Opinion

Ofwat clarifies rules on developer contributions to water investment

Carl Roche, Osborne Clarke

Anglian Water was forced to refund part of the contributions paid to it by developers for upgrading water infrastructure. Osborne Clarke associate director Carl Roche explains the impact of this Ofwat ruling.

On 26 August Ofwat published its final determination of a dispute between a number of property developers and Anglian Water, regarding the level of financial contribution for increasing the capacity of the Wing water main in east England.

Ofwat's decision saw Anglian Water ordered to refund part of the contributions paid by developers and provides a useful clarification on the level of contributions that can be sought from developers.

"Ofwat’s rationale was that the developers’ contribution to the construction of the Wing Main should only reflect the costs incurred by Anglian Water in providing services to the new developments."

The dispute concerned contributions sought from developers by Anglian Water under the Water Industry Act 1991, which provides that: 

  • Where a water undertaker is called upon to exercise its statutory duty to connect a property development to the mains supply, it is entitled to seek a contribution to the associated connection costs from the developer (Section 41).  
  • As well as new mains required to serve the development, the associated costs can also include a contribution towards other water mains which are needed in order to comply with a developer's section 41 request (Section 43). 

Paying for the Wing Main

In this case, the sticking point between the developers and Anglian Water was the financial contribution demanded by Anglian Water in consideration for increasing the capacity of the Wing Main.  With the parties unable to agree, the matter was referred to Ofwat. 

In determining the dispute, Ofwat held that while Anglian Water was justified in requiring the developers to pay a proportion of the costs incurred in increasing the Wing Main capacity, the level of the contributions demanded by Anglian Water was not appropriate. 

Ofwat’s rationale was that the developers’ contribution to the construction of the Wing Main should only reflect the costs incurred by Anglian Water in providing services to the new developments. The cost of works that would have been incurred without any new developments having taken place should be passed onto existing customers.  This should include any excess capacity being built in to allow for future developments, although it may be possible to pass this on to any future developer within 12 years of those works.

"Following this decision, developers will take comfort that their contributions to key infrastructure projects should be limited to the cost of the additional capacity required for their project(s)."

Having reached its decision, Ofwat has instructed Anglian Water to provide refunds to the developers within 3 months. In addition, the developers are entitled to receive interest on any security deposit paid to Anglian Water. 

Ofwat did not reveal the amount to be refunded to each developer, but the interest repayments on each security deposit are likely to be significant given that many of the connection requests date from 2006. 

Richard Khaldi, Senior Director for Customers and Casework at Ofwat has said that the decision “ensures a fair deal for Anglian Water's developer service customers, since what they pay better reflects the services they are using”.

Clarifying future contributions

Following this decision, developers will take comfort that their contributions to key infrastructure projects should be limited to the cost of the additional capacity required for their project(s).  Where a portion of contributions sought relates to increasing capacity of other mains, this is likely to be scrutinised even more closely.

Water companies will need to take note of Ofwat's guidance in order to ensure they are remunerated appropriately for key strategic investment in their networks, whether by developers or existing customers.  

Above all, developers and water undertakers alike will hope that the clarification in this decision will reduce the scope for delays and costly disagreements about the allocation of costs for future infrastructure projects. 

 

Carl Roche is an associate director at law firm Osborne Clarke.