The Department for Food Environment and Rural Affairs (Defra) has now formally issued new charging guidance to Ofwat since it was laid in Parliament for consideration on 9 November 2015.
The Guidance to the water sector regulator establishes the policy framework within which Ofwat sets charging rules for the water industry. Its purpose is to make sure that Ofwat’s Charging Rules reflect the government’s policy priorities for the water sector.
The Guidance covers the charges incumbent undertakers set for customers as well as those for other businesses that use the network. These include licensees, inset appointees, self-lay operators and developers. It also covers the retail charges that may be levied by water supply and sewerage licensees.
In line with the new Guidance, Ofwat now has new powers to issue rules on the charges schemes that incumbent water companies use to charge customers for water supply and sewerage services. This will replace the current system under which Ofwat annually approves companies’ charges schemes on an individual basis.
Aim is to reduce bureaucracy and increase accountability
The Government said the objective is to reduce bureaucracy and increase accountability, while ensuring that incumbent water companies’ charges schemes are consistent with Government policy. The intention is to have Ofwat’s charges schemes rules in place in advance of the charging year 2016/17 - the market for non-household retail competition is scheduled to open in April 2017.
Phased approach to reform
Introducing the Guidance, Defra said the Government has always been clear that the programme of reforms to the water industry would be introduced in a phased, evolutionary manner.
In line with this, the Charging Guidance will ultimately replace the “costs principle” which currently regulates interactions between water undertakers and other licenced businesses that use the network. Due to the different timeframes for implementing the Government’s competition reforms in the retail and upstream markets, Defra is proposing to undertake a phased commencement of the legal powers that will remove the costs principle.
Ofwat has already set separate wholesale and retail price limits and companies have reflected these different boundaries in their charges. The intention is to remove the costs principle in respect of the water supply market for non-household retail services in advance of retail market opening in April 2017.
Government’s approach to charging will need to evolve as competitive markets develop
The Guidance provides an interesting insight into how the Government’s thinking on the future of the UK water sector is developing, stating:
“The Government’s approach to charging will need to evolve as the competitive markets develop and will need to be reviewed to reflect changes in Government policy and to take account of future price controls.”
“In particular, we recognise that it may be necessary to issue further guidance in respect of the upstream markets as the plans for these become more concrete and to take account of abstraction reform and other relevant policy developments. The time frame for Ofwat to issue charging rules in respect of these emerging regimes is, therefore, expected to reflect this phased approach to implementation.”
It goes on to suggest that as some competitive markets develop over time, the need for detailed charging rules may diminish. However, the Government takes the view that in the early years of the new retail market Ofwat must keep under review the development of charges and their implications for different groups of customers. It is essential both for individual customers and for the credibility of the market as a whole that all non household customers should be able to switch in order to access a good retail service at a fair price.
Charging Guidance supports Government's key policy objectives
The Government’s Charging Guidance to Ofwat is one of a number of policy tools available to support the delivery of four key policy objectives, namely:
- Fairness and affordability
- Environmental protection
- Stability and predictability
- Transparency and customer-focused service.
The Guidance points out that ensuring all customers of water and sewerage companies are charged fairly for a high quality service is at the heart of the Government’s policy priorities.
SuDs are part of a water company’s functions
It also has some interesting comments to make on drainage, saying that as part of its commitment to protect people and property from flood risk the Government expects sustainable drainage systems (SuDs) to form a normal part of drainage networks, wherever this is appropriate and cost effective.
SuDs to be financed via charges with maintenance costs funded via surface water drainage element
“To fulfil their statutory duty water companies may construct, maintain and operate drainage systems which relieve the public sewer. Such SuDs are part of a water company’s functions, and can be financed through charges contained in a water company’s ordinary charges scheme with maintenance costs funded through the surface water drainage element of sewerage bills.”, the guidance says.
The Government said it expects the water industry to play their part in innovative and strategic approaches to surface water management and that Ofwat should encourage water companies to raise awareness amongst their customers of the environmental and economic benefits of SuDs.
Competition: all business customers should be able to switch suppliers
On the opening of the retail market to competition in 2017, the Guidance says the Government considers that it is “essential both for the security of individual businesses and for the credibility of the market as a whole” that all non-household customers should be in a position to switch suppliers. In doing so they should also be able to access a good retail service at a fair price. To secure this outcome, Ofwat is therefore expected to set out in Charges Rules the appropriate level of back-stop protections for the retail customers of all licensees.
In regulating charges in respect of the non-household retail market the regulator will be responsible for keeping under review the retail margin they have set through the Price Review in order to ensure that it enables efficient retailers to enter the market and facilitates the effective operation of the market.
No intention to introduce competition to upstream networks
Commenting on the longer-term introduction of upstream competition after 2019, the Guidance says only certain upstream services will be open to competition. There is no intention, for example, to introduce any contestability into the network. All customers rely on the existence of a resilient network and the Government sees no case for any moves towards the de-averaging of network costs.
The Guidance concludes:
“The aim is to promote a charging regime where bills are set out in a clear, transparent and easily understandable way. In addition, the guidance provides an effective basis for the extension of competition into the water industry from April 2017.”
Click here to download the new Charging Guidance