Ofwat has written to all the water companies following a number of complaints alleging that incumbent water companies have made it difficult for self-lay providers to compete and operate efficiently in the developer services markets.

Writing to the Regulatory Directors, Emma Kelso, Senior Director, Customers and Casework at Ofwat said:

“Ofwat has received a number of complaints over the last 12 months in which it has been alleged that incumbent water companies, through their charges, contractual terms and/or actions, have made it difficult for self-lay providers (SLPs) to compete and operate efficiently in the developer services markets.“

“This is understandably of great concern to us and disappointing given we have previously written to companies regarding competition law compliance in the self-lay market and in general.”

The letter explains that there are a limited number of markets in the water sector in which competition is able to take place and that Ofwat is determined to ensure that “whether deliberately or through lack of awareness and understanding”, water companies do not impede effective competition.

The water sector regulator has raised a number of key issues which it expects the firms to address.

As the regional undertaker in upstream markets, where only they can provide the relevant service or access they are therefore in a monopoly position, the letter points out. Water companies should generally ensure that their charges “allow sufficient margin for equally efficient companies to compete against them in downstream, contestable markets and that the charges reflect the actual costs of providing those upstream services.”

Where equivalent services are provided, water companies should charge competitors the same amount as they do their own downstream businesses.

Emma Kelso told the companies that they must also ensure that their contractual terms are fair and reasonable and that they are sufficiently clear that purchasers are able to understand what charges will apply to the services they are buying and the circumstances in which they will apply, commenting:

“This helps avoid customers of upstream services suffering unnecessary delays whilst they seek clarification, and the knockon effects of this on their ability to compete and operate efficiently in the downstream market.”

She described the fact that Ofwat had received complaints about a number of water companies as “disappointing” on issues such as:

• the level, clarity and application of design fees;
• the clarity and comparability of how requisition and self-lay charges are calculated;
• and the way in which asset payments and income offsets are calculated.

Design services costs vary significantly – and regional variations do not account for the difference

The extent to which changes to companies’ charging schemes for new connections are properly consulted on has also been questioned, Kelso added.

The complaints allege that it is not clear as to what services are included in the design fees and other developer service charges or how the charges for these services are calculated or compare between requisitioned and self-lay provision. Whether the charges allow sufficient margin to enable SLPs to compete with water companies for the provision of services has also been questioned.

An annex to the letter sets out in more detail some of Ofwat’s concerns arising from the recent complaints to illustrate the types of matters companies should be considering further, including a lack of cost reflectiveness.

Ofwat said the charges for providing design services vary significantly across water companies, pointing out that in certain circumstances some companies appear to be providing their design services for free, while others are charging over £1,000 for what appears to be an equivalent service.

“Although there may be some regional variation in the level of costs incurred when providing design services, we consider that the range of charges that we have identified is too large to explain this.” The regulator said.

“Imperative all water companies take action to ensure practices are consistent with competition law”

Emma Kelso told the Regulatory Directors:

“Given the breadth of issues and companies concerned, at this stage we have chosen to highlight our concerns publicly to all companies and to emphasise the need for all companies to focus their attention on these matters as a matter of urgency.”

“It is imperative, therefore, that all water companies take action to ensure that their practices in these areas are consistent with their competition law and other regulatory obligations.”

“Companies should be taking appropriate steps to ensure that charges are cost reflective and that their approach to setting any charge or income offset is transparent and does not result in a situation where an equally efficient competitor is unable to compete with it on a level playing field.”

Ofwat is now more likely to consider escalating its response through formal enforcement powers where the issues are not addressed promptly, or if any future breaches of the Charging Rules or of competition law are identified.