Ofwat to industry: develop a NAV code of conduct – or we will

Ofwat has given the industry until the end of the year to make significant progress on developing a code of conduct on service standards and information access for new appointments and variations (NAVs)– or it will begin work on developing a code itself.

The news came as part of a revision of NAV policy guidelines, issued last week. It followed feedback from NAVs that incumbents had dragged their heels in this area. Elsewhere in the document, the regulator suggested little in the way of new policy, beyond a few points of clarification.

Ofwat’s NAV policy was last updated in January 2014. Since then, Frontier Economics has studied the market, publishing its findings in October 2017. It identified a number of barriers to entry which Ofwat has been steadily responding to. The new guidelines set out these issues and what Ofwat has done in response. Beyond that, it argued the 2014 policy remains appropriate.

In some cases, it pointed out that some suggested changes would require substantial programmes of work that extend beyond Ofwat’s remit. For instance:

• NAVs noted that the national approach to licensing in the energy market made competing with incumbents easier. Ofwat said: “Legislation in the energy sector is different and we would not be able to implement national licensing for NAVs without alterations to primary legislation, as geographically defined licences, and the criteria for a NAV to be granted a new site, are specified in the Water Industry Act 1991. This work is outside Ofwat’s remit, and would require NAVs to engage with other agencies. However, it is not clear that the barrier warrant such significant changes at this point in time.”

• The Consumer Council for Water raised the concern that end customers have seen only limited direct benefits from NAVs. This partly reflects that NAVs are regulated through a relative price control. Ofwat said: “Consumers do benefit from indirect benefits such as faster home-building, improvements to the environment and strategic benefits leading to a more efficient water market more generally. More in-depth regulation, such as a direct price control, could also increase direct benefits to customers. However, it would require significant input from NAVs and us, increasing this costs of the regime, and potentially disincentivise NAVs from growing. We therefore do not believe this is appropriate at present. But as NAVs become larger it may be more appropriate to adopt alternative forms of regulation that seek to share cost benefits with NAV customers directly.”

Responses are invited until 17 December 2018. Ofwat said it will continue monitoring the NAV market and left the door open for changes in the future.