DEVELOPER (NEW CONNECTION) CHARGES CONSULTATION

DEVELOPER

(NEW CONNECTION)

CHARGES CONSULTATION

24th FEBRUARY 2017

This consultation document sets out Anglian Water’s proposals for new developer

charging arrangements as a result of the recent charging rules published by

Ofwat which are due to come into effect from April 2018.

We consider that these rules present an opportunity to make a step change in

the approach to charging, which will promote clearer and more transparent

charges.

The purpose of this document is to seek early views on our direction of travel in

preparing our new connection charges for 2018-19. Throughout the document,

we pose questions relating to our proposals which we would like particular

feedback on.

We would really appreciate your opinion and instructions on how to comment on

these proposals is outlined at the end of this document.

We are seeking feedback on our proposals by 18th April 2017.

The Water Act 2014 made changes to the Water Industry Act 1991, which

allowed Ofwat to set rules about charges for developers. This is where an owner

or occupier of a premise/building, to which the supply of water and/or water

recycling services will be provided, requires access to the existing public water

supply or water recycling system by means of a service pipe or lateral drain

and/or a new water main or public sewer.

On 29th January 2016, Defra issued charging guidance to Ofwat1.

The guidance is structured around four key objectives:

Fairness and affordability

Environmental protection

Stability and predictability

Transparency and customer focused service

Defra’s January guidance was clear in stating that:

“It is right that developers should bear the costs associated with

connections to, or adoption of, water and sewerage systems. Charges

should ensure that the distribution of costs for new infrastructure between

developers and current customers of water and sewerage companies is

fair. Cross subsidy between developers and water customers should be

limited.”

1https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/496044

/charging-guidance-ofwat-2016.pdf

Therefore, any new charging framework should retain the existing balance

between developer customers and existing bill payers. This can be achieved in a

number of ways and will be explored further in this document.

Following a consultation in July 2016, Ofwat published the final rules in

December 20162.

The Water Industry Act 1991 (WIA91) allows water companies to recover from

developers the costs to provide relevant infrastructure and connect new

developments to the water and water recycling network for domestic purposes.

These charges are intended to reflect the costs of the infrastructure needed to

make such connections.

There are different ways in which infrastructure can be provided and there are

also different charges that apply depending on how the relevant infrastructure is

provided.

The charges that are relevant to the new connections framework are as follows.

The developer pays these charges to the water company, when the water

company provides a physical connection for a premise/building, to the water

main or to a sewer. This charge is intended to cover the costs (reasonably

incurred) of the physical connection to the main or sewer. Water companies are

able to recover reasonably incurred expenses, including for the costs of ancillary

work, necessary to facilitate the connection.

The developer pays these charges to the water company when a

premise/building is first connected to a water main or to a sewer. This charge

contributes to water companies’ investment in improvements to the existing

wider distribution and sewerage networks, to meet increasing demand from new

customers. Standard domestic dwellings are charged a single rate for each

service; whereas other types of premises (for example, those subject to

common billing agreements, such as flats, or with larger than usual connection

sizes) are charged a multiple of the single rate based on the number of water

fittings in the premises.

2 http://www.ofwat.gov.uk/publication/charging-rules-for-new-connections-decision-

document/

When a developer requests the water company to provide a new water main(s)

or a public sewer(s) and certain associated infrastructure to serve a particular

locality, this is known as a ‘requisition’. The water company then builds the

infrastructure required to connect the new development to its network.

Requisition charges are intended to recover the costs reasonably incurred in

providing this infrastructure, where those costs exceed income received for the

development over 12 years. This charge can be paid annually for 12 years (the

Relevant Deficit approach) or as a lump sum: the Discounted Aggregate Deficit

(DAD) approach. This leads to the effect of the costs of the infrastructure being

recovered partially from developers and partially from existing bill payers.

Many developments and connections to individual premises will not require a

requisition and in those cases will be subject only to connection and

infrastructure charges (see above).

The self-lay option enables the developer to either build the necessary

infrastructure itself; or contract with a third party - such as a self-lay

organisation (SLO) - to build it. The developer pays the SLO the costs of building

these self-lay assets. Either the developer or the SLO pays the water company

for any additional infrastructure required (some of which only the water

company may be able to build). The water company then ‘adopts’ these assets

and, where appropriate, pays the developer an asset payment when it takes

ownership. This is discussed below.

