Ofwat has determined that the discounts from existing retail charges offered by Anglian Water Services Limited to Aquavitae (UK) Limited in relation to four identified customers should have been greater than those Anglian had proposed.
This determination reflects a change of approach by Ofwat to the issue of access prices since the criticism of Ofwat’s original proposed approach by the Competition Appeals Tribunal in the Albion case on 26 May 2004.
Ofwat published its final determination on Friday 28 March 2008 in respect of an original dispute that arose when Aquavitae claimed that Anglian Water’s proposed wholesale access prices were too high. Notwithstanding Ofwat’s higher determined discounts, the level of discount arising from the application of Ofwat’s methodology remains low and Ofwat was disappointed with the results of its determination in the context of incentivising water competition.
The costs principle system is outlined in the Water Industry Act 1991 and in Ofwat’s Access Codes Guidance, and continues to factor in ARROW costs, those costs that nominally pass from water undertaker to licensee when they take over as supplier to a particular customer. ARROW costs are expenses that can be Avoided, Reduced, or are Recoverable in some Other Way.
The determination confirms Ofwat’s belief that the costs principle continues to be a hindrance to the development of competition in the water sector.
Keith Mason, Director of Regulatory Finance and Competition, said: “this case underlines that the Costs Principle framework, which Ofwat is required to use, is restrictive and leads to very low margins.”
While Ofwat’s determination is important for water undertakers, water suppliers and customers in setting out the basis on which Ofwat would expect access prices to be calculated under the access agreements to be offered to supply licencees under the WIA, it seems unlikely that there will be a rush of new activity in the sector on the basis of this decision.
Ofwat and DEFRA are both separately considering issues relating to competition in the water sector and are due to report on the same over the coming months.
