Water industry regulator Ofwat has launched a new consultation on how highway drainage charges should be dealt with by new appointees.

Ofwat said it now needs to update its existing  policy because it considers the appointment of new appointees and the granting of additional sites to new appointees to be an important tool for introducing innovative ideas into the water sector in England and Wales.

New appointees are companies that have successfully applied for a licence to replace the existing water and/or sewerage company for a specific geographic area. Ofwat has granted 54 new appointments and variations – known as NAVs - in total since 1997. This includes:

• 40 applications made by five new appointees, enabling new entrants to serve sites that were previously in the water supply or sewerage service areas of existing appointees; and
• 14 applications made by an existing appointee to vary its area of appointment to include eligible sites in adjacent appointees’ areas.

All NAVs provide water and/or sewerage services to the customers within their area, which often include highway drainage where water drains from a road into a public sewer. Highway authorities are allowed to use the public sewer system for drainage of roads repairable by them (public roads) , while sewerage companies are prohibited from charging highway authorities for that service.

Instead, sewerage companies bear the costs of highway drainage, which is shared by all their customers who pay for highway drainage through their sewerage bills i.e. the charge paid by each customer is unrelated to their use of the highways.

Charging for highway drainage

Typically, a new appointee will agree a bulk discharge agreement with an existing appointee to enable the new appointee to provide sewerage services to a site within its area. Ofwat is not involved in these negotiations and therefore does not know the extent to which existing agreements include an element to account for the cost of highway drainage.

However, Ofwat is aware that some new appointees do not pay anything towards highway drainage. Other new appointees negotiate not to pay highway drainage if:

• there are no public roads on a particular site; or
• they have put in place an alternative solution. For example, a solution that means the roads on a site do not drain to the public sewers of the existing appointee, including the use of Sustainable Urban Drainage Systems (SUDS)

The regulator cites the example of some new appointees who have introduced sustainable drainage solutions and soakaways at sites in their areas, rather than the traditional drainage solution whereby a new appointee’s site connects to an existing appointee’s sewerage network for foul sewerage and surface water drainage. 

Disputes can be referred to Ofwat for a determination in cases where an existing appointee refuses to provide a bulk supply, refuses to make a mains connection or if the parties cannot agree on the terms on which that supply or connection should be made.

New provisions in the Water Act 2014 will enable Ofwat to vary either a prior order it has made or an existing bulk discharge agreement made between other parties. Currently the regulator can only vary a prior order it has made - it cannot vary an existing agreement between parties. New legislation set out in the Act  also allows Ofwat to produce codes in respect of bulk supply and bulk discharge agreements and charging rules covering bulk supplies and mains connections.

Resolving disputes

Disputes can be referred to Ofwat for a determination in cases where an existing appointee refuses to provide a bulk supply, refuses to make a mains connection or if the parties cannot agree on the terms on which that supply or connection should be made.

New provisions in the Water Act 2014 will enable Ofwat to vary either a prior order it has made or an existing bulk discharge agreement made between other parties. Currently the regulator can only vary a prior order it has made - it cannot vary an existing agreement between parties. New legislation set out in the Act also allows Ofwat to produce codes for bulk supply and bulk discharge agreements and charging rules covering bulk supplies and mains connections.

In the context of bulk supply pricing, Ofwat regards new appointees as potential wholesale customers of an existing appointee and competitors to existing appointees . The regulator takes the view that bulk supply prices, including those between existing appointees and new appointees, should be cost reflective.

Ofwat said it is likely to consult further in due course on highway drainage charges when it develops the codes and rules. However, until the codes and rules are in place, Ofwat said it needs to clarify its policy expectations with regard to the payment of highway drainage charges by new appointees.

Under its proposed policy on highway drainage, Ofwat will only intervene if a negotiation on a bulk discharge agreement between a new appointee and an existing appointee fails and the matter is then referred under section 110A of the WIA91.

Ofwat is now seeking comment in particular on the following four principles it will take into account In the event of a referral .

1. If a new appointee’s site contains public roads and those roads drain to the sewers of the existing appointee, we are likely to consider that it is reasonable for the bulk discharge price to include a contribution to the existing appointee’s highway drainage costs.

2. If a new appointee’s site contains public roads that do not drain to the public sewers of the existing appointee, or there are no public roads on the site, we are likely to consider that it is reasonable for the new appointee not to contribute to the highway drainage costs of the existing appointee.

3. The amount of highway drainage charges payable should be a matter for commercial negotiation between new appointees and existing appointees, on a case-by-case basis.

4. A bulk discharge price should as far as possible be cost reflective, which should include taking into account the existence of efficient and sustainable drainage solutions which may result in less highway drainage entering the public sewers of the existing appointee.

Ofwat is seeking responses to the document by 28 October 2014. Subject to the comments it receives, it expects to update its highway drainage policy after mid-November 2014.

Click here to access the consultation paper.