Market competition in the water and sewerage industry

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. Its scope was extended by the Competition and Service (Utilities) Act 1992 and the Competition Act 1998 (CA98) that came into effect from 1 March 2000.

How can competition be achieved?

There are four main ways of achieving greater market competition: inset appointments; cross-border supplies; unregulated supplies; and common carriage.

Inset appointments

Inset appointments allow the existing regulated water or sewerage supplier to be replaced by another, at a specific site.

Only a limited company or a statutory water company can become a licensed supplier of water and/or sewerage services regulated by us.

An inset application must meet one of three criteria.

1. The customer uses (or is likely to use) at least 100 megalitres in England (about 22 million gallons), 250 megalitres in Wales, 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 can 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 that we regulate.

Some private operators exist, who are not licensed or regulated by us.

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 WaterVoice committees (independent water watchdogs). But we can consider complaints about unregulated supplies under CA98.

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 CA98 opened up the scope for common carriage. Companies risk infringing the CA98 if they refuse access to their facilities without objective justification, or if they offer access on unreasonable terms. We expect companies to produce a code setting out the terms on which they provide access to their systems.

In March 2002 we issued guidance to companies on what they should put in their access codes to minimise the risk of infringing the CA98 and to encourage faster adoption of best practice across the industry. Our guidance sets out standards of behaviour for both existing companies and new entrants to the market when making and implementing common carriage agreements. It also covers how we might deal with complaints about common carriage under the CA98.

Competition in providing new water mains and service pipes

Until recently, the water companies have controlled the water network including laying new mains and service pipes. But developers now want to lay new water pipes themselves either directly or using their own contractors. We call this 'self-lay'.

Once laid, these pipes become the responsibility of the water companies, who also remain responsible for the integrity and quality of the network as a whole.

Self-lay provides incentives for contractors and water companies to improve their performance and calculate their charges on a more competitive basis. Water companies can compete for this work in both their own and other companies' areas.

All water companies should operate self-lay policies. In March 2002, we published, 'Competition in providing new water mains and service pipes – guidance to water companies version 1.0'. This guidance includes the self-lay policies that water companies should have in place and provides a framework for us to consider complaints under the CA98.

What difference does the CA98 make?

The CA98 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.

How can competition be developed?

The Government announced proposals to extend competition for non-domestic customers that use large quantities of water in March 2002. If introduced, new entrants to the industry will be able to use the networks to supply customers. The Government intends to consult on its proposals in summer 2002.

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 from the Office of Fair Trading).
• The Department for Environment, Transport and the Region's consultation paper 'Competition in the water industry in England and Wales' (April 2000).
  – Telephone 0870 122 6236 for copies
• Our leaflet 'How to make a complaint: A guide to complaining to Ofwat under the Competition Act 1998'.

Information Note No 10 April 1992
(Revised May 2002)