Thames Water has been engaged in battle with Ofwat and Independent Water Networks Limited (“IWNL”) for the right to supply the 67-acre King’s Cross redevelopment site with water and sewerage services for several years. A recent decision from the Court of Appeal has brought proceedings to an end by rejecting Thames Water’s appeal against the judicial review decision which confirmed that Ofwat was acting within its powers by granting an inset appointment to IWNL over the site.
In the UK, water and sewerage services are generally supplied by companies which have been granted regional monopolies. These incumbent companies are, for the most part, the sole providers of water and sewerage services in their designated regions (e.g. Thames Water in London). In an attempt to introduce a level of competitiveness to this market Ofwat are, in some circumstances, able to grant “inset appointments” to third parties who make an application to take over supplying a specific premises within the incumbent’s geographical region (e.g. IWNL for the King’s Cross redevelopment site).
Under the Water Industry Act 1991 (the “Act”) Ofwat can only grant (or vary) an inset appointment if one of the following three criteria apply:
- the large user criterion;
- the unserved or “greenfield” criterion; or
- the consent criterion.
IWNL’s application for an inset appointment over the King’s Cross site was brought under criteria (a) and (b). In 2010, Ofwat granted the inset application under both criteria, allowing IWNL to provide both water and sewerage services to the site. Thames Water subsequently sought a judicial review of Ofwat’s decision, however, the appointment of IWNL was upheld by the Administrative Court at first instance. Thames Water sought an appeal on that ruling and the matter was referred up to the Court of Appeal.
The large user criterion
In order to satisfy this criterion, the end-customer whom the inset appointee will serve must use (or be likely to use) at least 50 million litres of water a year at the premises. The term “premises” is not defined in the Act, however, the Court of Appeal accepted the Administrative Court’s and Ofwat’s earlier interpretation that “premises” for these purposes should not be limited to buildings, but should include buildings, land or both.
The Court of Appeal further held that Ofwat had been correct to consider that the minimum supply to satisfy this criterion would be made out once the redevelopment of the King’s Cross site is finalised and the relevant premises which Ofwat had to take into consideration were the land and the buildings which would be occupied once the redevelopment comes to an end.
The unserved criterion
The unserved criterion is satisfied where a premises is not served by the incumbent supplier. This can clearly be the case where an application is made by a third party to become an inset appointee for a “greenfield” site. However, the question of whether a site is served by an incumbent becomes more complex when looking at “brownfield” sites such as the King’s Cross redevelopment site.
Old Ofwat guidance indicated that if a site had ever been served by an incumbent water supplier, at any time, then it would not be able to satisfy the unserved criterion. This would have been the case even if the site was a field with a simple stand-pipe in one corner - the whole field would have been deemed by Ofwat to have been served by the incumbent. Thames Water argued in the Court of Appeal that Ofwat should have applied this line of reasoning and interpreted the Act in a manner which serves to protect the incumbent, only granting unserved status to those parts of the site which had never historically been served by Thames Water. Clearly, this interpretation would have had the effect of limiting competition, such as it is, via insets and would have made entrance to the market by a new supplier only possible in extremely limited circumstances - possibly only where an inset application is in relation to a true greenfield site.
The Court of Appeal upheld Ofwat’s decision that it was correct to consider whether any of the existing buildings on the site retained links to Thames Water’s infrastructure. It confirmed that, contrary to previous guidance, in circumstances of redevelopment of brownfield sites, premises which have been completely demolished, including the disconnection of any pre-existing pipes, may be considered to be unserved for the purposes of an inset appointment application. Temporary connection to an incumbent’s infrastructure for the purposes of the development would not affect this analysis if the site is otherwise unserved.
The Court of Appeal further clarified that if it had been the intention of legislators to limit the unserved criterion to greenfield sites, that would be clear by the wording of the Act. Tellingly, the Act does not distinguish between greenfield or brownfield sites for this purpose. The interpretation of whether a site is served or not will ultimately fall to Ofwat. In its decision, the Court of Appeal confirmed that Ofwat was correct in taking a pragmatic approach and agreed with the Administrative Court that Ofwat’s decision to appoint IWNL was “unimpeachable”.
What are the consequences of this decision?
This decision provides clarity on an issue that has caused some consternation in the past. Ironically, it does so at a time when the future of the insets regime is now in doubt. In its recent water industry White Paper the Government questioned whether, in light of its other proposals designed to create a competitive market for commercial water customers, there was any need to retain insets going forward. Should, ultimately, the Government pursue its legislative agenda, it is more likely than not that there will be no further inset appointments.
Whilst it has given the regulator the opportunity to pretend that some competitive dynamic has been at work in the sector, the end of insets will be lamented by very few. Real benefits for water customers have been difficult to detect in most cases. Until such time, however, as the axe finally falls, this decision will open some new opportunities for suppliers, such as IWNL, and developers to push ahead with insets. Now that the Battle of Kings Cross has been lost, expect more raiders at a development near you, for a short time only.