John Reynolds explains how a Deemed Contract works, the key features and some hidden benefits for customers in England
We get regular questions from customers about their contractual relationship with Castle Water – this blog hopefully provides some useful background and explanation for all business water customers, and may, in particular, be useful reading for customers occupying business premises for the first time.
What is a Deemed Contract?
In utility markets, to ensure that all customers have access to services, and that customers are all required to pay their fair share for the provision of essential services, the Government and regulators have put in place a system of default contractual terms. These are deemed to be in force without either party being required to consent to the terms or sign a contract. Invoices issued pursuant to a Deemed Contract can be enforced through the courts.
A Deemed Contract is designed to provide:
A deemed contract also applies when a customer first enters a premises.
A Deemed Contract came into effect from 1 April 2017 for Non-Household water customers. This governed, for the vast majority of non-household customers, the prices and terms of water supply.
Under Ofwat’s Retail Exit Code:
A Scheme of Terms and Conditions must not include non-price terms which cumulatively in complying with them would cause Transferred Customers to be materially worse off, whether financially or operationally than they were immediately before the Exit Date.
But it also states:
The price terms may allow higher charges to be paid by a Customer where the Customer freely chooses to pay different charges to those that they would otherwise be liable for.
So a Deemed Contract provides protections to customers which can be waived by signing a new contract with the same or another retailer.
Our charges are set out in separate documents, which are based on the wholesale charges in each water wholesaler’s area. These are called the Scheme of Charges, and are enforceable under the Deemed Contract. These can be found on the Useful Resources section of our website at https://www.castlewater.co.uk/help-support/useful-resources
Under the Water Industry Act 1991, the “Occupier” of a premises is liable to pay for water charges. This means that even if you pay your landlord for water charges, if you are a tenant you will be liable if the landlord does not pay. If you consider this is an issue we would recommend you contact us to discuss how to resolve this.
A new occupier is liable for water charges immediately they take occupation. They are free to switch to another retailer, provided they pay the first retailer for the period up until the switch takes effect. Full details of how to switch are on the official Open Water website and www.open-water.org.uk
If you are in serviced accommodation, such as serviced offices or a storage unit, and have a licensing arrangement rather than a lease, the water retailer is able to determine that either the licensee or service provider is liable for charges.
Although the key features of a Deemed Contract are set out by Ofwat and in statute, each licensed retailer published its own contract terms. A series of regulatory codes tell water retailers, such as Castle Water, what needs to be incorporated into a Deemed Contract; and the Deemed Contract is submitted to Ofwat. Ofwat does not explicitly approve the Deemed Contract. Customers should therefore always review the contractual terms when accepting an alternative contract for water services.
The Deemed Contract has some specific advantages for customers: it is submitted to Ofwat; it is subject to potentially valuable protections in the Retail Exit Code which do not apply to customers transferring to other retailers (such as requiring there to be no termination fees).
It is very important to review fully any T&Cs from a new retailers, as many include additional charges:
* Although Castle Water does not have any termination fees for customers moving into new premises which we supply, other water retailers may have these fees
* Some retailers charge additional fees or vary their tariffs if you change payment method, such as cancelling a direct debit. Castle Water does not charge fees in this situation (if you let us know you are changing).
Under the Exit Regulations (which govern how customers may be transferred to a water retailer), customers on a deemed contract also had the specific right to be “billed by the same method, and to pay by the same method, as immediately before the exit date” (the exit date was 1 April 2017) – this means, that if you previously paid by cheque, you were entitled to continue to pay by cheque, and likewise for direct debit etc; and that if you received bills by post, you were entitled to continue to receive bills by post. Any subsequent agreement to change these arrangements may affect your future right to pay or be billed by these methods.
Unlike other markets – the electricity market in the UK, or the water market in Scotland – the maximum default margin in water is not typically very different from contractual margins. For example, one small independent water retailer
, cites in its 2020 annual report that its gross margin has risen to over 7% - this is higher than the Castle Water gross margin for the same period.
