Originally featured in the April 2018 issue of Building Engineer
April 2018 is an important date, perhaps more significant than many in the construction industry have yet realised. A fairer and more transparent charging structure, introduced by Ofwat, comes into force, sweeping aside the existing barriers to competition. This marks a fresh beginning for the new water connections market in England and Wales. For the first time, independent network operators will be able to offer housebuilders and developers a real alternative to working with the traditional water companies. It is truly a watershed moment.
The 2014 Water Act included provisions to open up the water market and offer the construction industry a genuine choice to select their water company for the first time. These provisions, which Ofwat has described as ‘a significant change from the past’ come into effect this month and are expected to deliver tangible benefits such as speeding up connections, lowering prices and offering both better customer service and innovative supply solutions. The liberalisation of gas and electricity changed those markets out of all recognition, with the vast majority of new connections now being carried out by independent network providers such as GTC. In a similar way, it is anticipated that the regional water companies will no longer dominate new water connections in the future.
Everyone involved in commissioning or specifying utilities for new developments – architects, consultants, engineers, developers, contractors and housebuilders – needs to be aware of these changes and how to ensure that they obtain the best value and service from the water industry. This is definitely not a case of ‘business as usual’. The structure of the water market
In England and Wales, water companies supply water and wastewater services on a monopoly basis within their specific geographical area. They are referred to as the ‘incumbent’ water company. For new connections, a developer has a number of options:
1 To use the existing ‘statutory’ offer from the incumbent water company to deliver the new connections
2 To choose a competing water company, referred to as a NAV – a ‘New Appointment and Variation’. NAVs are licensed by Ofwat and own the site network. NAVs can install the site network or adopt networks that are installed by Self-Lay Providers (SLPs). To date, NAVs have been restricted to large sites, but the opening of the market means full competition, with NAVs operating on all sizes of development
3 To employ SLPs to install the site water network. The network can then be adopted and owned by a NAV or the incumbent water company. In a similar way, NAVs can own
the site wastewater networks installed by the developer. The case for change
Concerns about how the water market in England and Wales has been operating have been expressed to Government and regulators for many years by both developers and by potential network providers interested in entering the market. Developers wishing to appoint new providers, rather than the incumbent water companies, were faced with delays and uncertainties, disrupting development scheduling and leaving little option but to stay with the familiar local water company. Potential new entrants to the market were faced with a tariff structure that squeezed margins to the extent that only the largest projects were viable.
The 2014 Water Act gave Ofwat the responsibility for the rules governing new water and wastewater connections. Ofwat consulted widely with the regional water companies, the industry body, Water UK, and experienced NAV licence holders like GTC, which is already responsible for more than 8,000 live water and wastewater new connections with an order book of 40,000 more homes. Having ascertained that market competition was not operating effectively, Ofwat conducted a formal investigation in 2017. The report was published in October and identified a number of barriers to competition and the action that was required to remove them. The barriers to competition
Charges payable to the incumbent water company fall into two categories: a non-contestable charge to cover the costs of work on the off-site infrastructure of the incumbent’s network; and a wholesale boundary charge for the delivery of water to, and the removal of wastewater from, the site. Income Offset – before... The first block to competition to be examined was the implementation of income offset and relevant deficit. Incumbent water companies have historically assessed the future income that they would receive once a development has been built out and discounted the capital cost of construction of that network by making an asset value payment. In many cases this could offset the entire cost of the water network construction and in some cases also discount the cost of offsite reinforcement. However, these asset value payments and discounts were only applied where the water company itself was to become the ultimate owner of the network and not when a potential NAV licence holder was involved. This, despite the fact that the incumbent water company would still benefit from long term revenue generated by the wholesale boundary charge levied on the NAV, and the reduction in costs from not having to manage the water supply and billing to the new residential dwellings. …and after Under the new rules, regionalwater companies are obliged to offer the
same income offset that they benefit from toNAVs, SLPs and developers. The income offset will be netted off resulting in a consistent cost of offsite connection for developers
and housebuilders, irrespective of who is providing water network construction services
to their development. Wholesale Boundary Charge – before...The second source of distortion in the water market was the wholesale charge – what NAVs were charged at the boundary for the bulk supply of water. Water companies had been using a Large User tariff as though a single large company or factory were being supplied. This completely ignored the reality of an onsite network infrastructure serving a large number of individual residences and the costs incurred in providing and managing that network. Since Ofwat rules prohibited NAVs from selling water to customers at prices no greater than the water companies, this resulted in a significant squeeze on NAV margins. Indeed, only for the largest developments did it make economic sense for a NAV to enter the market. …and after Water companies now have a duty to offer a costreflective charge and some have already developed and published NAV-specific wholesale charges. Application Process The final barrier to competition that the report identified was the length of time that it was taking for NAV licences to be processed. This could take between 6-9 months. Whilst large developments, which could be years in the planning, could live with this timescale, for small sites this was impracticable. Recognising that hundreds of applications will now be expected, Ofwat has undertaken to streamline the process.
