Retail exit

The Act enables the Secretary of State to introduce regulations that will allow undertakers to exit the competitive part of the retail market (i.e. business customers) with the consent of the Secretary of State. This means that companies will be able to transfer their non-household customers to a water supply licensee (either an associate licensee or an unrelated licensee).

Department for Environment Food & Rural Affairs (Defra) has published an update on progress in which it sets out a number of policy assumptions, including (i) exit will entail the removal from the undertaker of statutory powers and duties relating to existing and future non-household retail customers; (ii) all non-household customers must be transferred to a licensed retailer; (iii) after transfer the undertaker will no longer be able to provide retail services to non-household customers. In respect of timescales,   Defra has committed to consult on draft regulations by the end of 2014, to publish a summary of responses by May 2015 and to consult on draft regulations in summer 2015. 

OfWat’s (The Water Services Regulation Authority) resilience duty

A new primary duty has been imposed on OfWat, namely to further the resilience objective. This means securing the long-term resilience of water supply and sewerage systems, including through promoting long-term planning and investment, and taking measures to manage water resources sustainably, and to increase efficiency in the use of water and reduce demand for water. This duty came into effect on 14 July 2014 in respect of water and sewerage undertakers wholly or mainly in England. It remains to be seen how the new duty will influence OfWat’s conduct. 

Discharges to watercourse

In its recent judgment in Manchester Ship Canal v United Utilities the Supreme Court has provided clarification on the right of sewerage undertakers to discharge surface water or treated effluent from a sewer into a watercourse. Until 2001 the law had been understood to give sewerage undertakers an implied statutory right of discharge, but the Court of Appeal decision in British Waterways Board v Severn Trent Water ruled that the implied right did not survive consolidation of water legislation in 1991. 

In the Manchester Ship Canal decision the Supreme Court approved the BWB v STW judgment, agreed that the implied right of discharge had continued after the Water Act 1989, and also agreed that the changes which were made in the Water Industry Act 1991 meant that the right of discharge could no longer be implied.

The Supreme Court undertook further analysis of the position, adding that a discharge which was taking place at 1 December 1991 (when the Water Industry Act came into effect) continues to have implied statutory legitimacy, whereas a discharge commenced since that date has no statutory legitimacy. Lord Sumption was not attracted by the argument that the implied right for pre-1991 discharges had ceased to survive, stating, “When pressed to say how a sewerage undertaker was to comply with this view of the law immediately after 1 December 1991, the canal owners had no answer except that the law would not in practice be enforced by injunction but that if it was they must block the outfalls and allow surface water and treated effluent to backwash through the system into the streets. In fact, s 116 of the Act would rule out even that possibility. This is not just a practically inconvenient way of dealing with an issue which engages an important public interest. It is legally incoherent. Without the clearest possible indication that Parliament intended such a preposterous result, I decline to accept that it is the effect of the current legislative scheme.

Whilst this is a helpful clarification of the pre and post-1991 law, the judgment leaves some unanswered issues. The 1991 Act was merely a consolidation act, implementing recommendations of the Law Commission, none of which related to the undertakers’ discharge rights; how then did the position on discharges change. Of more practical concern, will alterations by an undertaker to a discharge pipe amount to a new discharge and have the effect of terminating the previous right? For new discharges, the position remains as it has been since the BWB decision, namely that undertakers can lay a sewer under notice, but will need to acquire a right of discharge in order to use that sewer.

Licence modifications

Following consultations Ofwat has modified companies’ licences, with new Conditions N and R1.

Condition N increases the cap on fees that Ofwat can recover from companies in relation to the price review process, with effect from 1 March 2014.

Condition R1 requires companies operating wholly or mainly in England to provide temporary funding of Open Water Market and/or Ofwat as part of the implementation of business retail market reforms. The Condition will cease to have effect on 1 April 2018.

The companies concerned consented to each modification.

Memorandum of Understanding between Ofwat and CMA

On 17 June 2014, the Competition and Markets Authority (the “CMA”) published its Memorandum of Understanding with Ofwat (the “MoU”).

Whilst not legally binding, the MoU provides guidelines on how the CMA and Ofwat propose to ensure greater co-operation in the exercise of their strategic objectives and promote effective competition in the water sector. This follows the introduction of regulations[1] which revised existing rules on co-operation between the CMA and sectoral regulators, together with the implementation of the UK Competition Network (“UKCN”) which aims to achieve a more consistent and effective use of competition powers.

The MoU states that the CMA and Ofwat will seek to use their powers to achieve more competitive outcomes in the water and sewerage industry in England and Wales for the benefit of consumers.

In particular, the MoU sets out the proposed working arrangements between the CMA and Ofwat in relation to concurrent competition powers to apply competition law, undertake market studies and make market investigation references.

A summary of the key provisions is set out below.

General guidelines on co-operation

In addition to more specific guidelines relating to particular objectives, the general guidelines set out the way in which both authorities will work more closely together. In summary, these guidelines state the following:

  • the CMA and Ofwat will meet regularly to discuss matters of mutual interest directly and through the UKCN;
  • the CMA and Ofwat will be in regular dialogue and share information where it is permissible by law;
  • the CMA and Ofwat will commit to early bilateral consultation where an issue has the potential to have a significant impact on each other’s statutory objectives;
  • before exercising statutory powers in matters where there is potential for concurrency, the CMA and Ofwat will consult each other to ensure efficiency and consistency;
  • where appropriate, the authorities may pool their resources to assist one another with the carrying out of their respective functions. This may include the provision of training, people or expertise where it is considered that this will provide a benefit.

