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Ofwat issues guidance on its approach to the application of the Competition Act 1998 in the water and wastewater sector in England and Wales

  • United Kingdom
  • Competition, EU and Trade

20-04-2017

On 23rd March 2017 Ofwat issued guidance in respect of its powers under the Competition Act 1998 (“CA98”) and equivalent provisions under Articles 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”). The guidance comes following a period of consultation and aims to provide more clarity on how the competition law prohibitions may apply in the water and wastewater sector. The guidance serves as a helpful reminder of key competition law principles as well as explaining Ofwat’s procedural approach in terms of investigations and enforcement.

The publication of the guidance coincides with market opening in the non-household retail water and wastewater sector in England. The guidance also acknowledges that the water and wastewater sector is evolving from being largely monopolistic and regulated to being more contestable and open to competition. The guidance is therefore written with future developments in mind, noting that changes to the sector will bring new challenges to companies operating within it. Some of the areas covered by the guidance are set out below.

The prohibition against anti-competitive agreements

In light of the changes taking place in the water and wastewater sector, the guidance states that Ofwat expects to monitor closely whether any agreements or conduct may impede or interfere with the development of effectively competitive markets (e.g. by restricting the emergence of new competitors). The guidance refers expressly to industry collaboration in the context of the business retail market, such as within trade associations, and reminds companies of their responsibilities to conduct their interactions in a manner that is compliant with competition law.

Market definition

The guidance sets out in an accessible way, a broad overview of market definition. Ofwat discusses some of the considerations which are specific to the water and wastewater sector in defining the market. It has also included helpful indications as to what it considers to be important influences on geographic market definitions, with Ofwat’s focus being heavily influenced by statutory areas of appointment. In terms of relevant product market, the guidance predicts that definitions may change over time as more areas are opened up to competition, although the guidance does not go further in terms of specifying where the boundaries of product or service markets may lie.

Cost Benchmark Analysis

The guidance includes a section on predation, margin squeeze and refusal to supply which reflect the importance of abuse of dominance considerations in the water and sewerage sector. The guidance includes some helpful suggestions as to how the regulator may deal with these types of abusive conduct but emphasises that the approach taken is case specific, owing to the complex questions of and law and economics in this area.

Procedure

There is a useful section in the guidance which sets out in detail the procedural approach taken by Ofwat. It clarifies how the regulator interacts with the Competition and Markets Authority, sets out the stages of an investigation and outlines Ofwat’s principles in terms of prioritising its resources. Importantly, the guidance clearly states that Ofwat is required to consider whether the use of its competition powers would be more appropriate instead of taking enforcement action under its sector specific, regulatory powers.

Comment

The guidance is clear that Ofwat sees its competition law powers as a critical part of its toolkit for protecting the ‘level playing field’ and dynamics of contestable markets in the sector from anti-competitive conduct that distorts competition and harms consumers. To this end, whilst the guidance provides a useful backdrop on how Ofwat may approach competition law issues that arise in the future, the guidance expressly states that all companies operating in the sector are responsible for ensuring they are compliant with competition law. The guidance also reminds companies that even if a company is compliant with its regulatory obligations, it could nevertheless be in breach of competition law. Companies should therefore give careful consideration to their conduct from both a competition and regulatory standpoint and should seek legal advice in the event of any uncertainties.

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