Water industry regulator Ofwat has expressed concern over the implications of the acquisition of Cambridge Water by South Staffordshire Water, currently the subject of an inquiry by the Competition Commission.

Ofwat has raised its concerns over the issue in the submission of its initial response to the Commission’s investigation into the merger.

In general, the water industry regulator views any merger as prejudicial to its ability to make comparisons. Since privatisation 23 years ago, comparative competition has underpinned the way in which Ofwat has regulated the water and sewerage sectors in the absence of market competition to drive benefits for customers.

Ofwat acknowledges that the degree of prejudice will not always be the same, depending upon the nature of the each individual case and views the key question as the extent of prejudice that occurs as a result of the merger and whether that merger can be remedied.

In Ofwat’s view, its regulatory approach and the reliance it has  placed on comparators since privatisation has worked well – and  sees any reduction to the number of comparators as affecting its ability to make comparisons and deliver value for customers.

The regulator also believes, that the degree of prejudice will also depend on the extent to which its  future approaches might rely on the need for independent comparators – a key issue in the light of upcoming changes to the current regulatory and competition regime.

The response says that under its previous regulatory approaches, Ofwat would  consider that the merger would prejudice its ability to make comparisons. However, given the relative size of South Staffordshire Water and Cambridge Water, this would be small and therefore there likely to be only a small detriment to customers.

The regulator now wants South Staffordshire Water to give a number of undertakings, which include ensuring that customers gain financial benefits from the merger.

Ofwat said:

“While we do not consider that this merger should be prevented, we do think a remedy is required that passes the benefits that arise from the merger back to customers. We consider that customers should see a financial benefit from the merger and no customers should see a detriment to the service they currently receive. In the short term we would expect the customers in both regions to receive the service of the best performing of the two companies in all aspects of service.”

“In our view, the most proportionate and cost-effective approach in this case would be for the company to offer an undertaking that delivers such benefits to customers and/or delivers proposals that recognise the future challenges to the sector that may advance wider benefits to customers in time.”

Ofwat’s initial submission to the Competition Commission points out that at present, neither South Staffordshire nor its owners have provided formal details about the scale or type of benefits it considers the merger might achieve or set out for its present and future customers the benefits it considers this merger will provide for them.

Click here to read Ofwat’s response in full.