Res Stk Finarrangselflay

Guidance on financial arrangementsfor self-lay and requisitioning

agreements summary of responses

www.ofwat.gov.uk

Protecting consumers, promoting value and safeguarding the future

Guidance on financial arrangements for self-lay and requisitioning agreements version 2.0 Summary of consultation responses

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About this document This document summarises the responses we received to our consultation, Guidance on financial arrangements for self-lay and requisitioning agreements version 2.0, published in August 2008.

__________________________________ Contents 1. Introduction 2 2. Executive summary 4 3. Responses 5 Appendix 1: List of respondents 18 Appendix 2: Principles that underpin our financial guidance 20


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1. Introduction We published our consultation paper Guidance on financial arrangements for self-lay and requisitioning agreements version 2.0 in August 2008, alongside a consultation on Competition in providing new water mains and service pipes: Guidance to companies version 3. This guidance is the subject of a separate response document. The consultation was an opportunity to review how the provisions of the Water Act 2003 had been implemented and also to propose improvements to the content and presentation of our financial guidance. In our consultation we invited responses to three specific questions. 1. Do you have any comments or suggestions regarding our new worked example? 2. Do you believe our principles are still fit for purpose? If not, why not? 3. We have tightened up the wording of principle 11 regarding the level of security or

deposit that can be requested. Do you agree with our proposal to make companies that request deposits greater than 100% of the DAD to provide justification up front?

We received responses from all ten water and sewerage companies, eight water only companies, six self-lay organisations (SLOs), a joint response from 16 of the 25 fully WIRS-accredited SLOs and four responses from other organisations. The previous consultation on our financial guidance in 2004 attracted 21 water company responses. Only four SLOs submitted a response to us in 2004. The scale of the SLO responses to our 2008 consultation illustrates how the self-lay market has grown in four years, benefiting customers and developers by giving them real choice in the provision of water infrastructure. Most water company responses related to requisitioning rather than self-lay, though their comments regarding build rate assumptions are relevant for both self-lay and requisitioning as the build rate has a key impact on the calculation. SLO responses were (obviously) specific to self-lay activity.


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We met with SLOs on 16 December 2008 to discuss further their responses to our consultations to ensure the final documents addressed the issues raised by SLOs. This response and the revised financial guidance were also discussed at the Ofwat Self-Lay Group meeting on 23 January 2009. Consequently, this response and the revised documents have been subject to wide and extended consultation. The responses to this consultation have been used to further improve the guidance. A list of our principles can be found in appendix 2 at the back of this consultation response.


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2. Executive summary

Nearly all respondents considered the new worked example and supporting text and explanation a big improvement on the old worked example.

SLOs welcomed the fact that the worked example was now placed within the

main body of the guidance. However, SLOs would have preferred even more detail to be visible in relation to the worked example, namely how scheme costs are built up. We address respondents comments in detail later in this document.

All companies except two were content with the proposed changes to the

wording of principle 11. One company suggested the deposit or security should be equal to the estimated scheme costs. A number of companies suggested some nuances regarding security, for example the use of credit scoring in some cases.

A significant number of companies and SLOs made general comments on the

principles that underpin our guidance and also on the structure and content of the guidance. These will also be addressed in detail below.

We have made some drafting changes to the paragraph following principle 16

to aid clarity. At the end of S2.1 we have added some text to cover commercial offers that some companies make to developers.


