Water UK says competition legislation is flawed

Water UK, the UK water companies’ representative, say competition will allow some customers to benefit at the expense of others and cause confusion over legal responsibilities for the quality and safety of the water supply.

Water UK’s attack on the imminent introduction of competition came as the UK water regulator, the Office of Water Services (Ofwat) published its new guideline setting out how the Competition Act 1998 will be applied in the water and sewerage industry.

UK water companies that abuse a dominant market position could be fined up to 10 percent of their turnover when the Act comes into force on 1 March , according to Ofwat’s guideline. The Competition Act will allow action to be taken against companies that abuse a dominant market position or make anti-competitive agreements. It gives the Director General of Water Services, Ian Byatt, stronger powers of investigation and the ability to impose financial penalties of up to 10 per cent of a company’s UK turnover for each year of the infringement up to a maximum of three years.

Byatt will apply and enforce the Act, concurrently with the Director General of Fair Trading. “Ofwat will be actively pursuing potential breaches of the Act,” Byatt said. “We will not just be waiting to receive complaints, although we will investigate them rigorously when we do get them. As part of ensuring that companies do not abuse a dominant market position, I have asked them to finalise their terms and conditions for allowing other companies access to their networks.

“The spotlight is now on competition in water and sewerage. The Act will shortly give the Regulator stronger powers to ensure that there is an open and level playing field, and reduce barriers to entry. I welcome the fact that competition is here to stay. There is a groundswell of demand from customers for the benefits of competition.”

Ofwat expects the Competition Act to stimulate water companies to adopt ‘common carriage’ – the sharing of distribution systems. Companies have been asked to develop terms and conditions for access codes, which will allow others to use their networks to supply water or sewerage services to customers. The codes must be in place by 1 March.

But Water UK says Ofwat’s hoped for decrease in water prices and increase in the choice of water suppliers, “simply will not happen” because the legal framework driving competition is based on “ad hoc case law” rather than on “a well thought out legislative process.”

As things stand, Water UK says, urban customers could benefit at the expense of those in rural areas, confusion could arise over which companies are responsible for the quality and safety of the water supply, and the environment could be damaged.

Until now, affordable access to services for customers living in both rural and urban areas has been achieved through the averaging of tariffs. The costs of delivering water and collecting wastewater are generally higher for customers in rural areas than in towns and cities. With average tariffs, urban customers effectively subsidise customers in the countryside. As this practice ends with the introduction of competition, some customers in rural areas will have to pay more, Water UK says. “New water suppliers would be free of the social responsibilities implicit in average tariffs. They would not need to be any more efficient than the suppliers they replace, but they could still undercut prices for selected customers.”

In addition, say Water UK, Ofwat’s guideline on water could be read as proposing that the cost of meeting environmental standards and of giving rebates to vulnerable customers should be carried by customers outside the competitive market: ie. by customers who stick with their with existing suppliers. These customers would also have to cover the cost of ensuring that supplies are maintained to customers of new companies as a last resort, Water UK says. “This would be neither equitable nor fair. It imposes penalties on incumbents and their customers for the benefit of a few,” Water UK says.

Water UK believes the Competition Act could lead to environmental damage through the actions of unlicensed suppliers. The current legislation, according to Water UK’s interpretation, allows new suppliers to operate without a licence and outside the independent monitoring regime of the Drinking Water Inspectorate (DWI). Water UK wants to see Ofwat’s existing system of licensing of regional water companies extended to cover all new entrants to the market.

Meanwhile, the DWI has said it will block proposals for common carriage where poor water quality inserted into pipes by competing firms threatens to increase levels of dissolved lead (see related story). Some regional water companies are introducing plumbosolvency measures in order to meet EU lead standards and to avoid the costs of replacing lead pipe required.

To avert the possible negative consequences of the Competition Act, Water UK has called on the Government to provide the same kind of legal framework for water as for gas and electricity. “When competition was introduced in the energy sector, rules of engagement were laid down in sector-specific legislation designed for the task. Nothing of this sort has been developed for water,” says Water UK.

In the energy sector, for instance, there is legislation built around a ‘universal obligation’ to supply all customers in a region. Water UK say that such an arrangement should be considered in order to solve the problem of ensuring access to water in rural areas.

Water UK says the Competition Act was designed to control existing competition, not to introduce it. In the absence of sector-specific mechanisms to ensure that everyone benefits from competition, the Act could help irresponsible companies make money at both the customer’s and competing company’s expense.

Water UK also criticises the fact that the Ofwat/ OFT guideline has only just been published in final form, while another OFT Guideline – on statutory duties which may be legitimately protected from competition – has yet to appear. Unfortunately, the first guideline refers to the second.

Despite Water UK’s gloomy predictions, some UK water companies see competition as an opportunity for growth. Anglian Water, for example, is openly looking forward to competition.