they want an appointed water or sewerage company to take over responsibility for infrastructure they have constructed. They are the agreements entered into under section 51A WIA91 for water infrastructure, and under section 104 WIA91 for sewerage infrastructure.
The duty for Ofwat to issue a code came into effect for companies operating wholly or mainly in England in October 2017 and, on 13 November 2017, we published our Code for Adoption Agreements for water and sewerage companies operating wholly or mainly in England (the Code). This followed our engagement with the sector and its customers through a discussion paper we published in September 2016, a stakeholder workshop in January 2017 and our statutory consultation on the draft code in summer 2017.
The Water Act 2014 also introduced changes to the WIA91 requiring Ofwat to issue statutory codes for adoption agreements for companies operating wholly or mainly in Wales. However, in March 2019 the Welsh Government decided to delay the commencement of these changes in order to wait for changes to the governance of the water sector resulting from the Wales Act 2017 to come into effect, which are currently expected to take place in April 2022. We will work with the Welsh Government to keep this under review.
What is the Code for Adoption Agreements?
It is a single code that covers the adoption of water infrastructure and sewerage infrastructure under sections 51A and 104 WIA91. It applies to companies wholly or partly in England.
Why have we introduced the Code for Adoption Agreements?
It is crucial that developers, new appointees and SLPs have confidence they can receive the services they want from companies to enable their own business in providing contestable services. End-user customers must also have trust and confidence that their company will only adopt quality, resilient infrastructure.
We expect that in bringing in the Code, we can ensure there is a more consistent approach to adoption agreements in the sector and the information being provided to those parties that need that information.
In introducing the Code we expect the sector to demonstrate its commitment to providing a good customer experience for its customers, which in turn will support the Government’s objective of housing growth and a level playing field for customers who wish to apply for and enter into adoption agreements.
What are the expectations on companies?
The Code sets a framework of overarching principles within which companies must deliver adoption agreements and places obligations on companies to work with their customers to develop, agree and maintain sector guidance (setting out the processes by which parties can enter into adoption agreements) and model adoption agreements.
There are already guidance publications for the adoption of water and sewerage infrastructure, which will provide a useful starting point for companies, but the sector guidance companies are now required to produce will be expected to comply with the requirements in the Code.
The Code sets out the minimum requirements for these documents, including information and publication requirements; when deviations from them may be permitted; and governance arrangements, which include the sector convening governance panels to consider future changes to the Code.
In accordance with the Code, companies need to submit draft sector guidance and model adoption agreements for both the water and sewerage sector to us for approval. When we have approved these documents they will form part of the Code.
What timetable is the sector working to?
Water sector documents
First recommendation (January 2019)
On 7 January 2019, companies submitted draft water sector guidance and a draft model water adoption agreement for our approval. This followed an extension to the original deadline for the submission of 1 October 2018, in order for companies to further engage and consult with stakeholders on the documents.
We reviewed the draft documents and concluded that companies had produced documents that broadly included the content required by the Code. However, we also decided that there were some aspects of the draft documents that needed further work and engagement by companies, in consultation with their customers, before we could consider that they complied with the Code’s principles. The particular areas requiring further work and engagement before we could make a decision to approve the documents were:
- The draft model water adoption agreement where we considered there had been insufficient consultation that had led to drafting quality issues and inconsistent terminology;
- The balance of obligations on parties in the documents including clarifying how non-compliance with procedures will be deal with;
- The amount of detail included in the design and construction standards;
- Clarifying the scope of ‘standard’ procedures and exploring the potential to provide greater certainty about the timescales for delivery of activities for SLPs;
- Clarifying an agreed and consistent accreditation definition throughout the documents;
- Addressing concerns raised about the complexity of the adoption process when compared to the requisitioning process and how this raises potential level playing field concerns. We do not consider the sector documents can address all such concerns, however, we considered companies could do some further work on this in the drafting of the water sector guidance;
- Further clarity on companies’ proposal that, aside from any defects rectification obligations under the Model Water Adoption Agreement, there are no maintenance obligations or maintenance period for which the developer/SLP is responsible;
- Further transparency around companies’ approach to inspections that might act as ‘control points’, which are key to an SLP’s ability to progress its works; and
- Introducing a standing agenda item for the Code Panel to reflect on Ofwat information notices, orders and determinations, and consider whether any amendments are subsequently needed to the sector documents.
Companies were required to consider the above issues and consult further with customers on them. In consulting, we expected companies to clearly set out the areas on which they were seeking customers’ input, alongside revised documents for comment. We did not require companies to re-consult on all elements of the sector documents submitted to us on 7 January 2019, just the specific issues we identified for further work.
We asked companies to provide us with a revised recommendation, including, where necessary, revised documents. We expected companies’ revised recommendation to clearly demonstrate how they addressed the issues we raised and how customers had been consulted and had their views reflected in the recommendation. We considered that whilst there were some examples of positive engagement with customers as part of the initial recommendation there were also areas where companies could have done better, in particular in consulting on the model water adoption agreement. We asked companies to reflect on how they can best engage with their customers in their further consultation for the revised recommendation.
We considered that companies were best placed to lead this further engagement and consultation with their customers since they should own their relationship with their developer services customers. Companies are also better placed to ensure the detail of the resulting documentation can be implemented in their day-to-day business.
Revised recommendation (October 2019)
Companies initially committed to submitting a revised recommendation to us by 9 August 2019. This deadline was subsequently extended to 7 October 2019 because companies’ engagement with stakeholders, to respond to the issues we had raised, identified some wider knock-on changes that both companies and customers agreed should be considered at the same time. In addition, SLPs asked for sufficient time for them to engage with the consultation on the revised documents, particularly over the summer period.