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3. Responses The first part of the response will cover the responses to the three questions we asked. Other more general issues will be addressed as a separate section. 1. Do you have any comments or suggestions regarding our new worked example? A few companies suggested that our worked example was too simplistic. For example, it make no assumptions about K and the calculations did not take into account the probability of two different K factors in a year. (K factors follow the financial year rather than the calendar year.) SLOs requested that the worked example prescribe the build-up of the scheme costs to include a full breakdown of contestable and non-contestable elements. This should also include all water company overheads and non-work specific charges. Also a number of companies do not include the costs of the self-lay agreement in the final calculation, whereas they do with the requisition agreement. SLOs requested that all water companies include a full worked example in their self-lay policies as this will show whether they are correctly interpreting the method of calculating asset values. One respondent raised concerns that companies were not following our current guidance to provide full cost information. They requested that we ensure all companies provide all scheme cost information (contestable and non-contestable) when a requisition or self-lay application is made. A few companies asked us to explain and clarify how they should forecast inflation and also how they should treat K factors in relation to the financial calculations. One company suggested that the standing charge element be removed from the average income estimate. Another company also asked for bad debt to be taken into account when calculating the projected income. One company asked us to clarify when we believed charges are payable, as this affects the income calculation in the financial calculations.


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SLOs requested that charges become payable from the point of occupation and not when a company chooses to issue a bill (which is the companys decision). Indeed some company charges schemes state that the charges apply per year and are payable on demand on a daily basis. Our response The worked example is for illustration only and there is a balance between clarity and complexity. The new worked example is less simplistic than the one used in the 2004 guidance and there is greater explanation of the assumptions that lie behind the worked example. We are not persuaded of the need to change the new worked example. However, we have made some minor drafting changes to section 4.9 that will address some the concerns raised by the companies. A significant number of companies do not have an adequate worked example in their current developer services or self-lay literature. Going forward we would like all companies to provide a reasonable worked example in their developer services literature and on their websites. This will increase transparency. We intend to put a template worked example on our website. As stated above, the worked example is for illustration purposes only. Quite simply the self-lay financial estimates should be calculated in accordance with S51C(8) of the Water Industry Act 1991 (WIA91). This states that the financial estimates should be calculated in the same way as if the main had been provided under requisition. If companies are not calculating the asset payment in accordance with the legislation, we would like SLOs to provide us with examples. We have made some minor drafting changes to section 4.9 to indicate some of the items that should be included in the asset payment calculation. This will include the costs of the self-lay agreement. There is merit in the proposal for companies to include a worked example in their self-lay or requisitioning publications. We are aware that progressive companies already include a worked example in their policies. Once the guidance has been updated and published we will look at companies self-lay policies, in particular their content and accessibility. If companies do not currently have a worked example in their self-lay policies, they should include one. We believe companies should provide detailed financial information and breakdown to developers. Company literature should contain a worked example with assumptions explained and this should be available on their website.


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HM Treasury issues forecasts every three months about the medium-term prospects for the economy, including inflation1. This includes inflation forecasts four years ahead. After the four-year period we expect companies to use the Governments long-term inflation target in the financial calculation. As a minimum, we expect companies to use the K figures where known, and to use the same K and inflation assumptions they use when submitting their business plans and proposals to us. We can confirm the income allowance should be 100% that is the standing charge element should be included in the income allowance for the property. We do not agree that companies should assume levels of bad debt in the income projections. It is for companies to manage their customer revenue and minimise debt. Some companies face different debt recovery issues and also some companies manage debt better than others. We do not think building in failure to the income calculation is appropriate, and it is unclear why a developer should subsidise a water companys inability to collect due revenue. A water company will have to balance risks to its existing customers when considering the appropriate level of security for a particular site. We can see merit in taking previous performance into account when assessing security or deposit. is the amount of a reasonable minimum security or deposit needs more consideration. For example, Sewers for Adoption stipulates a surety of 10% of estimated construction value. Charges only become payable after a bill has been issued. Bills will be issued in line with the companys billing cycle which may be several months after the property is physically occupied. It is important that companies are fair and that income allowances actually reflect the billing cycle rather than a desktop formula. In any case we would expect all companies to have issued a bill (even if estimated) no later than six months after a property is occupied. Metered charges are payable in arrears, that is when a customer is billed. This will vary depending on the company specific billing cycle. The fact that a customer is charged on a daily basis is not relevant to the fact that metered charges are raised in arrears. Water companies should ensure the income allowance precisely matches their billing cycle, whether that is one week or six months after the property is occupied.

