Water mergers
This page is for material relating to the regulation of mergers between water companies in England and Wales, including:
- the current statutory regime,
- the history of the law,
- previous water merger cases,
- Competition Commission guidance and
- other relevant links.
Current statutory regime
The current legal regime is provided by Section 70 and Schedule 6 of the Enterprise Act 2002, brought into force by The Water Mergers (Modification of Enactments) Regulations 2004.
This provides for:
- mandatory reference to the Competition Commission of any merger of water undertakers with an annual turnover of more than £10 million;
- a sole test of detriment for the Competition Commission to consider:
whether that merger may be expected to prejudice the ability of [Ofwat], in carrying out its functions by virtue of the Water Industry Act 1991, to make comparisons between different water enterprises.
- a duty to have regard to the effect of remedies on customer benefits from the mergers provided that they are reasonably foreseeable and cannot be gained without the merger, and that having regard to these benefits does not prevent a solution to the prejudice to Ofwat's ability to make comparisons or that
the benefits which may be expected to accrue are substantially more important than the prejudice concerned.
History of the law
The current legal regime changed the one established by the Competition and Service (Utilities) Act 1992 by deleting references to a broader concept of public interest. Before the Enterprise Act 2002 (and implementing measures), the Commission was asked to consider the public interest and to:
have regard to the desirability of giving effect to the principle that [Ofwat's] ability [...] to make comparisons between different water enterprises should not be prejudiced.
Prior to that, the original wording under the Water Act 1989, reenacted as Section 34 of the Water Industry Act 1991 (before amendments), was:
have regard to the desirability of giving effect to the principle that the number of water enterprises which are under independent control should not be reduced so as to prejudice [Ofwat's] ability to make comparisons between different such water enterprises.
The prohibition on considering customer benefits that cannot be achieved without the prejudice unless they are “substantially more important” than the prejudice has remained in place throughout these changes. There is no such restriction for general merger inquiries under e.g. Section 41(5) of the Enterprise Act 2002.
Previous water merger cases
- Mid Kent Water / South East Water 2007
http://www.competition-commission.org.u…ep_pub/reports/2007/525water.htm
Allowed with price cut to capture some of the merger efficiencies, which were deemed to be "substantially more important" than the the loss of a comparator.
- Vivendi Water and First Aqua (JVCo) (Southern Water) 2002
http://www.competition-commission.org.u…_pub/reports/2002/472vivendi.htm
Mild remedy suggested by Commission rejected by Secretary of State. Transaction abandoned.
- General Utilities PLC and The Mid Kent Water Company 1997
http://www.competition-commission.org.uk/rep_pub/reports/1996/gu.htm
Prohibited on comparator grounds.
- Severn Trent and Wessex bids for South West Water Plc 1996
http://www.competition-commission.org.u…/rep_pub/reports/1996/severn.htm
http://www.competition-commission.org.u…/rep_pub/reports/1996/wessex.htm
Both prohibited on comparator grounds.
- Lyonnaise des Eaux SA and Northumbrian Water Group Plc 1995
http://www.competition-commission.org.uk/rep_pub/reports/1995/lyon.htm
Allowed with price cut to capture merger efficiencies, deemed to remedy the loss of a comparator because "the merger would, with appropriate remedies, create a new and improved comparator capable of providing sufficient stimulus to the industry and to provide immediate benefits to the consumer".
- Southern Water plc and Mid-Sussex Water Company 1990
http://www.competition-commission.org.uk/rep_pub/reports/1990/275.htm
No prejudice to Ofwat's ability to make comparisons because Mid-Sussex was not independent.
- Mid Kent Water / General Utilities and SAUR 1990
[http://www.competition-commission.org.uk/rep_pub/reports/1990/276.htm
Prohibited on comparator grounds.
- General Utilities PLC and the creation of Three Valleys Water 1990
http://www.competition-commission.org.uk/rep_pub/reports/1990/270.htm
Allowed with price cut to capture merger efficiencies deemed to outweigh the loss of a comparator.
- A number of absorptions of small water companies in larger water and sewerage companies where the transaction fell below the threshold for a mandatory reference to the MMC/CC have been allowed by Ofwat, subject to price cuts.
Competition Commission guidance
The Competition Commission has produced guidelines on water mergers.
Other relevant links
In the electricity sector, Ofgem has a policy to adjust price limits by a £32 million merger tax when electricity distribution companies merge. This applies in addition to the pass-through of deemed efficiency savings with a five-year lag. Franck Latrémolière led the consultancy team commissioned by electricity distribution companies (through the Electricity Association) to produce a critical review of Ofgem's draft policy. The report (35 pages, PDF) is available from the Europe Economics website.
The Commission consulted on a draft of its water merger guidance in the autumn of 2004 (see the draft for consultation and the responses on the CC website).
An article (4 pages, PDF) which was published by Reckon during the consultation period argued that the CC's draft risked focusing too much on the value of comparators to Ofwat, and that there are several other effects which ought to be taken into account, in particular:
- the potential lessening of competition in markets for corporate control which might result from a merger;
- the risk that an unduly restrictive approach to merger control could itself impede competition in markets for corporate control; and
- the value of comparative information to the industry (and ultimately to consumers), over and above its value to Ofwat.
This page is managed by Reckon LLP. Users are encouraged to contribute relevant views and links. Use the "Edit this page" or "Add a comment" button above to edit the text or to add comments and notes. Advice on making contributions (including trackback) is in the Guidelines.
Last changed by Franck at 5:19 PM on Thursday 7 February 2008.