Offer to supply water without charge for offsite works

20 January 2005

Richard Eccles

An allegation of breach of the Chapter II prohibition of the Competition Act 1998 was held by the Office of Water Regulation (“Ofwat”) to be unfounded because Southern Water Services Limited (“Southern Water”) was, ultimately, complying with statutory requirements in offering to undertake off-site works for free, though it originally proposed charges.

Mid Kent Water plc (“Mid Kent”) complained against Southern Water about the prices and terms offered by Southern Water to a developer, Rosefarm Estates plc (“Rosefarm”), for provision of water, wastewater and infrastructure services to a development site known as EuroKent. The basis for the complaint was a series of letters sent by Southern Water to Rosefarm in which they firstly stated on 16 September 1998 that the cost of supplying water to the development site would be between £100,000 and £500,000 due to upgrades to its off-site network, and then on 25 October 2002 stated that they could provide all off-site infrastructure work free of charge. Mid Kent had estimated a charge of £360,000 for the provision of infrastructure works connecting EuroKent to an off-site network.

Mid Kent complained to Ofwat that Southern Water’s proposed price did not reflect the costs reasonably incurred, and was exclusionary in an effort to prevent Mid Kent from obtaining the business. Mid Kent also maintained that Southern Water’s actions were unlawful discrimination in favour of Rosefarm as against other developers.

Decision

The Director General of Water Services assessed whether Southern Water’s conduct was caught by the Chapter II Prohibition in section 18(1) Competition Act 1998. The Director provisionally accepted Mid Kent’s submissions that Southern Water was a dominant undertaking in the relevant product and service and geographic markets without finding it necessary to come to any conclusion on these points. The Director’s findings were that, even on the assumption that Southern Water holds a dominant position, it had not abused that position.

Looking at the background to the earlier letter of 16 September 1998, it was found that the basis of Southern Water’s originally proposed charges of either £500,000 or £100,000 was an error in calculation resulting in a substantial overestimation of the input required by EuroKent. The £500,000 figure was based on the provision of a dedicated water main to EuroKent due to the high input supposedly required. The figure of £100,000 was for upgrading the existing network to take account of a lower, but still overestimated input. The changes in the letter dated 25 October 2002 reflects Southern Water’s realisation of their calculation errors and their revision of required input which removed need for either a dedicated main or specific upgrades just for EuroKent.

The Director furthermore held that under sections 45-51 of the Water Industry Act 1991, Southern Water is under a duty to connect a service pipe from its mains to any premises where the purpose of connection is to receive water for domestic purposes, which was the case for the bulk of supply required by Rosewater. The only costs Southern Water could recover are expenses reasonably incurred in making the connection, and not expenses in upgrading the network. The charge of £100,000 would, therefore, have been illegal. Their offer to provide sufficient capacity without charge for off-site works could not, therefore, amount to abuse.

Comment

There was found to be no abuse of dominance in this case, but if Southern Water had persisted with their demand for payment for upgrades to their network, this would have amounted to an unacceptable access demand under Chapter II of the Competition Act 1998. The OFT decided that it was not permitted to make a charge for the cost of improving the network as opposed to maintaining and operating it.

Source found here. Decision of the Director General of Water Services, CA98/02/2004, Southern Water Services Limited/ Provision of new infrastructure in East Kent

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