Cathryn Ross, Chief Executive of Ofwat, has warned that a culture change needs to take place across the water sector toward competition law compliance and that it was not yet where it needs to be, “especially given that the business market in England is opening in April.”

The warning came in a presentation by Ross at a Competition Law event held on 21st November to present the regulator’s refreshed competition law guidance to the sector and Ofwat’s approach to the Competition Act 1998 (CA98). The guidance has been refreshed for the first time in six years, and sets out how Ofwat may approach competition law issues that arise in the future.

Referring to Ofwat’s Competition Act Prioritisation Principles, Ross said the regulator was anticipating the scope to do more competition work especially following business market opening. For the first time the guidance outlines in detail how Ofwat will consider early resolution of potential infringements of CA98.

"Sector's track record has not been great"

According to the regulator,  culture change needed to take place across the sector toward competition law compliance and historically, it was “fair to say that the sector's track record hasn't been great.”

She went on to warn:

“While I can see great efforts being made on this front, I do worry that we aren't yet where we need to be, especially given that the business market in England is opening in April.”

Ross cited a number of examples giving cause for concern, including:

• Anecdotally, Ofwat was hearing that associated retailers are claiming to be able to provide a better service because of their relationship with their wholesaler. “Even just as marketing spin, that's not great. But if it is actually true, then some companies are in very hot water.”
• Ofwat has also heard of an appointee which has organised its CCG meetings believing just one retailer should be in attendance – the one that the appointee had exited to.

Exploiting market power unintentionally - no defence to competition law

The regulator also wants incumbent water companies to be aware of their existing brand and the associated market power that it carries relating to CA98. Ross commented:

“If they are not careful they could exploit this market power unintentionally, which … is no defence to competition law.”

Ross said Ofwat has been playing a key role in change in the water sector, including work on Water2020 to develop markets for incremental new water resources and bioresources and challenging companies to test the market for significant new projects, i.e. those with more than £100mn whole life totex through direct procurement for customers.

Alongside markets which had already been operating in the sector for some time, notably through the supply chain but also in respect of local distribution through new appointments and variations, self-lay and for the very largest business customers, taken together the opportunities from all of these markets were immense, she said.

According to Ross:

“Markets create the opportunity for transactions to take place – providing companies with opportunity to contract with others to do things they may not be best placed to do themselves... where others have an advantage, or where companies simply want to focus their management time and effort in some areas and not in others.”

“We have seen this already happening in the business customer market -with some of the incumbent companies such as Portsmouth and Thames and Southern choosing to exit altogether, and others, such as Severn Trent and UU having made an early move to change size and shape to maximise their own advantage in the market.”

Business customers will benefit via better account management and multisite billing

The Ofwat chief said customers would soon be seen to benefitting from competition in the retail market - through better account management, through multisite billing and through water efficiency.

The opening up of markets would also open opportunities in regulation – Ofwat saw scope for regulation to be lighter touch  and more focused on setting the frameworks within which these markets can operate, and on intervening where there are problems, rather than as a matter of course.

However, challenges would also arise as markets opened up scope for new transactions to take place and some existing relationships would need to change.

According to Ross, experience in other sectors and in the water sector in those markets that have been competitive for some time (e.g. new appointments and variations, and self lay) showed that  particular tensions emerge when markets involve some very big, established players and some smaller new players, especially those who want to do things differently.

She went on to specifically flag up 'level playing field'.concerns over changing relationships between incumbent companies with power in markets, and their relationship with other market participants and emphasised the need for all companies to be clear that it was their responsibility to ensure their own compliance with competition law. They also needed to think not only about the processes but also about the implications of  their behaviour in markets for the functioning of those markets.

She concluded by saying that Ofwat was working closely with other regulators through UkRN and UKCN, not only on specific issues such as application of competition law but also more broadly for example, learning from the experience of others - such as Ofgem and the FCA - on how to maximise customer engagement in competitive markets and ensure they are treated fairly.