1 http://www.hm-treasury.gov.uk/d/200811forcomp.pdf


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2. Do you believe our principles are still fit for purpose? If not, why not? One company sought clarification of principle 14 and in relation to S100(7) of WIA91. Under section 100(7) of WIA91, the drainage charges that sewerage companies should consider when calculating requisition charges are those relating to the premises connected to the sewer and are reasonably attributable to the use of that sewer for domestic sewerage purposes or the disposal of effluent from those premises. The assessment of future revenue does not need to take account of charges for trade effluent or highway drainage. The company asked us to clarify what we consider to be effluent as distinct from domestic waste. In the final sentence of the principle we state that trade effluent should not be taken into account. Therefore the company sought clarity on the use of the term effluent in this principle. One respondent suggested we change the wording of principle 16 to be applicable to foul sewers. (Principle 16 states companies should not pay an asset payment for self-laid sewers.) This was to take into account changes since the guidance was last issued, PPS25 and future decisions that will arise out of the Pitt review. Our response Effluent is broadly defined and includes both trade effluent and effluent produced for domestic sewerage purposes. The fact that s100(7) of WIA91 expressly applies to effluent relating to domestic sewerage purposes excludes the possibility that it also captures trade effluent. If section 100(7) of WIA91 intended to capture trade effluent, it would expressly state that the charges would relate to charges levied for the disposal of effluent relating to domestic sewerage purposes and to trade effluent.

Companies are not obliged to pay asset payments for self-laid sewers under the current legislative framework. General issues related to our principles Below are more general comments on our principles and on the structure and content of the financial guidance. A large number of companies raised concerns about section 9.3 of our guidance. We state that when considering a dispute about network reinforcement, we will take into account the infrastructure charges payable for premises on the relevant development. Companies argued that infrastructure charges were a statutory


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entitlement under S146(2) of WIA91. The companies argued that there is no statutory basis for netting off infrastructure charges when looking at network reinforcement. In effect companies argued that network reinforcement costs were a discrete item that they were entitled to recover, regardless of any infrastructure charges raised. Three of the other responses raised the issue of network reinforcement and infrastructure charges. One of these responses argued that infrastructure charges should not be taken into account when considering network reinforcement. The other two responses both asked us to provide greater clarity as there were big differences between companies. A few companies challenged our guidance that infrastructure charges could not be collected in advance. One company argued that S47 of WIA91 allowed companies to raise security, and that included the infrastructure charge. One company raised the issues of licence conditions C and D. One company questioned our approach and guidance in relation to providing infrastructure credits for previous use. They argued that implementing our guidance to provide credits for previous water use at the site would lead them to breaching their operating licence. Their licence talked about credit rather than credits. The same company also wanted us to define the five-year period. Some companies suggested that averaged measured charges varied between property type and also that new properties were more water efficient. This fact needed to be reflected in the financial calculation. One company argued that it was too difficult to use the companys average measured charges when estimating income. One company suggested that on small developments it was not cost effective to review the discounted aggregate deficit (DAD) when the main is laid. It would be better to offer a fixed price to the developer that eliminated risk. Another company believed it was often not cost effective to recalculate the DAD on the basis of actuals for small developments. A few companies requested that we write requirements and service levels for developers into the guidance. SLOs expressed concern that companies should not be allowed to delay paying the asset payment for 28 days. The legislation states the asset payment is due when the water company makes a declaration that the water main is vested in the company.


