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MD 222
To Managing Directors of all
water and sewerage companies
and water only companies 4 April 2007
REVIEW OF COMPETITION IN THE WATER INDUSTRY
The Water Supply Licensing (WSL) regime, which was enacted by the Water Act 2003 and came into force in December 2005, is designed to provide competitive opportunities for eligible non-household customers who use at least 50 megalitres of water per year.
We believe that consumers' interests will be protected if we promote effective competition wherever appropriate in the water sector but it has become clear that the WSL regime as currently enacted by the Water Act 2003 is not, and is not likely to, deliver either effective competition or customer benefits. Despite the efforts of Ofwat, customers, licensees and water companies to make the regime work, there has been little progress in this area. To help us to assess the reasons why and to help us to identify actions to address this, we carried out an internal review of competition. Our review focused mainly on the WSL regime but also reviewed the operation of inset appointments and competition in laying new water pipes (self-lay).
The key outcomes of our review, set out below, show the need for further work on our approach to competition in the water industry which we have now started and will continue during 2007. The key findings are:
- One of the biggest obstacles to WSL competition is the Costs Principle. This is set out in primary legislation and governs how access prices are calculated.
- Retail competition is unlikely to flourish under the current regime, but for combined supplies indicative access prices suggest that, in some locations, large discounts may be available to entrants who provide new water resources to replace appointed water company's planned resources.
- The current 50Ml eligibility threshold for WSL competition may also be a significant barrier to entry.
- We consider that we can improve some aspects of the current WSL regime without the need for new legislation, but these improvements are likely to have a limited effect in the absence of changes to the Costs Principle and the 50Ml eligibility threshold.
- We have received limited feedback on inset appointments but so far stakeholders generally consider that the legal framework for inset appointments should remain unchanged. Potential inset appointees consider that a quicker application process with less regulation once an appointment has been granted would make inset appointments more attractive.
- While the self-lay market generally appears to be operating effectively, there is low uptake in the south of England, and there are problems with multi-utility lay and delays in making connections.
- More work and public debate is needed to decide our future approach to promoting effective competition for the benefit of consumers.
Our paper on the outcomes of our internal review of competition in the water sector sets out the detailed findings. The paper is available on our website.
In response to these findings we will take the following actions, which the outcomes paper explains in more detail:
- We will take action now to refine our existing policy by issuing a WSL letter shortly after this paper to highlight best practice and we will consult at the end of April on proposed changes to our WSL guidance. However, we are likely to need changes to the legislation to establish a workable framework in which effective competition will be able to flourish.
- We intend to streamline our processes for evaluating applications for inset appointments where appropriate. However, we will continue to take a rigorous approach, in particular where inset appointments involve supplies to household customers, as those customers have no choice of supplier. We will seek further views in our June consultation before revising our guidance on inset appointments later in the year.
- We will develop policies to address the problems in the self-lay market identified above, and will consult on changes to our self-lay guidance in November.
- We will undertake further work and encourage public debate, including evaluating the possible benefits of changes in primary legislation, to decide our future approach to promoting effective competition for the benefit of consumers. We will consult in June on issues that may, in the longer term, benefit competition in the water and sewerage industry. If appropriate we will consult further in November.
In addition to our work on market competition, we consider that there is a need to understand better the value of water and sewerage services, and the costs that companies incur along the chain of supply. We intend to initiate work in this area, and the work will underpin many of Ofwat's priorities, as set out in our forward programme.
We welcome your comments on the findings of the internal review and our proposed actions. Please send them to Clair Daniel by 4 May 2007. If you have any questions please contact Clair at our offices, by email to Clair.Daniel@Ofwat.gsi.gov.uk, or by telephone on 0121 625 1318.
Keith Mason
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