Many might look at “default” contracts as being poor value. It is worth looking at how high the “retail margin” is for water in England, compared with other utilities. Water tariffs are complicated
, so it isn’t possible to just give a percentage uplift. However, as an example of the margins:
For a typical SME with a 20mm meter in the Thames Water area, the retail volumetric charge for water and waste combined is £2.46 per cubic meter (1,000 litres of water). The wholesale charge is £2.39. This gives a retail margin (also referred to as a gross margin) of just 2.9%.
By comparison, for a customer in Scotland, retail volumetric charges are £2.34 per m3, where the wholesale charge is £1.64. This gives a retail gross margin of 29.9%.
One of the most common questions we get is why our standard payment terms are 14 days. Castle Water has taken over the non-household retail activities of four water wholesalers (such as Thames Water) in England. The payment terms we inherited were either payment within 14 days, or immediate payment. We have not changed this, but do not typically take action to enforce payment unless a bill is 30 days overdue. The structure of the water market is designed to ensure that water wholesalers can fund their activities, and water retailers such as Castle Water are invoiced for wholesale charges every month. As we have no flexibility over the timing of payments to wholesalers, we are not in a position where we can offer extended payment terms to customers. However, we do offer all customers the option of monthly direct debit payments, to enable payments to be spread over a year (these are normally taken as 10 payments during a 12 month period). There are no specific requirements about billing in arrears of consumption, in advance, or a combination of both; although changes to billing periods may be subject to regulatory limitations.
Where payment is overdue, charges may be payable pursuant to the Late Payment of Commercial Debts Act 1998, and the Scheme of Charges. These charges are enforceable through the courts.
An invoice may be based on actual meter readings, or on estimates. Under Ofwat’s Business Customer Protection Code of Practice, the definition of meter readings includes estimates. There is no requirement for there to be an up to date meter reading in any invoice – this makes sense, as in a significant number of cases where we try to take a meter reading we are unable to do so – for example, because of lorries parked over meters. Customers can provide meter readings at any time, and we ask customers to provide regular readings via our website. This is especially important for customers with seasonally varied usage (such as farms and golf clubs), as the water market central systems do not change their estimation calculations seasonally.
The Deemed Contract does not specify any payments due to be made by a water retailer to a customer. However, Ofwat has put in place a Guaranteed Standards Scheme which provides for specified payments to be made in the event of a service failure – for example, where there is a prolonged supply outage, or a retailer does not respond to a complaint. There is no provision for payments to be made by the retailer for customer time in managing their account, or for any advice/services procured by customers in relation to managing their account.
Payments for damage caused to property by a wholesaler (for example in the event of sewer flooding) remain the wholesaler’s responsibility, and claims can be made directly to the wholesaler.
Customers are responsible for water from the point their pipework is joined to the meter. It is worth taking regular meter readings, to check for any signs of unexpected increased consumption, as leaks can be very costly if not identified rapidly – there are a number of relatively low cost types of equipment which can be added to your water network to tell you of any change in consumption.
Where a leak has been identified and fixed, customers can claim a leak allowance, although this is normally only granted against waste charges, and normally requires supporting data including an invoice from a plumber and two subsequent meter readings. The reason for an allowance only normally being granted against waste water services only is that the clean water has been used, but has not been returned to the waste water system.
A Leak Allowance is a separate discretionary payment made by the wholesaler, and invoices are enforceable for the water services used, even when there has been an application for a Leak Allowance which is still pending. We will handle the Leak Allowance application for you, but we have no power to specify to a wholesaler what the outcome should be, as the payment is discretionary and outside our control.
You should note if you identify that you have had a leak, we will have already paid the full charges for the services on your behalf.
The Deemed Contract sets out the limitation of our liability, including that we are not liable for any actions or omissions of a water wholesaler.
Customers on a Deemed Contract are free to switch to other retailers, provided their account is not in debt and they are not party to a fixed term contract. Full details of how to switch are on the official Open Water website at www.open-water.org.uk