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SLOs were concerned about the difference of approach between the DAD and the asset payment. There is a difference in the timing of when the DAD and asset payment calculations are made. The DAD is estimated some months before the work is done and not revisited until the works are finished. Actual costs are available, whereas the asset payment is calculated after the work is done. SLOs would like both calculations reworked at the same time. SLO are concerned that when a main is laid by self-lay in phases, water companies will not make an asset payment until all the phases have been completed. SLOs want us to use a formula or methodology in relation to company SLO overheads and costs, similar to one we use for supply pipe connections (S45 connections). SLOs allege that there is a wider divergence in company costs for similar activities. They would like us to issue guidelines and set maximum permitted charges. SLOs want the guidance be changed to allow disputes to be referred to us at an early stage. One other respondent expressed concern about companies charging similar amounts for checking designs and producing designs. This was a barrier to SLOs doing designs and not cost reflective. One company pointed out that there was no mention of companies right to retain a surety for the defects liability period. The company suggested this should be for two years. Our response We understand why companies would like to see greater guidance in relations to insets. This guidance is primarily aimed at the statutory self-lay and requisitioning markets. We are currently reviewing and updating our inset guidance. This will be the appropriate vehicle to address the issues and concerns raised. Our central position remains the same, namely that developer submissions should be the starting point for any discussion about build rates. If a water company has reservations about build rates, these should be communicated up front to the developer with the companys reasoning clearly outlined. Water companies are not developers or estate agents and arguably do not have the expertise to impose build rates on developers. If a company provides a reasoned challenge to a developer


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about build rates and, for example, requests more evidence from a developer, it would seem reasonable for a developer or SLO to be able to provide that information. We hope that all parties come to the subject in a spirit of transparency and realism. We do not support the use of a national build rate. Sites are not developed at the same rate and build rates vary depending on the economic cycle. Consequently, a one size fits all approach is not appropriate. We expect companies and developer or SLOs to look at the site and location specifics. The current legislative framework allows for the DAD to be revisited once the works have been completed but not at periods after that point. To revisit these figures at points during the 12 years would require a change in legislation. It is not clear that this has been a major issue before the current housing marker downturn. We remain unconvinced that it makes sense to change the status quo. Corrections to the DAD will work both ways. We acknowledge companies comments and reasoned arguments. At this stage we do not feel it is justified to substantially change the wording of the guidance. However, we have reworded part of the sentence relating to network reinforcement and infrastructure charges to have regard to rather than take account of. We also accept there is wider company and developer concern about these issues. We will look at this area after the current price review has been completed. In light of these company responses we feel it is right to clarify and improve what we have said in the guidance. We do not believe companies can insist on collecting infrastructure charges in advance of a connection. RD 02/95 made our views on the subject clear. Developers and customers should be aware of their total overall liability and it is sensible for a company to issue an invoice that includes the connection cost and any infrastructure charge liability. Fundamentally it is the choice of the developer or customer to pay the infrastructure charge in advance of a connection being made. The conditions imposed by S46 and S47 of the WIA91 relate to pipe installation and not to the infrastructure charge. Consequently, we do not believe a connection could be refused if a customer or developer declined to pay the infrastructure charge in advance. Companies and developers should also be aware that we can determine disputes relating to security and conditions imposed by a company for providing a new supply connection.


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Our guidance remains the same, namely that companies should be flexible and proportionate when looking at infrastructure credits. The other water companies that responded on this issue did not raise similar concerns in relation to credits versus credit or possible licence condition breaches. We accept that the average metered income may vary between property types. The central issue is that companies should use the average metered charge for the particular property type detached, flat or terraced. Also the companys assumptions should be clear and transparent and open to challenge. We acknowledge that many new properties may be more water efficient. That is a matter of fact rather than assumption. The income per property needs to be based on what the property is likely to use, rather than on a desktop formula. The argument that it is impracticable to use average metered charges because it would be costly to keep updating company literature is unconvincing. This information should be immediately accessible from company systems and can surely be placed on the company website at a minimal cost. Developers are entitled to expect companies to be using robust and up-to-date information. We assume the company was referring to a commercial offer being available in addition to the statutory relevant deficit and DAD options. There is nothing in the legislation to stop companies making commercial offers. Indeed we are aware that a number of companies do make such offers. However, we would expect any company to offer the statutory options in the first instance, followed by any commercial offer. A companys information to developers should clearly explain that if a non-statutory offer is chosen, there will no be review of costs once the work is completed and that the developer will not be able to seek our assistance as the matter is a private, contractual issue. The few examples of commercial offers we have seen do not appear to make these facts clear to developers. Financial information such as costs should be readily available to companies on completion of works. It is difficult to see how they pay and monitor their contractors without this information. If a developer requests that a company review the DAD once works have been completed, this should be carried out by the water company. We regulate water and sewerage companies and not developers. The guidance outlines how we expect water companies to behave. We do encourage developers to provide as much information as possible, as this prevents delays and complaints later in the process. Where a company has concerns about the quality or robustness of information received from a particular developer, they should attempt to resolve any ongoing concerns with the developer.


