Website http:www'ofwat'gov'uk

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Website http//www.ofwat.gov.uk

• The boundaries of competition and regulation in
  the water sector
• Presentation by Jon Ashley
• (Senior Competition Analyst, Ofwat)
• for the ECR Conference
• held on 9 November 2005

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The water and sewerage industry

• Currently 10 water and sewerage companies and 14
  water-only companies.
• Local monopolies for all but the largest users.
• Ofwat regulates prices, service quality and
  leakage.
• Comparative competition to measure efficiency and
  drive improvements in performance.

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Competition developments

• Private supplies
• On-site services
• Cross-border supplies
• Insets
• Self-lay of infrastructure
• Competition Act 1998
• Water Supply Licensing

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Competition not supervised by Ofwat

• Private supplies - water or sewerage supply not
  using an appointed water companys supply system.
• On-site services - tailor-made solutions for
  customers.

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Size of public supply system(Purpose of
abstractions by volume in England and Wales in
2003)
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Cross-border supplies

• Where a customer in one appointed companys area
  is connected to a neighbouring appointed
  companys supply system.
• Only economic for customers located on the border.

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Insets

• Competitor replaces incumbent as the appointed
  company for a geographic area.
• Site eligible if
• a large user
• previously unserved or
• the incumbent consents.
• 11 insets granted, of which 1 granted to a new
  entrant.
• Large users taken out of tariff basket.

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Competition Act 1998

• Since March 2000 Ofwat has powers to enforce the
  Competition Act 1998 in the water and sewerage
  sectors.
• Ofwat has considered complaints relating to
  insets, common carriage, infrastructure and
  tankered waste.
• Ofwat has published 4 decisions and handled 7
  appeals.
• Found CA98 did not provide solutions in certain
  areas and sectoral regulation was required to
  introduce competition.

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Self-lay of infrastructure

• Complaints highlighted problems with price and
  quality of service for laying new infrastructure.
• Self-lay is where a developer chooses its own
  contractor to install new water mains and service
  pipes instead of asking the water company to do
  this work.
• Water Act 2003 provided a formal framework and
  complaint resolution mechanism for self-lay.

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Water Supply Licensing (WSL)

• Issue of common carriage highlighted by
  complaints.
• New WSL regime starts on 1 December 2005.
  Provides for
• Wholesale supply - licensee buys water
  wholesale from an appointed water company to
  retail it to its customer.
• Combined supply - licensee introduces its own
  water into the supply system of an appointed
  water company to supply a customers premises.
• Choice for non-households using at least 50
  million litres per year (2200 customers).

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Size of the WSL market (by revenues)
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Access pricing

• Access prices must be set in accordance with
  Costs Principle.
• Form of retail minus similar to the Efficient
  Component Pricing Rule.
• Access price retail charge any expenses
  reasonably incurred in providing access ARROW
  costs.
• ARROW costs are costs which can be Avoided,
  Reduced or Recovered in Other Ways.

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Access pricing (2)

• Companies have published indicative access prices
  for each water resource zone.
• Margin in wholesale supply affected by the
  incumbents avoided retail costs.
• Margin in combined supply influenced by scarcity
  of resources.
• Actual access prices calculated on a case-by-case
  basis.

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Indicative access prices(selected companies)
-8p
Note Published indicative access prices for
2005/06 except Essex 2009/10. Combined supply
access prices for selected regions. Exact
details available from Jon Ashley.
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Prospects for WSL

• Scope for competition on quality of service as
  well as price.
• likely to be a slow burn take off rather than a
  big bang. Philip Fletcher, Director General of
  Ofwat, speech 16 June 2005.
• The government will review the threshold after 3
  years. The size of the market can be increased
  over time if the regime is successful.

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Why use regulation to introduce competition?

• Market competition at an early stage in water and
  sewerage sector.
• Regulation provides clearer rules for competition
  in self-lay and common carriage than CA98.
• Government wants to introduce competition in a
  controlled manner taking into account its other
  policy objectives.
• Gradual reduction of regulation as the market
  develops. For example, taking large users out of
  the tariff basket.

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Constraints on competition

• Market competition more advanced in England and
  Wales than the rest of the EU. BUT
• Water is cheap to produce and costly to
  distribute. Natural monopoly part of the industry
  accounts for a higher proportion of revenues than
  electricity or gas.
• High distribution costs limit competition from
  sources located elsewhere in the country.
  Imports from abroad not economic.

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Transport costs (per 100km)
Source European Commission
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Constraints on competition (2)

• Government has chosen to retain
  vertically-integrated incumbents for the
  foreseeable future. Natural monopoly
  (distribution) will remain linked to potentially
  competitive sectors (abstraction, treatment and
  retail).
• Ongoing regulation and strict obligations on
  water companies due to
• public health
• environmental
• social and
• security of supply concerns.

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Conclusions

• Market competition is in the early stages of
  development in the water industry.
• The boundary between regulation and competition
  has been moving over time.
• Regulation has been used to introduce
  competition.
• The scope for market competition in water may be
  more limited than in other industries.