Water industry regulator Ofwat has warned that current Government proposals on the future management and transfer of private water supply pipes could result in an increase in customer water bills.

The regulator was responding to Defra and Welsh Government’s consultation on policy options regarding the future management of water supply pipes.

These are currently owned by private individuals and the consultation suggests they are poorly maintained because customers do not understand their responsibilities. Defra has proposed to create a power which will allow future regulations to be made to transfer ownership of those water supply pipes that are currently privately owned, to the incumbent monopoly water companies.

Ofwat was referring to the evidence provided by single UK Water Industry Research (UKWIR) report which suggested  that the transfer would not be cost beneficial, placing a cost of over £4 on customer bills, in return for only £2 of benefit. The regulator said there was currently insufficient evidence available on the costs and benefits of the solution which would justify the transfer of ownership.

The regulator said the limited evidence did not provide any examination of the existing market for supply pipe maintenance and repair, including relevant insurance products, and how well or poorly this is currently protecting customers interests.

Ofwat also believes that it does not examine any alternative options to addressing these issues except transferring ownership to incumbent monopoly companies, commenting:

 “Transferring ownership of supply pipes may not be necessary to achieve the proposed benefits. Companies can repair customers’ supply pipes now with their consent and they have strong incentives to do so including to achieve their leakage reduction targets and wider cost savings such as reduced pumping costs  and dosing to meet water quality standards - all of which are referenced in the UKWIR report.”

“ Under the regulatory regime if companies seized this opportunity then they would be able to keep a proportion of the savings gained. ….most companies currently offer either free or subsidised repair schemes for supply pipes.“

 Ofwat said there is already an existing market for the maintenance and repair of the assets, including both private individuals contracting with third party plumbing and construction contractors and through the protection provided to customers through general buildings insurance against the failure of their supply pipe.

However, although Defra had referenced this within its impact assessment, it had provided no analysis of it - making it impossible to identify whether or not the market is working effectively for customers, and what, if anything might make the market work better.

Ofwat also pointed out that the existing market had the advantage of allowing customers to choose the amount of risk t they wished  to bear, thereby maximising the consumer benefits.  In contrast, a  solution that forced a fixed cost on all customers’ by transferring ownership to the incumbent monopoly would introduce another cross-subsidy into customer bills and would fail to maximise the consumer surplus.

Ofwat said:

“Fundamentally we believe that before a transfer of ownership is considered that will increase customer bills a market study should be undertaken into the existing market so as to identify a range of potential solutions.“..

“We do not think that the options put forward in the consultation are complete. Nor have they been sufficiently considered or quantified to allow an informed choice to be made between them. “

In the regulator’s view a study would provide much better understanding of the underlying issues, making it easier to identify “a more sensible and proportionate range of policy responses.”