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We have removed the 28-day reference in section 3.2.1 as the legislation does not make reference to a specific timetable. It would be in the interest of all parties to ensure the timing and method of the asset payment is agreed up front, and it could form part of the self-lay agreement. This is because different water companies have different invoicing and accounting requirements. Water companies should make clear at the outset what an SLO has to do to ensure an asset payment is made in a timely manner. We are not sure we understand SLOs concerns here. When calculating an asset payment, the company figures will always be an estimate in relation to the calculation if the work had been done under requisition. In most cases, these figures will be available before the work begins. The DAD calculation is quite different: the water company has actually provided the water main and an estimate can be compared with an actual cost. With a self-lay water main it will always be a proxy number or an estimate. What may change between an estimate and when the main is completed is the build rate. It seems sensible that those assumptions are looked at again when the works are completed, whether the water main has been provided under requisition or via self-lay. If the site self-lay agreement clearly states that a site is being developed in phases, the asset payment should be made for the relevant phase. The mirror image of this issue is water company concerns that on requisitioned sites developers often seek income allowances for all phases in the initial financial offer. We welcome SLOs to contact us where water companies impose these conditions with regard to the asset payment. It is not appropriate to use a simple percentage formula for these charges, as sites differ. The comparison with supply pipe connection charges is superficial as these jobs are often relatively simple and straightforward and may involve one or two connections. Providing mains is a more complex activity. There is currently a mechanism available to SLOs to challenge these company costs, namely a referral to Ofwat. To date we have not received any complaints from SLOs about this issue. We welcome SLOs to approach us in the future as we can look at case specifics and any systemic issues that may arise out of individual disputes. We do not directly approve these water company charges. The charges should be cost reflective. We do not expect uniformity in relation to these charges, as these will vary according to a number of factors, company size for example. We have not been approached directly by SLOs about this matter. We will engage directly with SLOs via the WIRS forum to make sure we know about SLOs concerns early.


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The option to refer disputes to us at an early stage already exists but has rarely been used. We have made some drafting amendments to section 2.2 to clarify which disputes we can determine and when we will consider them. It should not cost the same or take as much time to check a design as to produce a design, assuming the submitted design was robust and provided enough detail. If that is the case, it suggests some issues with company processes. One of the major concerns of SLOs is the quality of design they receive from the water company in terms of detail and assumptions. We will take up the issue of these design fees after the guidance has been published. This is an issue that is relevant to the main self-lay guidance. The defects liability has been reduced from two years to one year and this will be the benchmark used in the revised National self-lay code of practice which is due to be published in April 2009. 3. We have tightened up the wording of principle 11 regarding the level of security or deposit that can be requested. Do you agree with our proposal to make companies that request deposits greater than 100% of the DAD to provide justification up front? One company proposed making the estimated scheme cost the basis for the deposit rather than the DAD. The company concerned felt that in the current market conditions there was a risk of developers defaulting on their agreements and leaving the company and wider customer base to meet the shortfall. A few other companies suggested some flexibility in relation to the level of security required, namely using credit scoring or seeking higher deposits from known problem payers. One company stated it only accepted deposits and security in one form, for example a bond. Another company suggested that flexibility in relation to deposits was justifiable because a developer could appeal to us if a dispute arose. SLOs are concerned that there are wide variances in the level of security or bond required by water companies. This is different to the arrangements in the gas sector where no such provisions are required. SLOs request that the surety or bond not be a requirement for a self-lay agreement. Failing that, SLOs request that security for self-lay is done on the same basis as for a requisition. This would equate to around 3% of the construction value. SLOs request that we set a maximum surety/ or bond level.


