Ofwat has announced proposals to strengthen the level playing field in competitive markets and prohibit water companies from showing undue preference or discrimination.

The water sector regulator is consulting on proposals to introduce a licence modification prohibiting water companies from showing undue preference towards, or undue discrimination in relation to the provision of certain services in competitive markets to help ensure a level playing field.

Ofwat said that market developments for water resources, demand management, leakage services and bioresources would mean greater involvement by a range of market participants and that it was vital that a level playing field exists, to ensure the markets can develop.

The new measures are intended to help to support the development of new markets and to bring about a change in water companies’ behaviour in relation to self-lay and NAV markets.

“Undue preference or undue discrimination can be used to prevent or harm effective competition"

Introducing the proposals, Ofwat said:

“A level playing field is not only important for new and developing markets, but also for existing markets where this conduct has already been identified as a barrier to market development.”

“Undue preference or undue discrimination can be used by vertically integrated monopolies to prevent or harm effective competition by disadvantaging competitors in the downstream markets, so as to force them to exit the market, or induce them to compete less aggressively.”

The regulator has already taken a number of steps as part of PR19 to create opportunities for new entry into the new wholesale markets. The PR19 methodology, makes it clear that Ofwat considers that the water resources market, in particular, can benefit from significantly more trading from out of area water companies or other wholesale providers of water rather than water companies simply relying on their own in-house solutions to meet their future water needs.

A second area for potential development in the water resources market is the future scope for participation from third parties or out of area water companies in England, to sell water directly to water retailers as the retail business market develops.

The bilateral market will involve other water resource providers paying an access price to the incumbent water company for use of their distribution system and, if needed, treatment facilities. The consultation paper says:

“Even with an access framework in place, incumbent water companies may have incentives to engage in undue preference or undue discrimination. Therefore, the proposed licence modification will protect against undue preference or undue discrimination in the bilateral market.”

Commenting on the bioresources market, the paper says there is evidence that there is “scope for increased optimisation of activities across the water companies and greater participation from firms operating in wider waste markets.”

For companies in both England and Wales, there may be also cross-boundary opportunities which could lead to more efficient operations and lower costs. There are also other organic waste (OOW) facilities that may be able to offer bioresources treatment services to companies in both England and Wales.

"If water companies’ behaviour is slow to change ...market development would be hindered"

In Ofwat’s view, if water companies’ behaviour is slow to change and/or the perception of new entrants means that they will consider it too risky to enter, market development would be hindered.

In the new wholesale markets, out of area water companies or third party providers can submit bids to the incumbent water company to provide, manage or develop water resources, demand management, leakage services or bioresource services. The consultation paper says:

“To maintain trust and confidence in these markets, those submitting bids must be reassured that any information they disclose to the incumbent water company will only be used in limited circumstances, to ensure the incumbent water company does not gain an unfair advantage.”

Similarly NAVs, or SLOs who submit information to the incumbent water company as part of an enquiry into entering an agreement to adopt water mains or service pipes, or sewer, drain or sewage disposal works, should benefit from the same reassurance.”

Ofwat has proposed two modifications of the conditions of the appointment of each of the 17 largest water companies in England and Wales.

The first proposed modification would prohibit water companies from showing undue preference towards or undue discrimination against themselves, other water companies (including new appointees - NAVs), water supply and/or sewerage licensees or unlicensed third parties in relation to the provision of certain water and sewerage services.

The second proposed modification would place restrictions on the circumstances in which water companies could externally disclose or internally use information they were provided with in relation to the submission of bids to provide certain services or agreements for the adoption of infrastructure.

Deadline to submit responses to the consultation is Tuesday August 14th 2018 – click here to access the consultation document.