Companies submitted their revised recommendation to Ofwat on 7 October 2019, including updated versions of the water sector guidance and model water adoption agreement. The documents can be viewed on WaterUK’s website.
Our review of the documents found that companies have submitted an improved set of documents in response to the outstanding issues we had identified from their first recommendation to us. The latest recommendation does, however, show that a number of SLPs raised concerns during the consultation on the revised documents and it is unclear whether these have been fully resolved.
The Code sets out that, where possible, the draft sector guidance and model agreement must reflect a broad consensus of opinion amongst customers and water companies. The Code also sets out that Ofwat can seek further views from customers and companies prior to finalising the guidance and model agreement documents. We consider that, given the apparent lack of consensus among SLPs, it would be beneficial to seek further views from this group. We are keen to better understand the extent and nature of any outstanding concerns SLPs have in regard to the revised documents, to inform what next steps to take. In particular, we hope further engagement with SLPs will help inform our view on whether there are outstanding issues that should be resolved before our approval and/or if there are issues that could reasonably form part of future work for the Code Panel to consider as part of its on-going role to maintain and further develop the sector documents.
Due to the protocols Ofwat is subject to prior to and following a general election, we do not anticipate undertaking this engagement until January 2020. As a result, the timing of our decision on whether or not to approve the documents will be delayed. We now expect to make our decision in February 2019. If we do approve the documents, we do not currently anticipate any change in the timing of their implementation by water companies, but that will form part of our final decision.
Code Panel arrangements
As part of the recommendation submitted on 7 January 2019, companies’ submitted terms of reference for a Code Panel (see Appendix H). Once we have approved the water sector documents, including the terms of reference, the function of the Code Panel (set out in paragraph 3.8 of the Code) will be to consider change proposals to the water sector guidance and model water adoption agreement.
Having reviewed the terms of reference for the Code Panel, we are content that preparatory work should begin to put the Code Panel in place ready for the documents being approved. We are therefore supportive of companies starting to progress constituting the Code Panel. We consider this a sensible and practical approach, as it will take a number of months to get the Code Panel in place and it is in the interest of all stakeholders for the Code Panel to be able to familiarise itself with the Code as soon as possible and to start to develop a work programme for when the water sector documents have been approved.
Sewerage sector documents
On 26 March 2019, companies submitted draft sewerage sector guidance and a draft model sewerage adoption agreement for our approval. We subsequently reviewed these documents and in July 2019 we set out that, subject to some minor revisions, we were satisfied that they met the requirements of the Code and we were content to approve them.
Companies have since addressed the minor revisions and submitted revised documents highlighting the changes that have been made. We are now content that our revisions have been addressed and, as such, we have confirmed with companies that we are satisfied with the sewerage sector documents. As such, these documents now form part of the Code.
Companies have dealt with two minor revisions we initially highlighted in a different manner to what we originally envisaged, however, we are content that companies’ final proposal is compliant with the Code:
- Inspections prior to construction – we set out that companies should include text in the model adoption agreement that if the water company fail to inspect a site prior to construction they cannot subsequently complain about any problems the inspection would have revealed. Companies agreed that a failure to inspect should not impede progress, however, they had concerns that our proposed wording may mean a failure to inspect could excuse failures to comply with the agreed specification for the works. Companies, therefore, addressed our initial concern by adding a provision to clause S4 of the model sewerage adoption agreement, setting out that if the water company fails to carry out an inspection prior to construction that the developer may commence works following the expiry of the inspection period (which is 14 days). We are content with this as it ensures that developers’ progress is not impeded while not removing their accountability for building works to the required standard.
- Financial liability – we set out that companies should clarify in the model adoption agreement that financial liability, in respect of defects, would be capped at the amount of the surety or deposited sum as appropriate. Companies have, however, clarified that in the event of the works being defective, water companies should be compensated for the loss they incur and the purpose of the reference to the deposited sum or surety level is intended to ensure a minimum amount of security is available. The approved version of the model sewerage adoption agreement states at clauses S22.1 and S22.2 that in the event of the developer failing to meet its obligations under the agreement, the developer will pay to the undertaker any expenditure which it reasonably incurs as a result of the failure, and that the amount shall be certified by an Engineer. We are content with this wording.
We initially set out that we anticipated the sewerage sector guidance and model sewerage adoption agreement coming into effect from 31 October 2019. Companies, however, as part of their response to our minor revisions, requested a longer timeframe with a suggested implementation date of 1 April 2020. We consider this to be reasonable and, as such, in accordance with B1.4 of the Code, this is the date the sewerage sector documents will become ‘live’.
Companies have also set out that they do not anticipate they will not be in a position to start reporting against the level of service metrics set out in the sector documents until 1 October 2020. The main reasoning behind this is the time it will take to get the reporting systems in place. Our primary focus is that companies are committed to delivering against those metrics for customers and that customers (and companies) will be able to enforce their rights under the model adoption agreement and the sector guidance from 1 April 2020. As companies have committed to this we can accept the delay to the reporting. We have, however, made it clear to companies that the 1 October 2020 should act as more of a backstop and that they should work towards fulfilling their reporting obligations as soon as possible.
Code panel arrangements
Appendix G to the sewerage sector guidance sets out the Terms of Reference for the Code Panel. The function of the Code Panel (set out in paragraph 3.8 of the Code) is to consider change proposals to the sewerage sector guidance and model sewerage adoption agreement.
Having approved the terms of reference for the Code Panel, we expect companies to progress constituting the Code Panel. We consider this a sensible and practical approach, as it will take a number of months to get the Code Panel in place and it is in the interest of all stakeholders for the Code Panel to be able to familiarise itself with the Code as soon as possible and to start to develop a work programme for when the sewerage sector documents are implemented.