Providing new connections
We use the term new connections here to describe where a customer requires either or both:
- access to the existing public water supply or sewerage system by means of a service pipe or lateral drain
- a new water main or public sewer Alternatively, they may choose their own contractor to do the work, which is then known as ‘self-lay’. The monopoly company will take over responsibility for (adopt) all self-laid infrastructure that meets the terms of its agreement with the owner, developer or self-lay organisation that carries out the work.
The Water Industry Act 1991 (WIA91) places a number of duties on monopoly water only and water and sewerage companies in providing or enabling new connections for an individual property or development site.
If a property requires a new water main, sewer, service pipe or lateral drain for domestic purposes (cooking, cleaning, central heating or sanitary facilities), the owner or developer may ask the local monopoly company to install the infrastructure. For water mains and public sewers this is often referred to as ‘requisitioning’ the infrastructure.
Below we provide further clarity on our general expectations of monopoly companies for:
- customer service
- competition law obligations
- planning for and enabling growth
- charging for new connections.
New connections bring new customers to the water sector in England and Wales. These can be an individual property or a large-scale development site. As one of the few parts of the sector open to competition in the market, new connections can also deliver the benefits of effective competition. These benefits include new providers driving service improvements, innovation and efficiencies for customers across the sector.
New connections customers are also important drivers of the national economy. So, the sector has a responsibility to enable them and their contribution to economic growth and sustainable development. As well as the end-user of water and sewerage services, monopoly companies should recognise the following groups as customers of their services.
Monopoly companies should apply the principles of good customer service to the recipients of any new connections services they provide. In particular monopoly companies should be working closely with their new connections customers to:
- understand their needs, which include commercial considerations and may be different from end-users of water and sewerage services
- provide clear and transparent information on how and when to access their services, including details of what the customer needs to provide in order to receive the quality service they want
- provide clear and transparent information on their charging arrangements
- explain their level of service commitments. This should include details of what the company will do if they do not meet their commitments and what the customer’s rights are, for example, to bring a dispute to us for determination.
Water and sewerage companies have agreed a shared set of service measures for key new connection services they provide to developers and SLOs.
Competition law obligations
Monopoly companies provide a broad range of new connections services.
Some of these services can only be provided by the monopoly company in its licensed geographical area (‘area of appointment’). These are ‘non-contestable services’. For other new connections services, customers can choose from some or all of the following providers:
- the monopoly company
- self-lay organisations
- sewerage infrastructure contractors
- new appointments and variations
The specific new connections services that are considered contestable and non-contestable are not defined in legislation. The ‘Code of Practice for the Self-Laying of Water Mains and Services – England and Wales’ sets out the current working practice in the sector. Monopoly companies publish an addendum to this code of practice setting out details of any areas in which they operate differently from the code of practice. This includes if they consider different services to be (non-)contestable in their area of appointment.
These are called ‘contestable services’.
Monopoly companies should have a strong understanding of:
- each of the distinct new connections services they provide
- in what capacity they deliver them (that is, as the monopoly provider or as a competitor)
- who the customers for each of their services are
This understanding is critical to a monopoly company’s ability to:
- provide a high quality service to its new connections customers; and
- comply with their obligations under competition law.
Monopoly companies must offer their non-contestable services on equivalent terms for all of their customers. This includes circumstances where a monopoly company is providing non-contestable services to another part of its own business – which may be competing with other new connections providers – to enable it to provide a contestable service.
Planning for and enabling growth
Monopoly companies have general duties under section 37 and 94 of the WIA91 to develop their networks in order to meet increasing demand through new connections.
- Section 37 requires a water company to develop and maintain the system of water supply such that it can make such supplies available to persons demanding them.
- Section 94 requires a sewerage company to provide, improve and extend a system of public sewers to ensure an area is effectually drained.
Monopoly companies’ price controls include allowances – where they provide sufficient evidence ‒ for them to:
- invest in their water and sewerage networks to support growth; and
- recover the costs of this investment from customers.
