Introduction

Last week Ofwat issued its consultation is about proposed changes to their charging rules.

Specifically, they address;

• Wholesale Charging Rules
• Charging Rules for New Connection Services 
• Charges Scheme Rules

TDS has issued a response to the latest Consultation, a summary of which can be found below along with our full report.

TDS is an Engineering Consultancy that operates throughout England and Wales. It is one of the leading Consultants in the procurement and project management of utilities for House Builders and Developers. We work in partnership with our Client’s to provide various options in how utilities can serve a development in both a cost effective way as well as from a practical perspective on their development requirements.

We have an in-depth understanding of charges that our Client’s pay to the Water and Sewerage Sector prior to and following the privatization of the Sector.

We have also been at the forefront of a number of important Ofwat Determinations against Companies which have been successful in securing substantial refunds to our Client’s, notably the recent Final Determination for Linden Homes at the Novartis Development.

One of our main achievements was when we worked alongside the QC’s providing technical advice for Barratt Homes in the Supreme Court Case against Welsh Water in December 2009.

Q1: Do you agree with our proposed rule changes? Please offer alternatives if you think they would better achieve our intentions.

Our section-by-section response(s) relating to this question follows:

Section 3.2.1 – Charging Publication Dates  

Agreed.

Section 3.2.2 – Publishing Statements of Significant Change 

We consider these should be published on 1^st February.

Section 3.2.3 – Cost Reflectivity – This constitutes the biggest issue in this Consultation.

Over the last four years issues surrounding cost reflectivity and the variation in charges for “like for like” issues between Companies have been highlighted to Ofwat. Last year Ofwat pledged to investigate this matter further and explain why these variations exists and we quote:-

“We consider that the differences in levels of charges are so marked that they are unlikely to be a function of cost alone. Such problems may undermine key principles of our rules, including that the charges are predictable, transparent and fair.”

Other statements made by Ofwat emphasised the severity of this issue. From a House Builder and Developer perspective cost underpin viability and are also one of the most important aspects of the regulatory regime.  Therefore, as this was an issue highlighted not only in the last four years but also in 2009 by the Gray Review we would have expected Ofwat to have undertaken a forensic analysis of what the problems are and how they will be resolved.

So, what do we get from Ofwat as a solution to this matter is a fourteen-word new rule which says nothing about why or what it means.

Furthermore, the external Consultants investigation into this issue has not been disclosed with this Consultation which is most concerning and begs the question why has Ofwat not published this Report?

These fourteen-words goes nowhere near addressing the issue of cost reflectivity. This whole situation is even more serious, as not only is there vast variation in charges but costs in relation to on-site water mains, sewer requisitions, admin charges and other costs have and are increasing substantial since 1^st April 2018. If there is an issue with cost reflectivity it has a snowball effect on everything including income offsets.

From our Client’s perspective Ofwat needs to explain what analysis of costs has taken place as well as how they have come to this new rules fourteen words and position. More importantly what actually does it mean? With the balance of charges being seen as unexplained and ambiguous and with this matter being far from transparent the only conclusion that can be drawn is that the Charging Rules are in disarray and turmoil which constitutes one of the biggest regulatory failures that has ever taken place in this sector.

Section 3.2.4 – Consistent Terminology

We are aware that Company Consultations are taking place on this issue but to be frankly honest the whole aspect of consistent terminology does seem a bit of a smoke screen. What we are talking about here is not a complex area of construction requirements.

3.2.5 – Using Worked Examples

These are very useful, helpful, and informative and something that we have supported but here again we see the introduction of a new term, namely, “parent main”.

It seems somewhat ridiculous that into the fourth year of the Charging Rules and Charging Arrangements both Ofwat and WaterUK are still trying to sort this matter out.

Is it not apparent to Ofwat yet that WaterUK are not the best organisation to address any issues relating to the Charging Rules because of their vested interest to the Water and Sewerage Companies as well as the Water only Companies? It was WaterUK that have been tasked with many aspects of sorting out the detail from the Charging Rules and here we are into the fourth year of this Regulatory Reform still no further on than were we where on 1^st April 2018. In fact on many accounts House Builders and Developers are a great deal worse off financially.

To continue reading this independent paper, please click here.

To view our comprehensive presentation on the Comparisons of Water and Sewerage Companies and Water only Companies Infrastructure Charges, Income Offsets, Asset Payments and Net Contributions, click here.

If you have any comments and would like to discuss this paper in further detail or find out more about TDS Group’s involvement in previous important Ofwat Determinations, please contact your local regional office here.