The removal of these barriers will enable the market for water connections to operate in the same way as the gas and electricity markets, and open the door to genuine choice of providers for the construction industry. Reassurance for developers and customers
Major change within a market can cause understandable concerns and uncertainties for customers, unsure whether new entrants to the market will be able to provide reliable services and how the move to new regulations will be handled. The provision of new connections by NAVs has, however, already proven to be successful. Projects such as Greenwich Millennium Village in London and Priors Hall Park in Corby have shown that NAV network operators like GTC can deliver quality water connections, owning and managing networks and committed to the long-term service of customers.
Developers can be reassured, moreover, that under the arrangements new appointees will have the same duties and responsibilities as the existing water companies, and that customers are not permitted to be worse off with services provided by a NAV. The Drinking Water Inspectorate, too, must be satisfied as to the quality of the water supplied.
Transitional arrangements must allow developers to choose which charging regime they wish to apply to their projects where a quotation has already been obtained. This measure protects the business plans of projects already well advanced but also offers the option of requesting a new quotation if that would be more cost effective. This being so, current projects should be reviewed now to see if new opportunities are available. What effect will all this have?
Ofwat states that these changes will deliver ‘clearer, more predictable and stable charges’, which are tailored to the needs of developers and other customers. Charges will also be fairer, with new connections not paying for pre-existing network issues. Industry experts predict that more effective competition will drive down costs and, by bringing in new providers, encourage improved service levels and new thinking.
All developers will benefit from a speedier licensing process, and the greater degree of certainty over timescales will mean that choice of supplier will not be determined by concerns over delays to the overall project. The streamlining of the application process, and the more equitable charging structure will mean that smaller projects will now be able to exercise a choice over provider rather than being forced to default to the incumbent water company.
Perhaps the most significant opportunities and benefits for developers will come through being able to work with a single network provider nationwide rather than having to build relationships with individual regional water companies. This will also open up the potential for a truly multi-utility approach, with all of a development’s utilities – water, wastewater, electricity, gas and superfast fibre broadband – being handled by a single network operator. This will reduce the length of time spent in the procurement phase and allow developers to deal with a single project manager who co-ordinates and schedules everything, with clear efficiency and cost-saving gains.
The welcome arrival of genuine competition in the provision of new water connections has the potential to be a game-changer for developers and housebuilders. Utility procurement may never be the same.Originally featured in the April 2018 issue of Building Engineer April 2018 is an important date, perhaps more significant than many in the construction industry have yet realised. A fairer and more transparent charging structure, introduced by Ofwat, comes into force, sweeping aside the existing barriers to competition. This marks a fresh beginning for the new water connections market in England and Wales. For the first time, independent network operators will be able to offer housebuilders and developers a real alternative to working with the traditional water companies. It is truly a watershed moment. The 2014 Water Act included provisions
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