The water company makes these payments to a developer/SLO once it has

adopted the assets owned by the developer, for example, those put in place by

an SLO as discussed under ‘self-lay charges’ above. This currently only applies to

water mains, however, the new legislation makes provision for potential asset

payments for sewerage in the future.

The following diagrams, developed with Ofwat and the wider sector, set out

types of infrastructure the charges in Section 3 relate to.

Property to new or existing water main, highlighted in grey (communication

pipe) in the diagram above.

Onsite:

New water mains within the area highlighted in green with ‘- - -‘ boundary and

the connecting pipework to the nearest water main of the same or of larger

diameter.

Offsite:

This can include water mains, reservoirs and pumping stations (new or

upgraded) that are required in consequence of growth.

Trust in water 1

New development

WATER

Stop tap and meter

installation (mainly C)

Existing strategic assets

Existing network

Connecting main

On site

Site boundary

Key

M Meter

ST Stop tap

C Contestable

NC Non-contestable

Existing road

Connection to live main (mainly NC)

Piece-ups to the live main (C)

Existing properties

New connection (C)E

xis

ting tru

nk m

ain

M

ST

M

New infill

property

M

M

Ne

w r

oa

d

ST

Pressure

management (including zonal

metering)

Service

reservoirs

Booster

pumping

stations

Water

towers

Ne

w ‘re

qu

isit

ion

ed

’ w

ate

r m

ain

(C

)

Supply pipe Communication

or service pipe

Existing ‘live’ water distribution main (non Trunk Main)

Dams and impounding reservoirs

Intake and source pumping stations

Raw water aqueducts, balancing tanks, other raw water

distribution structures and booster pumping stationsWater treatment

works and

forwarding pumping

stations

This is orange in colour on the above diagram. The costs associated with

upgrading treatment capacity cannot be charged to developer customers and are

not recovered under either the existing or proposed new connections charges

approaches.

This is reflected in the green area dotted boundary area in the diagram above -

foul or surface or both. Adoptable sewers are those included in the road

structure (sewers for adoption 6th edition) or in addition, those sewers serving

more than one property (sewers for adoption 7th edition). Adoptable sewers

include the connection to the nearest sewer of the same or larger diameter.

Onsite:

Onsite refers to sewer adoption as per the above.

Offsite:

Offsite can include costs incurred for the installation of sewers, storage tanks,

pumping stations and terminal pumping stations physically removed from the

Trust in water 2

New development

WASTEWATER

Sewage treatment

works

New shared foul water

sewer pipe (C)

Existing strategic assets

Existing network

Connecting sewer / drain

Onsite

Site boundary

Key

C Contestable

NC Non-contestable

Lateral drain

Existing road

New separate private foul

and surface water drains (C)

Existing properties

Oth

er public s

ew

ers

New

road

New private foul water drain (C)

Sea outfalls

Terminal pumping

stations

Combined

sewer

overflows

Sewage

pumping

stations

On-line and

off-line

tanks

Ne

w s

urf

ace

wa

ter

pu

bli

c s

ew

er

(eit

he

r se

lf l

ay

or

req

uis

itio

n)

New infill

property

Ne

w f

ou

l p

ub

lic s

ew

er

(eit

he

r se

lf l

ay

or

req

uis

itio

n)

New surface water drain

(C)

To local watercourse or combined sewer overflow

Existing foul water public sewerExisting surface water public sewer

sewage treatment. The costs must be incurred in the provision of capacity for

growth only.

This refers to the connection from a property to either foul sewer, surface water

sewer or both. Physical connections are normally completed by the applicants’

contractor and fees are charged for the vetting/approval/inspection.

This is orange in colour on the above diagram. The costs associated with

upgrading water recycling treatment capacity cannot be charged to developer

customers and are not recovered under either the existing or proposed new

connections charges approaches.

We are fully supportive of reform in this area and have been at the forefront of

the discussion of the desirable outcomes necessary to be delivered by the

proposed charging rules and subsequent charging scheme that companies will

develop in response. We have been central to the dialogue with Defra, Ofwat

and Water UK.

