Ofwat secures water infrastructure remedies from Bristol Water

 

Ofwat has confirmed that Bristol Water has committed to change its procedures and structures to address an alleged abuse of dominance in the provision of water infrastructure.

Companies operating in the regulated industries in the UK will be familiar with the “concurrent” application of competition by the competition authority – currently the Competition and Markets Authority – and the various sector regulators, including Ofwat.

The sector regulators share, broadly, the same powers as the CMA to enforce UK and EU competition law in their respective sectors (i.e. Article 101/102 TFEU and their national law equivalents under Chapter I/II of the Competition Act 1998).

Ofwat’s investigation into Bristol Water concerns competition in the market for building new water connections.  In broad summary, where a new development needs water connections a developer may ask the regional water company to install the mains or grant the contract to another contractor (‘self-lay organisation’).  Once the self-lay organisation has completed the work, the regional water company will take over the responsibility for operating it.  Due to the structure of the UK water industry this is one of the few areas where the sector is open to competition.

Ofwat received complaints that downstream infrastructure providers were being forced out of the local market for self-lay connections and contrary to Bristol Water’s duty to act fairly.

Bristol Water has given a commitment to ensure the functional separation of its downstream development business - which competes with the self-lay organisations - and its upstream business.  It has also agreed to provide greater consistency and transparency for the calculation of costs for its own infrastructure service and the work of a self-lay organisation.

As a result of these commitments, Ofwat has stated that it is satisfied that the ability for Bristol Water to discriminate between its own downstream business and competitors is reduced.

The case highlights the opportunities and incentives that may be presented to a vertically integrated business which operates in non-contestable (upstream) and contestable downstream businesses. 

As competition is expected to increase when the relevant provisions of the Water Act 2014 come into force in 2017 these issues will become more significant.

As a wider reflection this investigation was launched in 2013 before the CMA came into operation.  The Ofwat decision is especially relevant in the wake of the reforms introduced by the Enterprise and Regulatory Reform Act 2013 which are expected to contribute to a greater use by the sector regulators of their competition powers.

This is only the second time that Ofwat has secured commitments under the Competition Act 1998.  In 2013 Severn Trent offered to divest certain assets in order to address concerns of below-cost pricing.

When concurrency was introduced, arguments were made both for and against the system. In favour of concurrency it was argued that: (i) sector regulators had developed specialist expertise and knowledge of their sectors that could be applied effectively in competition cases; (ii) there was overlap between the sector licensing regimes and competition law; and (iii) concurrency would encourage sector regulators to move away from reliance on ex ante regulation to using ex post competition law.

Against concurrency it was argued that: (i) concurrency is rare in other jurisdictions including in the EU; (ii) the sector regulators lacked expertise in EU competition law analysis and investigations experience; (iii) there would be less efficient use of regulatory resources given the number of bodies that could potentially apply competition powers; (iv) there was a risk of inconsistency in decision making; and (v) there was a risk of “double jeopardy” where companies operating in more than one sector might face multiple investigations.

It was initially expected that reliance on regulatory powers would be lessened in favour of a more general application of competition law. However, in general, and with some exceptions, sector regulators have tended to favour use of sector regulatory powers.  The coming years will tell whether the new regime will bring in more use of competition powers by the sector regulators.  Against this there may still be cases which call for targeted and measured use of sector regulatory powers where, for example, competition law cannot be expected to bring benefits in a sufficiently timely or effective manner.