Water industry regulator Ofwat has published new guidance on its approach to the application of both UK and European Union competition law to the water and wastewater sector in England and Wales, replacing previous guidance on the issues.

Introducing the guidance, Ofwat said:

“Water and sewerage markets are evolving further from being largely monopolistic and regulated to being more contestable and, in some parts of the value chain, subject to head to head competition.”

“Looking ahead, amendments made by the Water Act 2014 will also enable the development of new markets for the upstream (non-retail) water and sewerage services provided by English water and sewerage companies. When the changes are brought into force …new entrants will have new opportunities to provide new sources of water or sewerage treatment services with obligations upon incumbents to provide access to their networks and treatment and storage systems.”

According to the regulator, the effective application of competition law will be a key tool in protecting the development of the new markets, ensuring the market dynamic and realising the benefits for customers and the environment.

The guidance emphasises that in particular, incumbent companies will need to be conscious of their special responsibility under Chapter II of the Competition Act 1998 (CA98) where they are in a dominant position - or a “super-dominant” position.

"We expect to monitor closely whether agreements or conduct may... interfere with development of a ..competitive market"

The starting point for cases when the regulator is either assessing the actual or potential competitive effects of agreements and concerted practices, or assessing whether an organisation is potentially abusing a dominant market position is market definition. The guidance says:

“Given the important changes taking place in the water and sewerage sector in the coming years, we expect to monitor closely whether any agreements or conduct may impede or interfere with the development of an effectively competitive market, for example by restricting the potential emergence of new competitors or forms of competition.”

It also point out that a number of the new structures set up to facilitate the operation of the business retail market from April 2017 may from time to time involve some forms of collaboration within industry. These could take place in the context of trade association meetings, or within separate organisations or fora. Ofwat says it will “nevertheless be the responsibility of companies involved in such arrangements, and any trade associations themselves, to ensure that they conduct their interactions in a manner that is consistent with competition law.”

The guidance goes into some detail on UK law prohibiting conduct by one or more companies which amounts to an abuse of a dominant position which may affect trade within the UK. Dominant companies are defined as those with significant market power, which can be thought of as the ability to sustain prices significantly above competitive levels or restrict output or quality significantly below competitive levels.

“As well as acting in ways that are harmful to customers, a dominant undertaking may have both the ability and incentive to harm the process of competition in order to maintain its position of strength on the market.” the guidance says.

In developing the case law on dominance, the courts have stated that dominance can be presumed, in the absence of evidence to the contrary, where an undertaking has a market share persistently above 50%.

In assessing whether an undertaking enjoys a dominant position, Ofwat said it will look at a range of factors, including:

• the extent to which an undertaking faces competitive constraints (from, for example, existing competitors, potential competitors or because of strong buyer power on the part of its customers);
• customers' behaviour and options (for example, awareness of competition, the extent to which alternative providers are chosen, the extent to which substitutes are available, the time and costs involved in switching);
• competitors' behaviour and capacities (for example, their range of offers, their ability to increase available supplies within the relevant time period, the time and costs involved in acquiring customers);
• market operation (for example the extent of barriers to entry and exit, such as the regulation of water abstractions and discharges to the environment);
• an undertaking's conduct in a market with regard to price and output setting as well as its financial performance (such as persistently earning a rate of profit above competitive levels).

Commenting on dominant companies, Ofwat says they have “a special responsibility not to allow their conduct to impair or distort competition.” The guidance defines these as  ‘super-dominant’ where they enjoy very significant market power, where they operate as a monopoly or quasi-monopoly.

"Not necessary for dominance and abuse to be on the same market"

However, the guidance makes the important point that dominance itself is not prohibited by the CA98 - it is only the abuse of a dominant position that is unlawful.

It also makes the interesting point that it is not necessary for dominance and abuse to be on the same market – and that competition law also applies where an undertaking that is dominant in one market commits an abuse in a different but closely associated market.

“ This might occur, in particular, when a vertically integrated undertaking that is dominant on one market commits an abuse on an upstream or downstream market on which it is not dominant, or on the market on which it is dominant in order to gain a competitive advantage in a related market.”

This is likely to be highly relevant in light of multi-services, multi-utility offerings offered by other organisations – for example, the possible entry of the big six energy retailers into the new retail business market. It is also likely to impact on the emergence of upstream markets in bioresources and water resources.

The guidance includes a number of examples of other types of conduct by dominant companies which could have either the object and/or effect of restricting competition and might amount to an abuse, including:

• price discrimination
• tying and bundling - situations in which two or more products are supplied together  and which in certain circumstances may allow a company which is dominant on one market to leverage its market power onto another market (on which it was not previously dominant) by foreclosing competitors from that latter market.
• exclusive dealing
• use of loyalty inducing rebates

Competition Act investigations may also be opened following receipt of a super-complaint brought by a designated consumer body (e.g. the Consumer Council for Water) which says that any feature, or combination of features, of a market in the UK for goods or services is or appears to be significantly harming the interests of consumers.

Click here to download Guidance on Ofwat’s approach to the application of the Competition Act 1998 in the water and wastewater sector in England and Wales