News
Utility costs; Do developers always have to pay?
Published May 2010
In December 2009, the new Supreme Court of the United Kingdom handed down a judgment which clarified certain areas of the law relating to drainage works. The case of BARRAT HOMES LIMITED -v- DWR CYMRU [2009] UKSC 13 arose because a water company tried to dictate the point at which Barratt would be permitted to connect to the existing sewerage network and in doing so, to force Barratt to pay for improvements to its sewerage network. The water company failed to make the developer pay in this particular case. However, the case raises an interesting question as to whether utility companies can always recover the costs of providing a supply to a new development.
The privatisation of water, gas and electricity industries in the late 1980s and early 1990s brought the need for new legislation to regulate and control the new regional utility companies.
In the case of each industry, the legislation provided that developers or an individual household had a right to be connected to the relevant utility networks. However, these rights comes at a price to developers because the legislation also provides that the developer has to meet the “reasonable” cost of making the connection.
There is an important distinction to be drawn between the right to be connected to a supply of water, gas or electricity and the right to connect to a sewer, which will be addressed below.
The legislation does provide a right to challenge the reasonableness of the costs of connection by referring any dispute to the industry regulators (OFWAT in the case of water and OFGEN in the case of gas and electricity). However, this mechanism is only available after the work has been done. The attached table sets out the relevant sections of the legislation.
Developers often find that when planning a development, a utility company will provide an estimate of the cost of connection which often bears little relation to the final cost. Unfortunately, there is nothing in the legislation that helps the developer in these cases. The test the regulators use is whether the final costs are reasonable, not whether the original estimate was accurate. Developers should also note that these costs can and do include costs of designing plant and equipment as well as capitalised costs of ongoing maintenance, all of which have been held by regulators to be recoverable.
In summary, the only way a developer can avoid these costs is to try to negotiate a reduction in the price paid for the land with the original land owner based on an abnormal cost.
The situation with connecting to the sewerage network is slightly different. Section 94 of the Water Industry Act 1991 provides that water utility companies have a duty to “effectually drain” their area. Many utility companies claim that the existing sewers are at or near capacity and that they have no capital funding to improve capacity or carry out capital improvement projects or to build new sewers.
In the Barratt Homes Limited -v- Dwr Cymru case, both the Court of Appeal and House of Lords agreed that (a) a utility company could not dictate the point at which a developer connected to an existing sewer; and (b) that lack of capacity was not a valid reason to refuse to allow a connection.
The Courts suggested that the water companies could use the planning system to control connections where appropriate.
In cases where a development site has not been included in the local plan, it may be appropriate to impose a “Grampian” planning condition that prevent any development until certain off site works and done. Off site sewerage and / or drainage works on such sites will usually have to be paid for by developers because utility companies will not have had the opportunity to include them in their funding submissions to OFWAT.
However, in cases where a utility company has applied for and been granted funding for certain works by OFWAT as part of their 5 year capital programme, it would be inappropriate for a local planning authority to impose a Grampian condition and developers should resist the imposition of such conditions on the basis that development has been planned and anticipated for some time.
A recent case shows how the battleground is moving from using the notice procedure under section 106 of the Water Industry Act 1991 to the planning process. A utility company has asked a developer to pay for improvement works to a waste water treatment works at a projected cost of £1.5 million, despite the same works being included in its 5 year capital improvement programme. The utility company had previously agreed to allow the developer to forward fund the works and on that basis, the developer did not challenge the imposition of a Grampian condition at a planning appeal.
However, now the utility company has the protection of a Grampian condition, it is arguing that it cannot give any assurances as to when the work will be carried out or even whether the work will be carried out at all. OFWAT have promised to investigate. The case demonstrates that water utilities will try to use any means at their disposal to force developers into paying for works to their networks and developers need to be especially vigilant to resist the imposition of unnecessary planning conditions.
Rhodri Lewis
Partner
Darwin Gray LLP
Helmont House
Churchill Way
CF10 3HE
Darwin Gray LLP acted for Barratt South Wales in the case against Welsh Water / Dwr Cymru.
Water
Governed by the Water Authority Act 1991 (WIA 1991)
Electricity
Governed by the Electricity Act 1989 (EA 1989)
Gas
Governed by the Gas Act 1986 (GA 1986)
Is there a right to be connected?
s.45 WIA 1991 - Water Authorities must provide a connection to water main
s.106 WIA 1991 – Water Authorities must provide a connection to public sewer
s.16 EA 1989 - Electricity Companies must provide a connection to an electricity supply, including any electric lines or plant
s.10 GA 1986 – Gas Suppliers must provide a connection to the mains gas supply
Who pays?
In both instances the developer must pay the Water Authorities costs in providing the connection to the water mains/sewer – s.45(6) and s.107(3)(b)(i)+(4) WIA 1991
s.18 EA 1989 – Electricity companies have the right to recover a charge for providing the supply
s.19 EA 1989 – Electricity companies have the right to recover the expenditure incurred in providing the service
s.10(1)(a) if the main gas supply is less that 23 meters away then there is no basis to charge under the Act
s.10(5) for all other connections requiring the laying of pipes to make the connection the cost may be defrayed to the developer
Who deals with disputes?
s.45(6)A and s.107(4)A WIA 1991 provides that disputes in respect of the above matters may be referred to OFWAT for determination.
s.23 EA 1989 (As amended by the Utilities Act 2000) – provides for all disputes in respect of the above sections to be referred to OFGEM for determination.
s.27A (As amended by Utilities Act 2000) – provides for all disputes in respect of s.10 to be referred to OFGEM for determination.