We summarise the following principles as being the desirable outcomes. These

are consistent with both the Defra and Ofwat guidance:

Equivalent charges and processes:

Facilitate fair competition between SLOs, NAVs and incumbents

Appropriately apportion and allocate costs

Fairness and affordability:

Between existing and new customers

Between water and sewerage services Between contributing developers

Stability and predictability

Incentivise water efficient homes and effective use of scarce resources

Transparent and customer focused:

Transparent (objective of reducing administrative burden)

Simple Accessible

Predictable Comprehensible

Cost reflective – reflect reasonable incurred costs

Using the principles set out by Defra and Ofwat’s charging rules, we are

proposing to reform both the structure and format of developer charges for the

areas set out above. We have sought to simplify the regime, e.g. by removing

complicated Net Present Value (NPV) calculations and predictions of the future

state of the Housing Market or inflation or interest rates used currently in DADs

calculations.

The percentages referred to in this document are based on an initial assessment

and are to be used for illustrative purposes only.

The proposal is a zonal charge, incorporating the existing infrastructure charge.

The charge will be based on a defined area, growth and offsite infrastructure

requirements, replacement of (or upsizing) of the existing water network, new or

upsized pumping stations, service reservoirs or trunk mains. The charge does

not include the costs of water treatment, abstraction or raw water transfer.

The proposal is not to recover the full costs of the offsite infrastructure, but to

retain the existing balance of contribution recovered through both infrastructure

charges and the recovery of offsite infrastructure through the existing requisition

route.

We propose to make an assessment of our water supply areas, into areas of

high, medium and low water scarcity. This will be informed by the Water

Resources Management Plan data, which forecasts water supply and demand for

25 years. There will be a different zonal charge for developments in different

zones at the varied levels of water scarcity.

There are options for the period of time that the charge will remain stable. The

longer the charge remains the same, the easier it would be to plan from land

purchase to plot completed. The downside to a longer period is the potential

imbalance between forecast and actual growth and costs.

The zonal charge will be calculated by dividing the existing contribution level of

the total cost (%), by the number of new connected properties within the

defined zone benefiting from the expenditure.

Consistent with the current charging approach, we propose to keep this as 100%

recovery of costs reasonably incurred in the completion of a new connection.

An initial assessment of the onsite contribution recovery for schemes completed

in the last three years was on average 15%. As a result, on average, 85% of the

costs of the installation of the water mains was offset by the predicted income to

be received from new customers. This retains the existing balance between

developer customers and existing bill payers.

We propose therefore, the recoverable costs should be set at a proportion to

maintain the balance of cost recovery as under the existing regime. We propose

to use a percentage based approach, informed by detailed data analysis of

recovery based on historical requisitions. We expect this to be around 15%, as

per our initial assessment. This is a percentage of reconciled reasonable costs of

installation of water mains onsite, including connection to the nearest existing

water main of the same or larger diameter.

If the water mains are completed by a self-lay organisation (SLO), in this

scenario, based on our initial assessment, we would pay 85% of the costs of

installation for works completed by the SLO, as an asset payment. This

maintains the likely ratio of 15:85 between developer and new customers’ bills.

The proposal is a zonal charge, as an addition to the existing infrastructure

charge. This charge will be based on a defined area, growth and offsite

infrastructure requirements, replacement of (or upsizing) of the existing

sewerage network, new or upsized pumping stations, storage tanks and rising

mains. The charge does not include the costs of sewage treatment or terminal

pumping stations located at water recycling centres.

The proposal is not to recover the full costs of the offsite infrastructure, but to

retain the existing balance of contribution recovered through both infrastructure

charges and the recovery of offsite infrastructure through the existing requisition

route. The same ratio is to be used once finalised, likely 15:85, for the costs of

installation of the sewerage infrastructure to enable growth.

The public sewerage network owned by Anglian Water expanded significantly as

a result of the 2011 private sewer transfer. The connectivity and exact location

of all assets is being captured. Therefore, we propose to have a single ‘zone’ for

sewerage, which will be further defined after 2020 (AMP7). We propose to

provide benefit to customers who build water efficient homes by reducing the

sewerage zonal charge in line with the water approach. This is reflected in the

diagram above where there are levels of water efficiency discounts.

It is our proposal to retain the existing regime for sewer connections (s106) and

sewer adoptions for onsite sewers.

We welcome your responses to this document. Please get in touch with us before

18th April 2017.

You can email your responses to [email protected]

Alternatively you can also submit your response by post to:

We will discuss these proposals at our charging engagement event on 2nd March

and would welcome feedback during this time also.