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SLOs were concerned that some water companies hold security until the developer has completed roads on the development. This could be a long time after the defined self-lay maintenance period. SLOs state requisitioned mains works are not treated in this way. One respondent suggested that water companies should not calculate surety or deposit using a notional percentage of the scheme cost. The previous performance of the SLO should be taken into account when assessing the level of surety or deposit. Our response The overwhelming majority of company responses felt the current deposit and security provisions were adequate and proportionate. We continue to expect companies to only request security or deposit that is not greater than the DAD. In many instances, because of high estimated scheme costs, the DAD and the deposit are already significant sums. The issue of the use of credit scoring is an interesting suggestion that may be worthy of more discussion. However, in the meantime the current deposit and security arrangements provide a good level of security for companies. Water companies are able under statute to request most of the funds for works before they are carried out. The risks carried by water companies are often lower than many other commercial entities would face in recovering money. The suggestion that companies request higher deposits from known bad payers may have some merit. However, it is for companies to justify up front any deposit requirement that exceeds the DAD. Our guidance states that companies should be flexible in regard to the type of security allowed, for example cash or a bond. We can understand a company preferring one type of security over another. Nevertheless we would expect a company to be flexible in its approach and not adopt a one size fits all policy. It is worth reinforcing that we have powers to determine matters related to deposits and undertakings. We have powers to determine deposits for mains and supply pipe connections. The principles and the guidance are to provide a proportionate framework that balances risks to all parties. Companies that follow the guidance are less likely to find themselves in disputes with developers. We expect companies to apply the principles to avoid us having to determine all but the most complex of disputes. Any


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powers we have in this area are a last and not a first resort. We expect companies and developers to talk to each other and attempt to resolve problems between themselves. We acknowledge SLOs concerns but are wary of making direct comparisons between the gas sector and the water sector. It may be more appropriate to look at the surety required for self-laid sewers. In Sewers for Adoption (sixth edition) the surety required is 10% of scheme costs with a minimum retention of 5,000. It may be worth considering a similar approach for self-laid water mains. This discussion could be considered initially as part of the review of the National Self-Lay Code of Practice. We believe self-laid mains should be treated in the same way as requisitioned mains. Water companies should be able to recover any damages through their usual third party damage procedures. Other issues A number of companies raised the issue of inset appointments and licensees and suggested separate and fuller guidance for both. One of the other respondents raised the issue of inset appointments. They suggested section 11 of the guidance be written in more detail. The issue of the legality of water companies charging up front design fees was raised. In the electricity sector these fees are believed to be illegal. These are so-called S16 quotations. Our response We understand why companies would like to see greater guidance in relations to insets. This guidance is primarily aimed at the statutory self-lay and requisitioning markets. We are currently reviewing and updating our inset guidance. This will be the appropriate vehicle to address the issues and concerns raised.


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In relation to the question of whether it is lawful for a water company to ask for prepayment of costs, if the charge is imposed under the general power conferred by s142 of WIA91, and if an Ofwat-approved charges scheme permits prepayment, there is no reason why such an approach should be prohibited. We are still considering those charges raised as miscellaneous and outside of the scope of an approved charges scheme. We will write to companies under separate cover when we have fully considered this matter.