Guidelines on issues relating to competition law infringements

The MoU also sets out guidelines for co-operation on issues relating to infringements of the Competition Act 1998 and Articles 101/102 of the Treaty on the Functioning of the European Union:

  • the CMA and Ofwat will aim to agree on which of them should have jurisdiction on a matter of concurrency by providing each other with sufficient information to understand the issues and consider which authority is better placed to investigate a matter;
  • the MoU provides specific timeframes in which the CMA and Ofwat should provide information to one another when it is suspected that a competition law infringement has occurred, in order to establish the most appropriate authority to investigate the matter. For instance, the MoU states that information should be provided “in a timely manner and…within ten working days” and that a view should be formed “within seven working days”;
  • it is expected that once the appropriate authority has been identified that both the CMA and Ofwat will work co-operatively on the case and pool resources and expertise where appropriate.

Guidelines relating to market studies and market investigation references

The MoU also sets out guidelines for co-operation on issues relating to market studies and market investigation references. In accordance with the MoU, when exercising such power to undertake a market study or make a market investigation reference, both the CMA and Ofwat have a duty to consult with each other before any action is taken forward. 

In regards to the coordination of super-complaints, the CMA and Ofwat will act in accordance with policies agreed and applied through the UKCN – thus ensuring that such action is consistent with the approach taken by other sectoral regulators.

Annual Concurrency Report

The CMA is required by statute to publish a report every year, starting after its first year of operation in 2014, containing an assessment of how the concurrency arrangements between the CMA and the sectoral regulators, as regards both the competition prohibitions and the market provisions, have operated during the year.

The MoU states that the CMA will consult, and co-operate with, Ofwat and with other sectoral regulators in preparing the annual concurrency report. In turn, Ofwat, and the other sectoral regulators, will provide the CMA with information and data on general market conditions and the application of competition law in their respective markets.

Comment

The implementation of the MoU follows the Government’s proposal for the CMA to work more closely with sectoral regulators. The MoU should provide more clarity on how Ofwat’s concurrent competition powers and statutory objectives intertwine with the CMA’s competition duties and create a more consistent approach on both a case-by-case basis and in comparison to the CMA’s relationship with other regulators.

The guidelines set out in the MoU are intended to ensure greater flexibility in order to promote effective competition. Taking the provisions relating to timeframes for sharing information as an example, it is clear that the MoU is focused on ensuring an efficient and expedient system of co-operation by ensuring both authorities follow a set process.

Further, the sharing and pooling of resources is likely to provide a real benefit to both authorities when carrying out their functions. However, it is important that with the implementation of the MoU, the CMA retains independence, objectivity and fairness when, for example, considering disputes involving Ofwat.

The above sets out a summary of some of the key provisions of the MoU. A full version of the MoU is available here.

SuDS consultation

The implementation of legislation enacted in the Flood and Water Management Act 2010 on sustainable drainage systems has been long-awaited. The Act introduces a regime for the approval and adoption of SuDS for any development which has drainage implications.

Defra has published a consultation paper, “Delivering Sustainable Drainage Systems”, which sets out an alternative approach, namely delivery of SuDS through changes to the current planning regime. The proposal “builds on the existing planning system, which developers and local authorities are already using. Policy changes to the planning system can also be introduced relatively quickly ensuring that sustainable drainage systems flood risk benefits can be brought forward as soon as possible.”

The paper explains Defra’s proposal that SuDS policy will be achieved by changing planning guidance, to set out the expectations of local planning authorities and developers when dealing with a planning application in relation to provision of a sustainable drainage solution. These amendments will be based on the (currently draft) sustainable drainage systems National Standards and Specified Criteria, which contain a hierarchy of acceptable discharge options ranging from discharge into the ground (most preferred), discharge to a surface water body, discharge to a surface water sewer, highway drain or other drainage system, or discharge to a combined sewer (least preferred option).

Planning conditions could be imposed to compel the installation of a SuDS system, and to ensure the maintenance of that system for the lifetime of the development. Maintenance options referred to include management companies funded by householders through a service charge, sewerage companies funded through surface water charges, and property owners drained by a SuDS system.

The paper proposes that sewerage undertakers, the Environment Agency, highway authorities, the Canal and River Trust and internal drainage boards be statutory consultees where a discharge will affect them.

The proposed planning policy changes would apply to residential developments of 10 or more houses, or equivalent non-residential developments. Smaller developments would continue to be subject to existing planning policy.

The consultation, which relates only to England, closes on 24 October 2014; changes to planning policy are proposed to come into effect in Spring 2015.

Labour Party proposes water reforms

In a speech at the Labour Party conference, Maria Eagle, Shadow Secretary of State for Environment, Food and Rural Affairs, stated that if elected Labour will deliver a new deal with water companies, focused on affordability and fairness for all. “We will reform the industry, creating a national affordability scheme – compulsory for all water companies – to help people struggling to pay their bills wherever they live in the UK…..we’ll give the regulator new powers to modify the terms of water company licenses…..times have changed along with company structures and ownership and we are seeing increasingly exploitative behaviour by some. It’s not right under these circumstances that licenses can’t be reformed. Under a Labour government that will change

No mention however of maintaining investor confidence in order to facilitate access to finance at attractive rates nor of the need to continue the on-going capital investment programme, and no mention of the measures made available by water companies to assist customers struggling to pay their water bills.