Removing the barriers to water market entry

The results of a study have spurred Ofwat to try to make the submission and processing of applications easier for providers looking to replace incumbents.

At Ofwat, we work hard to ensure that markets work as well as possible so that customers have continued trust and confidence in water. As part of this we are always open to new ways of thinking and different perspectives from customers and other stakeholders.

Through engagement with these stakeholders, we recognise the need for us and the industry to ­continuously change and adapt – to capitalise on changes including new technologies and moving social ­landscapes.

We want to be open-minded on what can make competition work better and one such example is the new appointments and variations (NAV) market.

To give some context, the NAV market, which has been in place since the 1990s, enables a company to apply to Ofwat to replace the incumbent as the monopoly provider of water and/or wastewater services for a specific site.

To date, the majority of NAVs that we have appointed have been for new housing or mixed-use development sites. NAVs typically provide, own and operate the on-site mains and distribution pipes to and from properties and provide retail services for customers on the site, but the majority also take wholesale water and wastewater services up to the boundary of its site from the incumbent in whose area it sits.

However, since its inception in the 1990s, only a handful of NAVs have entered the market – covering a total of 69 residential and business sites. Following engagement with stakeholders, including NAVs and developers, we were told that there might be barriers to the market working as well as it could. With this in mind, we commissioned a study to investigate how the market is working and to consider the extent to which any factors currently act to prevent, restrict or distort the market from achieving its full potential.

The study – which drew on extensive stakeholder engagement and a range of published information – identified a number of potential barriers faced by NAVs wishing to participate in the market. These include issues arising from the regulatory process, the transparency and timeliness of information provision from incumbents to NAVs and the impact of incumbents’ charges on the margins that NAVs are able to earn.

Having listened to the concerns raised by stakeholders during the course of the study, we think that this is a good opportunity to improve the way the NAV market works. We will be looking at how the submission and processing of NAV applications could be made easier and provide more certainty for NAVs and developers, while still appropriately protecting customers.

We have also consulted on changes to the rules on new connection charging and plan a further consultation on updating our guidance on bulk supply charging.

We will also be looking to industry to work alongside us to step up and address the concerns identified in the study.

In addition, as part of our consultation into our forthcoming price review (PR19) methodology, we have proposed introducing a new developer services experience incentive mechanism (D-MeX) to incentivise companies to deliver a better service to customers – including services to NAVs. More detail about this will be seen in December 2017 when we publish our PR19 methodology.

As we look to the future of the NAV regime, we will continue to consider how we can make the NAV market work better, while maintaining engagement with our stakeholders and customers to drive innovation and change within the industry.