Clive Mottram looks at the new licence options on offer in the draft Water Bill and asks, will they drive an active, competitive market?

Water industry stakeholders will by now be familiar with the provisions of the draft Water Bill, covering market reforms, merger controls and other topics. What is not yet clear is the extent to which the proposals to create new forms of licence are considered to provide a suitable platform for successful market reform. This could be due to the difficulty in understanding what the various different licences are intended to achieve and what distinguishes them from each other. A short analysis of the proposed licences may be timely.

There are currently two types of water supply licence. The first is the retail licence, which authorises the licensee to use a water undertaker’s supply system to supply water to the non-household premises of eligible customers.

A retail licence may contain a supplementary authorisation to introduce water into a water undertaker’s supply system, by means of which a retail supply is to take place. This form of licence is called a combined licence. A point to note is that the combined licence allows for the introduction of water only where the licensee is also providing retail services. It is not currently possible for a licensee to perform upstream services in isolation.

The draft Water Bill sets out proposals for six types of new water supply licence, and five types of sewerage licence, as shown in the table.

In England, the proposals will unbundle the combined licence, allowing a single water supply licence to contain a number of separate authorisations. A licensee will therefore be able to provide upstream services, such as inputting its own water into a water undertaker’s supply system, with no obligation to provide retail services. The extent of the undertaker’s supply system to which a licensee will be allowed access is to be extended – in addition to mains and pipes, reservoirs, other places of storage and treatment works will also become accessible. The accessible parts of the sewerage system will include sewage disposal works.

So, what activities do each of these authorisations permit? Both a water supply licence and a sewerage licence may provide the licence holder with one or more of the authorisations.

· Water supply licences

Retail authorisation. This allows the licensee to use a water undertaker’s supply system to supply water to premises of the licensee, its associates or its customers. This licence is a wider form of the existing retail licence.

Wholesale authorisation. The licensee can introduce water into a water undertaker’s supply system, if that supply system is to be used to provide a retail supply (by the same or a different licensee). Unlike the current combined licence, the licence holder need not be a retailer. This will allow alternative suppliers with access to spare water to input water into any part of the network – for example, into a reservoir.

Retail infrastructure authorisation. This covers the situation of taking water from an undertaker’s supply system to convey it through the licensee’s retail infrastructure to a customer’s premises. This licence has been described as enabling the licence holder to provide “last mile” infrastructure – for example, to new developments. Initially this will relate to commercial and industrial premises, but future legislation may allow a retail infrastructure licence holder to own and operate retail infrastructure for household premises, replacing the inset appointment regime for unserved areas. The benefit for new entrants will be having a single licence which is effective nationally rather than needing a new inset appointment for each development site. The licence holder will not be required to provide retail services unless it wishes to do so. It may make arrangements with another licensee or the water undertaker.

Network infrastructure authorisation. This licence enables new entrants to own and operate their own infrastructure, which is connected to a water undertaker’s network. It allows the holder to take water from a water undertaker’s supply system into the licensee’s network infrastructure for reintroduction into the undertaker’s supply system at a separate point. The water to be reintroduced may be the same or different water, but must be for a retail supply. The licensee may therefore bypass parts of the undertaker’s system, using its own network, and could, for example, take untreated water out and reintroduce treated water.

Restricted retail authorisation. An authorisation to use a water undertaker’s supply system to supply water to premises of the licensee’s customers. This replaces the existing retail licence, in Wales.

Restricted retail authorisation and supplementary authorisation. The supplementary authorisation allows the introduction of water into an undertaker’s supply system through which the licensee’s customer is to be supplied. This replaces the existing combined licence, in Wales.

Note the retail, wholesale, retail infrastructure and network infrastructure authorisations apply to the supply system of a water undertaker whose area is wholly or mainly in England. The restricted retail and supplementary authorisations apply to the supply system of a water undertaker whose area is wholly or mainly

in Wales.

In respect of the introduction of water into a water supply network, the Drinking Water Inspectorate will be consulted before a licence is granted. An existing water undertaker cannot also be a water supply licence holder.

· Sewerage licences

Retail authorisation. A licence holder will be able to use a sewerage undertaker’s system to remove discharges from the premises of the licensee, its associate companies or its customers. This is not dissimilar to the sewerage activity performed by an inset appointee, where effluent is discharged from the inset area to the incumbent undertaker’s sewerage network.

Wholesale authorisation. This licence allows the removal of matter from an undertaker’s sewerage system where that system is being used in connection with a retail authorisation. The retail authorisation can be held by the wholesale authorisation licensee or by a different sewerage licensee. The removal must be carried out in connection with the matter discharged from the premises.

Retail infrastructure authorisation. The licensee will be authorised to take matter discharged from premises into the licensee’s retail infrastructure, convey it and discharge it into an undertaker’s sewerage system which is being used under a retail authorisation. This will enable the licensee to construct “last mile” infrastructure to industrial or commercial premises, and also to household premises.

Network infrastructure authorisation. This authorises a licence holder to remove matter from an undertaker’s sewerage system into the licensee’s network infrastructure and discharge that or other matter into the undertaker’s sewerage system at a separate point. The undertaker’s system must be in use in accordance with a retail authorisation (whether the network infrastructure licensee’s or another sewerage licensee’s). An example might be a licence holder removing untreated sewage from one part of the sewerage system and re-introducing treated sewage into another part. The government hopes that this authorisation will help to create a market for alternative sewers and treatment.

Disposal authorisation. Similar to a wholesale authorisation, the licensee may remove matter from a sewerage undertaker’s sewerage system, which may then be treated, disposed of or otherwise used by the licence holder. However, this licence is not linked to the provision of services to premises. This authorisation may facilitate the development of markets for alternative sources of water, such as recycled water, and for sewage sludge.

The sewerage licences apply (if and when finally implemented) to the sewerage systems of undertakers in both England and Wales. In respect of the provision of sewerage services, the Environment Agency will be consulted before a licence is granted. An existing sewerage undertaker cannot also be a sewerage licence holder. The draft Bill incorporates provisions that will allow the extension of the licensing provisions to Wales.

There are clear signs that some water companies are gearing up to take advantage of the new regime when it takes effect. Others will no doubt wait and watch. Will these new forms of licence stimulate an active, competitive market? Without doubt they will provide a stimulus for increased competitive activity, but much will depend on the pricing rules that will replace the costs principle, and the extent of margin to be earned.

The liberalised forms of upstream activity should generate more new entry to the sector, which should be to the benefit of customers and the environment, provided that the difficult balancing act between improved service levels, reduced costs, avoidance of stranded assets, and maintenance of investor confidence can be achieved.

Clive Mottram is head of water regulation at Eversheds LLP

This article first appeared in Utility Week’s print edition of 21st September 2012.

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