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Appendix 1: List of respondents by organisation type Water and sewerage companies Anglian Water Dr Cymru Northumbrian Water Severn Trent Water Southern Water South West Water Thames Water Wessex Water United Utilities Yorkshire Water Water only companies Bournemouth & West Hampshire Water Bristol Water Cambridge Water Dee Valley Water Essex & Suffolk Water Folkestone & Dover Water South East Water South Staffs Water Self-lay organisations One joint response from SLOs that included the following 16 full WIRS accredited SLOs Bethell Clancy Docwra Core Utilities Energetics EON Fulcrum Inexus Integrated Utility Solutions


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Intoto JFD Morgan Est PDI Utilities PN Daly Primeshade UU Networks Veolia SLO responses direct to Ofwat Core EON Integrated Utility Solutions Inexus UU Networks Veolia Other responses Type of organisation GTC UCP in power sector HBF Housebuilders trade body Premier Energy Infrastructure consultancy Water UK Water company trade body


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Appendix 2: Principles that underpin our financial guidance Principle 1 Water companies estimates should be based on robust and transparent

information about the anticipated costs of the work. It is advisable for developers to provide timely and reliable information about the work that is needed so that water companies can provide estimates that are timely and accurate.

Principle 2 Water companies should assess the components of the charges and payments in the same way, whether they are estimating or calculating the asset payment or estimating or calculating the requisition charges.

Principle 3 Estimates of revenue should be calculated on the basis of the average metered charge per property. Water companies should also take account of the future revenue that will be recovered from supplies for non-domestic purposes, where this can be assessed.

Principle 4 The relevant deficit should be calculated on the basis of the revenue that is payable, not the revenue that has been received from a newly-connected property.

Principle 5 Water companies should allocate 100% of the revenue from newly-connected premises as the income allowance.

Principle 6 The discount rate that water companies use should be the same as the rate of interest for borrowing.

Principle 7 Water companies should forecast the long-term effects of inflation and adjustment factor (K) on anticipated revenue when calculating the statutory commuted sum charge or the asset payment.

Principle 8 Water companies should take account of developers submissions to estimate when income starts to become payable for a property.

Principle 9 For work provided under self-lay, water companies should complete a cost breakdown template for each job, including all the costs of non-contestable elements of self-lay work and the estimates for statutory commuted sums and asset payments. We expect the cost breakdown template to at least match our model as set out in appendix 3.

Principle 10 Water companies should not insist that security be provided in one particular form but should offer a choice of payment methods to the developer.

Principle 11 When works are requisitioned and the water companies require an undertaking or security we can generally see no reason why a water company should ask for security that is more than 100% of the estimated statutory commuted sum. If a water company requests a security or undertaking greater than the estimated statutory commuted sum, it should provide full justification at the time of making the request.

Principle11a The undertaking or security should be returned within six months of the relevant deficit becoming zero, or when the finalised statutory commuted sum is paid, unless the water company can provide justifiable reasons for holding the security for longer.


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Principle 12 When a water company requires security for self-laid works, this should cover the reasonable potential cost of remedying minor defects in the SLOs work and the reasonable costs of the non-contestable work, where these have not already been recovered.

Principle 12a This security should be held until the SLO has paid the charges for the work that has been carried out and the defects liability period or maintenance period is over.

Principle 13 Water companies should consider developers requests to self-lay non-domestic supplies. Water companies do not need to make an asset payment for self-laid mains for wholly non-domestic purposes.

Principle 14 Sewerage companies estimates of relevant deficit and statutory commuted sum charges for sewer requisitions should be based on robust information and calculated consistently.

Principle 15 Principles 4-8 relating to the calculation of charges for requisitioning water mains should be applied to the calculation of sewer requisitions charges.

Principle 16 When calculating the charges for self-laid sewers, sewerage companies are not required to pay developers an asset payment.

Principle 17 When sewers are requisitioned and the sewerage company requires security, the sewerage company should ask for no more than 100% of the estimated statutory commuted sum unless there are justifiable reasons for doing so. If a water company requests a security or undertaking greater than the estimated statutory commuted sum, it should provide full justification at the time of making the request.

Principle 18 When considering disputes about the level of charges for network reinforcement, we will have regard to the infrastructure charges that have been or will be raised for that development.

Ofwat, Centre City Tower7 Hill Street, Birmingham B5 4UA

Phone: 0121 625 1300 Fax: 0121 625 1400Website: www.ofwat.gov.uk

e-mail: [email protected]

March 2009

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