The Water Bill is but one element of a complex and extensive process of water reform. Parallel to the Bill’s legislative revisions (see box), Ofwat is extensively altering the way it regulates via its Future Price Limits project, Licence Condition B modifications and replacement of June Returns with risk-based compliance statements. Moreover, other aspects of reform announced in the Water White Paper but not included in the Bill (for example, reforms to the abstraction regime) are continuing independently.
That said, the Water Bill is central to the government’s ambitions for the sector – and it provokes at least as many questions as it answers.
Incumbent water companies must facilitate access to their infrastructure and provide bulk supply to water or sewerage licensees in accordance with a statutory agreement between the parties. Ofwat will publish codes outlining incumbent operators’ and licensees’ obligations when negotiating these contracts. These codes may cover negotiation procedure, agreement terms and conditions, and restrictions on system usage, among other things. Nevertheless, the full extent of the codes is unclear. Will they permit multilateral agreements or industry-wide standard contracts, for example? The Bill appears to allow such mechanisms, but the final framework of the regime is still to be determined.
Similarly, there is doubt surrounding the full extent of supply licensees’ rights and incumbents’ corresponding duties. Can licensees seek blanket permissions to obtain access to incumbent water companies’ infrastructure for the purposes of supplying water and sewerage services to eligible premises, or do they first need to have in place agreements with individual customers? In other words, what does “for the purpose of supplying water” to eligible premises mean? Unfortunately, the language of the Bill provides scope to argue the point either way, leaving ample space for future disagreement unless clarity is forthcoming.
Questions also remain in respect of various additional powers granted to Ofwat. For example, the Bill will give Ofwat transitional authority to modify water companies’ and supply licensees’ licences “where it considers it necessary or expedient to do so” as a result of the changes under the Water Bill. This power will last for two years from the Bill’s entry into force, and is potentially wide in application. Ofwat will enjoy discretion to determine which consequential changes it considers “necessary or expedient”. This may cause concern to the investment community.
The Water Bill undoubtedly offers both incumbents and new entrants compelling opportunities for growth and innovation in the delivery of water and sewerage services and related products. However, at the moment there is uncertainty as well as opportunity. This is particularly acute given the Bill is but part of an extensive reform process in the industry which – inevitably – gives rise to substantial legal and commercial uncertainties and risks. As such, all industry players will need a holistic strategy to balance the promise of expansion with the risk of commercial, regulatory and legal challenge.
Andrew Hockley is a partner and James Marshall a senior associate in the competition, EU & trade department of Berwin Leighton Paisner LLP
Quick guide to the Water Bill
The Bill will:
· extend the current water supply licensing regime by establishing new retail, wholesale, network infrastructure and retail infrastructure licences, allowing licensees to offer a full spectrum of both water and sewerage services to all non-domestic customers on a nationwide basis;
· support the development of a competitive wholesale market by permitting water and sewerage wholesale supply licensees to offer upstream wholesale-only services to non-domestic customers and intermediate licensees;
· reform the existing special merger regime by introducing a two-tier system, allowing water mergers which benefit consumers to be cleared without an automatic reference to competition authorities;
· work towards a joint retail market for water and sewerage services throughout Scotland, England and Wales;
· facilitate increased investment through clarifying the existing development charges scheme, and replacing the current disparate environmental permits regime with a single environmental permit to cover a variety of permissions;
· modernise Ofwat’s regulatory powers, including by encouraging it to use competition law powers in preference to sectoral powers and extending its ability to impose financial penalties.
This article first appeared in Utility Week’s print edition of 5th October 2012.
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