In order to plan for and enable new developments schemes we expect monopoly companies to speak with and listen to:
- new connections customers
- local planning authorities
- other relevant statutory bodies
- other infrastructure providers
Strong and on-going conversations between monopoly companies and their new connections customers should deliver a range of benefits to all parties, including both new connections customers and monopoly companies’ existing customers. These benefits include the monopoly companies:
- providing levels of service for new connections customers based on greater trust and confidence and a stronger understanding of their needs
- having a better and earlier understanding of the impact of changes in demand on their networks
- efficiently planning the development of their networks, with investment and business planning based on robust assumptions of growth
- effectively managing the investment risks of providing new capacity, only doing so where they are confident that it is required and that they will be able to recover the costs of providing it
- being able to deliver strategic, joined-up solutions where there are multiple development sites coming forward, rather than a succession of smaller schemes
- recovering fair and proportionate contributions from new connections customers and existing customers to the infrastructure required to respond to growth
On-going and timely conversations between monopoly companies and their new connections customers and planning authorities is essential for all parties to understand the timing, location and impact of future developments. Alongside the statutory planning system, these conversations are one of the ways in which monopoly companies should identify and enable the delivery of development schemes. Where appropriate, monopoly companies should use these conversations to work with multiple developers to identify and deliver joined-up solutions where several sites are coming forward together.
Charging for new connections
We use the term new connections to describe where a customer requires either or both:
- access to the existing public water supply or sewerage system by means of a service pipe or lateral drain
- a new water main or sewer.
The Water Industry Act 1991 (WIA91) gives Ofwat a duty to make determinations on certain new connections disputes. These determinations largely relate to the level of charges and the terms and conditions of agreements made between a monopoly company and their customer.
Sections 42-43A, 99-100A and 51C of the WIA91 sets out the methods for calculating both:
- the requisition charge a monopoly company can recover from a customer when it provides a new water main or public sewer, and
- the asset payment a monopoly company will pay to a developer or self-lay organisation (SLO) when a water main is self-laid and later adopted by the monopoly company. Asset payments are only paid for self-laid water mains – no asset payment is paid to the constructor of self-laid sewers, service connections or lateral drains.
Both of these calculation methods are based on what are considered to be the ‘costs reasonably incurred’ in providing the infrastructure.
Also, under sections 45, 47, 51C and 99 of the WIA91 the charges monopoly companies can recover the costs or expenses reasonably incurred by the monopoly company when they provide:
- service connections
- lateral drains
- works to enable the adoption of self-laid water mains
Disputes arise about both the level of costs and the range of the cost items considered to be ‘costs reasonably incurred’. The most common areas of dispute referred to us include where:
- administration and overhead costs are included alongside the physical construction costs of materials and labour
- off-site works, to provide new infrastructure or reinforce existing infrastructure beyond those directly requisitioned or self-laid by a developer, are required to enable the requisitioned or self-laid infrastructure
- the infrastructure provided includes additional capacity beyond that required by the person requesting the new connection
- the income offset provided for in the calculation of a requisition charge or asset payment has not been offset against the costs incurred in providing off-site works or capacity, or is offset twice or separately for on-site and off-site works
- a water or sewerage company has recovered contributions towards off-site works through its requisition or self-lay charges as well as recovering infrastructure charges for each property newly connected to its network. Infrastructure charges are permitted by section 146 of the WIA91 and condition C of monopoly companies’ licences. We investigate disputes on a case-by-case basis. We consider
When an SLO provides new connections it must enter into a self-lay agreement with the relevant water company under section 51A of the WIA91. Ofwat has powers under section 51B of the WIA91 to consider appeals about the terms on which a water company offers to enter into a self-lay agreement under section 51A. Common areas of dispute referred to us include the terms a water company has offered in order to satisfy itself about the quality of the self-laid assets it will be taking ownership of (‘assurance terms’).
- the legal framework of the WIA91
- the evidence provided to us by the parties to the dispute
Given that we do investigate disputes on a case-by-case basis, there may be justifiable grounds for moving away from our general expectations in light of the facts of an individual case.
