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MD 201
TO THE MANAGING DIRECTORS
OF ALL WATER ONLY COMPANIES
AND WATER AND SEWERAGE COMPANIES
28 February 2005
WATER SUPPLY LICENSING – IMPLEMENTATION AND OPERATION
This letter is a reminder that the new statutory regime for market competition under the Water Act 2003 will take effect later this year, and that regulated incumbent companies have new responsibilities under the Act.
Much work has been done by the various stakeholders in developing and implementing the Water Supply Licensing (WSL) competition framework. Between February and September 2004 industry advisory groups developed the broad structure of the new framework and have provided valuable advice. The industry sponsor group has given useful high-level direction to the project over the same period. Both the sponsor group and the new technical advisory group continue to be useful forums for discussion and development of important details of the new regime. Ofwat, in conjunction with Defra and the Welsh Assembly Government, published four consultations between October and December 2004 which set out in detail our proposals on how the regime will work. Responses to the last of these consultations are due by 22 March 2005. Ofwat's stakeholder workshop in November 2004 marked a transition from development to implementation of the regime and shifting the focus more to stakeholders, particularly water companies and what they have to do to prepare for WSL competition.
We aim to have the WSL regime largely set up by Summer 2005, for 'go-live' in Autumn 2005. There is still much work to do. Water companies will need to comply with new appointment conditions which support the WSL regime. They will need to be ready to deal with applications for access from water supply licensees, and be able to transfer customers to licensees. This will require access codes to be finalised and systems put in place to ensure smooth customer transfer. Both of these are large tasks, on which I know water companies are already working.
Access codes and indicative prices
At the heart of the new WSL regime is the duty on water companies to allow licensees to introduce water into their supply systems, and to give licensees wholesale supplies. Water companies will therefore require access codes that set out all aspects of how they will provide access, including publishing indicative prices. Companies will also need to give thought to how they will transcribe their access codes into specific access agreements with individual licensees.
We are reviewing the responses received to the consultation on our draft access code guidance. The technical advisory group will continue to discuss how our final guidance should be shaped, and we intend to issue this final guidance in May 2005.
Meanwhile the draft guidance should give companies a good foundation on which to begin preparation of their codes. By August 2005 we will expect water companies to have published their access codes and indicative prices.
Access applications and disputes
Water companies will need to ensure they are ready, from Autumn 2005, to receive and process applications by licensees for access although we expect that potential licensees will want to begin preliminary discussions with companies once access codes are available. In an emerging market, it is possible that disputes will arise, although if water companies and licensees follow our guidance I would expect these to be relatively few. If parties are unable to resolve disputes by themselves and they refer them to us for determination, we will expect both parties to explain their position promptly and provide evidence to support it. This will help to minimise delays and ensure the smooth operation of the WSL regime.
Customer transfer
An essential part of a successful WSL regime will be the smooth transfer of customers between suppliers. The industry has agreed that a simple, scaleable system for registering customer transfers is appropriate for a market of approximately 2,300 customers. The advisory group last summer and the current customer transfer sub-group have done a lot of work in designing the detailed system needed to support customer transfers. Water companies need to ensure they are able from Autumn 2005 to transfer without delay customers who want to switch suppliers.
Competitive opportunities
The WSL regime presents competitive opportunities for existing regulated water companies as well as new entrants to the market. Although water companies are prevented from competing for customers within their own Areas of Appointment, they are permitted to create associate companies with which to compete for business outside their Areas of Appointment. Water companies should consider whether this is something which forms part of their business strategy. For its part, Ofwat will be ready to fulfil its duty to protect the interests of consumers, wherever appropriate by promoting competition.
Enquiries on this letter should be referred initially to Phillip Dixon or Alison Dedicoat.
Philip Fletcher
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