ABSTRACTION LICENCING - INSETS AND THE COMPETITION ACT

OFWAT INFORMATION

The economic regulatory body (OFWAT) for the privatised water utility companies in England & Wales recently updated its information on Market Competition in the water & Sewerage Industry. The updated note reads as follows:

The Director General of Water Services (the Director) has a duty to facilitate effective competition in the water and sewerage industry in England and Wales. He interprets his duty to include creating a framework in which market competition can develop. The framework for competition was set out in the Water Industry Act 1991 and the scope was extended by the Competition and Service (Utilities) Act 1992 and the Competition Act 1998 that came into effect from 1 March 2000.

How can competition be achieved?

There are four main ways at present to achieve greater market competition: inset appointments; cross-border supplies; unregulated supplies; and common carriage.

Inset Appointments

Inset appointments provide for the existing regulated water or sewerage supplier to be replaced by another, for a specific site. Only a limited company or a statutory water company can become a licensed supplier of water and/or sewerage services (a licensed supplier) regulated by OFWAT.

An inset application must meet one of three criteria: 1. The customer uses (or is likely to use) at least 100 megalitres(1) (about 22 million gallons) of water per year (a large user). 2. It is a site not currently being served by a licensed supplier (greenfield). 3. The existing licensed supplier agrees to the inset.

Cross-border Supplies

Companies have a duty to allow connections to their water mains from outside their areas. This means that customers are entitled to receive water for domestic purposes from any licensed supplier, irrespective of where they live. The company is entitled to recover the costs of connecting the customer to its mains. Owners of private sewers and drains have a similar entitlement to connect to the public sewer.

Unregulated Supplies

Most people in England and Wales receive their water and sewerage services from licensed companies which are regulated by the Director. Some private operators exist, who are not licensed or regulated by the Director, and customers are entitled to buy water and sewerage services from them. The terms and conditions of supply to their customers are not regulated, although private supplies are subject to quality standards, enforced by local authorities. These customers are not represented by the local OFWAT Customer Service Committees (independent water watchdogs).

Common Carriage

Common carriage occurs when one service provider shares the use of another’s assets, such as its pipe network or treatment works. Common carriage between companies occurs now, but is limited in scale. Some new entrants to the industry (and some existing licensed suppliers) are interested in using others' networks to supply customers. To do so a company needs access to a supply of water.

The Competition Act 1998 opened up the scope for common carriage. If an incumbent supplier refuses without proper justification a request for common carriage, or imposes unreasonable terms for access, such conduct might be an abuse of a dominant position and thus infringe the Competition Act 1998. The Director will investigate complaints and may also investigate suspected breaches on his own initiative. The Director will use his powers under the Competition Act 1998 to deal with anti-competitive conduct. Licensed suppliers have statements of principles setting out the broad rules governing access to their networks and are developing detailed access codes. Any enquiries about common carriage should be directed to the relevant supplier in the first instance. A choice of supplier for domestic customers may be available in the future. (1) Threshold reduced from 250 megalitres per year to 100 megalitres per year on 17 August 2000.

What difference does the Competition Act 1998 make?

This Act brings UK law broadly into line with European law. It came into force on 1 March 2000. The Act applies to all businesses in the UK, including the water and sewerage industry in England and Wales. The Act prohibits companies from entering into agreements that are anti-competitive and prohibits abuse of a dominant market position. It strengthens the Director’s powers to investigate complaints and to take action, including imposing financial penalties, where behaviour is anti-competitive. The Act will be enforced concurrently with the Director General of Fair Trading in the water and sewerage sectors, although it is anticipated that the Director will normally deal with these cases. Decisions under the Competition Act 1998 are subject to appeal to the Competition Commission.

How can competition be developed?

There are other ways in which the scope for competition can be increased. The Secretary of State for the Environment, Transport and the Regions (DETR) issued consultation papers in April 2000 on competition in the water and sewerage industry and economic instruments in relation to water abstraction. Proposals to increase competition include:

1. a revised system of licensing water abstraction, to allow greater trading of abstraction licences, improving the scope for new entrants to secure new resources and to make more efficient use of existing resources;

2. provision of cross-border supplies of water for non-domestic purposes;

3. allowing premises to be combined to meet the consumption limit for a large user inset;

4. increasing the scope for competition in providing new mains and making connections to the water mains;

5. provision of a time limit for inset appointments.

As part of its review of competition, the DETR announced its intention to reduce the threshold for inset appointments to 100 megalitres of water per year, and this took place in August 2000. Over 1,000 additional customers are now eligible for inset appointments.

What other information is available?

* Application details for inset appointments are provided in OFWAT’s paper Inset appointments - Guidance for applicants (February 1999).

* Information note 45 Competition Act 1998 The Competition Act 1998 guideline The application in the water and sewerage sectors (OFT422)

* The Department of the Environment, Transport and the Region's consultation paper Competition in the water industry in England and Wales (April 2000) – Telephone 0870 1226236 for copies.

This and further information is available from the OFWAT library telephone: +44 (0)121 625 1373 E-mail address: enquiries@ofwat.gsi.gov.uk Website: www.open.gov.uk/ofwat/

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