Future Flood and Water Management Legislation

Further supplementary memorandum from OFWAT (FFW 26B)

Private Sewers Briefing

Key messages

· We have always been clear that costs associated with the adoption of private sewers were legitimate costs to be recovered through price limits.

· But, the impact of the adoption of private sewers is very uncertain and difficult to forecast in advance.

· We didn’t allow funding for the adoption of private sewers when we set price limits for 2010-15. But, we were clear that companies could recover costs if they prove to be material before we are next due to set price limits.

· We understand that companies may wish certainty in this area and seek protection from having to spend money that was not funded in price limits.

· However, we must consider whether customers should be asked to provide funding (through bills) based on very uncertain forecast data. It is entirely possible that actual expenditure could be very different [much lower] than forecast. It is also important that companies face incentives to manage the costs efficiently.

· Our position is unchanged. Companies can recover material costs associated with the adoption of private sewers. Our latest guidance simply emphasises the importance of actual data given the uncertainty in forecasting.

· This is principally a short term issue. Relevant costs beyond 2015 will be picked up as part of the normal price setting process.

Background

The ongoing Defra consultation on the adoption of private sewers by water and sewerage companies will lead the way for private sewers to be adopted on 1 October 2011. There are significant issues associated with the transfer. Companies will become responsible for infrastructure that they have little, to no, knowledge about.

The location, length and condition of the private sewers to be transferred are uncertain. Consequently, at this point in time it is difficult to forecast the likely short and long term cost of identifying, repairing and maintaining these assets with any great accuracy.

In the 2009 price review we did not make any allowance for costs associated with the adoption of private sewers. This reflected some uncertainty on the timetable for transfer but, principally it reflected the very significant uncertainty about the likely cost of the transfer.

Companies are naturally concerned about the impact on their business. But we must think carefully about the implication for customers. Given the uncertainty, there was a real chance that we might have funded substantial expenditure in 2010-15 which turned out not to be necessary either because the transfer was delayed, or because the costs turned out to be significantly lower than best estimates. We also want to maintain incentives on companies to properly understand the impact of this issue and manage costs efficiently.

However, we were clear from the beginning of the review process that we accepted that costs associated with the adoption of private sewers were legitimate costs. In our final determination we explained that companies could come back to us before 2015 once the timing and extent of the costs became clear.

We have always accepted that there would be legitimate costs associated with the transfer of private sewers. Where costs are properly calculated and accrued companies can ask us to adjust price limits to take them into account through the interim determination (IDoK) process.

We have recently published our guidance on the IDoK process between 2010-15 (RD 13/10), which included further comment on our expectations on private sewers.

In RD 13/10 we say:

"It was evident from the commentary provided in companies’ business plans that a significant degree of uncertainty surrounds the costs of the anticipated transfer and the timing of those costs.

In view of this unusual level of uncertainty, we would expect any IDoK application to be based, at least in part, on actual cost information gathered over a longer period than might otherwise be considered necessary. Consequently, on the Government’s current timetable for the transfer, it is unlikely that we would consider it appropriate to take account of estimated transfer-related costs before September 2013 at the earliest."

It would not be beneficial to customers or the companies to apply for an interim determination without fully understanding the costs.

We have been working with stakeholders, including water companies , Water UK and the Consumer Council for Water on these issues. We believe that there is a broad understanding of our position but understand that some companies remain concerned and would prefer to be afforded greater certainty at an earlier stage. Though we understand the concerns of these companies it is imperative we ensure customers get a fair deal and that the costs of transferring private sewers are kept down.

Our current broad estimate is that average bills could rise by around £8 by 2019 with a range of £4 - £14 across all water and sewerage companies .

The Government decided to implement this policy. We are ready and willing to help with its smooth transition. Making sure companies are able to continue to deliver a world class service and customers get value for money.

29 October 2010