Administration and overhead costs
We recognise that when monopoly companies or SLOs provide new infrastructure, their costs are not limited to materials and labour. They also incur ‘non-construction costs’ for the administration of the services they provide. We consider:
- that costs reasonably incurred are likely to include some administration and overhead costs
- that these non-construction costs should be permitted where they are reasonably incurred and can be directly attributed to the provision of the infrastructure (‘direct on-costs’)
We commissioned an independent review of the overhead costs and administration fees for new water supply connections, which we use to inform our consideration of such costs when determining section 45 disputes arising from monopoly companies providing service connections.
Off-site works is a term used for works a monopoly company provides beyond those directly requisitioned by or self-laid by a developer. These are often works on the existing water or sewerage network, outside the boundary of the development site that is subject to a requisition or self-lay agreement.
For water mains and public sewers requisitions sections 43 and 100 of the WIA91 detail what can legally be included as part of the ‘costs reasonably incurred’ for the purposes of calculating the requisition charge a monopoly company can recover:
- Sections 43(2) and 100(2) state that these costs should not include costs incurred in the provision of additional capacity beyond the requirement of the requisition.
- Sections 43(4)(a) and 100(4)(a) state that the costs can include the costs of providing other infrastructure that it is necessary to provide in consequence of the new main/sewer. For water mains this other infrastructure can include other water mains, tanks, service reservoirs and pumping stations. For public sewers this other infrastructure can include other public sewers and pumping stations.
- Sections 43(4)(b) and 100(4)(b) state that the costs can include a proportion of the costs incurred in providing additional capacity in a requisitioned earlier main/sewer (provided in the 12 years preceding the new main/sewer) which falls to be used in consequence of the new main/sewer. So, we consider that where they are considered necessary to provide in consequence and reasonably incurred, the WIA91 provides for a monopoly company to include the costs of off-site works in their calculation of requisition and self-lay charges. Unlike the provisions for water infrastructure, the WIA91 provisions for off-site works when a public sewer is requisitioned are not mirrored when sewers are self-laid. This means that when a customer decides to self-lay their on-site sewers and exercise their right under section 106 to communicate with an existing public sewer, there is no legal mechanism within the WIA91 for monopoly companies to require a customer to contribute towards the costs of any off-site works that the monopoly company considers necessary to provide in consequence of the new connection. This again reinforces who monopoly companies should be engaging in timely conversations with their new connections customers and planning authorities to ensure the monopoly companies have planned and invested for these types of connections.
- Section 51C(8) requires that these same costs be included in the calculation of the asset payment for self-laid mains. If a monopoly company fails to put both on-site and off-site costs through the asset payment calculation (as they would have combined them in a requisition charge calculation had they provided all of the works) it could risk breaching the requirements of competition law.
- Section 51C(3) of the WIA91 sets out the costs a monopoly company can recover when it provides off-site works that are considered necessary to provide in consequence of self-laid water mains. This section cross-refers back to sections 43(4)(a) and (b), enabling the monopoly company to recover the costs of these specific off-site works as though under a requisition, as set out above.
Apportionment of additional capacity
Where infrastructure is provided solely to meet the requisition or self-lay requirement, we would not expect there to be a need to split (‘apportion’) the costs of providing it for the purposes of calculating charges. Our consideration of the reasonableness of the charge would focus on the level of the entirety of the costs.
But, where the infrastructure provided will also serve existing customers and/or potential future development(s), we would expect the costs reasonably incurred to be apportioned between the relevant customers. The WIA91 does not set out how costs should be apportioned except as previously mentioned under sections 43(2) and 43(4)(a) and (b).
In the majority of cases where this is an issue we consider it is most appropriate to apportion costs on the basis of the percentage of the total capacity provided that is used by the customer.
We consider that this approach:
- provides greater transparency for customers
- apportions both the costs and risks of providing additional capacity reasonably between monopoly companies and customers
This approach also helps to avoid situations in which a customer is charged on the basis of the notional costs a monopoly company might have incurred had it solely provided infrastructure to meet their need. For example:
- where a customer is the first to trigger the need for network reinforcement works, or
- where a monopoly company decides to provide more capacity than requested by the customer in order to serve other customers
It is our view that charging on the basis of the notional costs a monopoly might have incurred:
- is not sufficiently transparent for customers
- risks over recovery of the costs actually incurred
A notional costs approach also risks deterring development and distorting competition between new connections customers. This is because a new connections customer may have to:
- bear the risk of triggering a monopoly company’s decision to provide network reinforcement works or additional capacity
- face higher charges than other customers who will ultimately share the same infrastructure.
Our preferred approach again highlights the importance of monopoly companies working constructively with new connections customers and local planning authorities to understand and enable new developments.
Sections 42-43A, 99-100A and 51C of the WIA91 set out the methods for calculating requisition charges and asset payments. They allow for the income that will be generated from the new properties being connected to the water or sewerage network as a result of the new water mains or public sewer to be offset against the costs reasonably incurred in providing that infrastructure.
In line with sections 43(4)(a) and (b) and 100(4)(a) and (b) of the WIA91, this income offset can only be applied:
- once, and
- against off-site costs where these are included alongside on-site costs as part of the total costs reasonably incurred. This is because these off-site costs are only permitted to be part of what are ‘costs reasonably incurred’ where they are necessary as a result of the on-site works.
Infrastructure charges were originally established to enable companies to invest in general improvements in their existing network needed to meet increasing demand from new customers. Charged separately for water and sewerage services, they are payable when connecting a property to a public water supply or a public sewer for the first time for domestic purposes.
Monopoly companies are entitled to raise infrastructure charges under section 146 of the WIA91. Condition C of their licence sets out how the charges are calculated. This is based on a standard charge that rises annually with inflation.
Disputes often arise when a monopoly company both:
- seeks to recover an infrastructure charge, and
- includes the costs of off-site works in their calculation of requisition or self-lay charges and payments. Section 146 is separate and independent from the WIA91’s provisions for charging for requisitions and self-lay. Legally there is no interaction between these sections. As a result companies are legally entitled to raise charges under both provisions when connecting a property to their network(s) for the first time. In contrast, only the costs of those off-site works that are considered necessary to provide in consequence of a requisitioned mains or sewer or a self-laid main can be included in the calculation of requisition or self-lay charges and payments. So, these costs are directly attributable to the newly connected property against which they have been raised.
Monopoly companies can legitimately use the money recovered from both charging provisions to fund network reinforcement works. But these funding routes are distinct.
As a standard charge, infrastructure charges do not relate directly to the actual costs of a specific scheme of works. Instead they become a source of general funding monopoly companies can use to improve and develop their networks so they can meet general increases in demand. Therefore works funded by infrastructure charges may not occur at the same point either geographically or in time as the newly connected property against which they have been raised.
Some customers consider that this means they are paying twice for network reinforcement works arising from their connection. However there is a clear distinction and the two charges should not overlap.
Requisition or self-lay charges may only be used to recover the costs of particular off-site works that are considered necessary to provide in consequence of on-site works. They must not be used to fund other network works that are not considered to be directly attributable to the development site they are being raised against.
Infrastructure charges may be used for other network reinforcement works within the monopoly company’s area of appointment as and when they arise as a result of general increases in demand.
Monopoly companies should be working closely with their new connections customers to:
- make sure they understand the make-up of and rationale for the charges they are being asked to pay
- minimise confusion or frustration in relation to their charges.
In respect of the terms offered by a water company within a self-lay agreement entered into under section 51A of the Act, we have set out our general expectations in Information Notice 16/ 06.
In summary, we consider it is reasonable for the terms of a self-lay agreement to require an SLO to:
- Demonstrate it is suitably competent to provide the proposed self-laid works, for example by means of WIRS accreditation
- Be subject to contractual obligations to meet the water company’s design and construction standards when providing the self-laid works
- Be subject to contractual obligations to remedy any defects arising with the self-laid works within a defined liability period
Beyond these requirements, we consider any additional assurance terms should be:
- Reflective of the accreditation schemes that are developed and recognised by the sector
- Transparent and available for all SLOs to access and understand the rationale for, including the reasons for any differences in their application
- Reflective of and proportionate to identifiable costs and/or risks the water company faces
- Reasonable in terms of who holds the balance of risk
Our general expectations allow for a water company to require different terms of different SLOs should it wish to. Water companies are responsible for their own compliance with competition law and this is a factor a water company will need to consider if it requires additional and/or different assurances from different SLOs.