Summary of Director's Introduction

• The workshop was an opportunity to listen to stakeholders' views.
• Common carriage will increase the scope for competition in the water industry. We want it to succeed.
• It must not be achieved at the expense of safety and drinking water quality, so we need to identify the best approach to get the balance right.
• Ofwat's role is to facilitate that.

A number of water companies are carrying out a review of the existing codes on behalf of Water UK. They are focusing on the major issues included in the codes produced to date, and on identifying the key similarities and differences. This will help them to assess the scope for a national code. The study will conclude with a document to be published on Water UK's web site in November.

The current legal framework for competition in the water industry is not perfect, but will change when DEFRA introduce the new Water Bill. We need to develop our thinking so that the new legislation can provide the right framework for common carriage. We are keen to consult widely to make sure that the consultation paper provides the right guidance to the industry, covers all the issues and provides the balanced wording that will enable us to move on to the next stage.

Ofwat will consider the responses from the workshop detailed below and written responses to the consultation. The closing date for written responses is 5 December 2001. We will publish revised guidance in January 2002.

General Issues
There were no fundamental disagreements with Part 1 of the draft guidance.

Essential Facility

• Stakeholders thought that underground assets would almost always be essential facilities. The position might not be so clear for treatment works. Any guidance by Ofwat would be welcome.
• Some thought that the guidance should contain more detail on the information that can reasonably be requested of the entrant about whether the facility is essential.

Incumbents welcome the approach to the licensing of new entrants. The proposals are workable, but legislation would not be ideal. The attendees thought that the process of obtaining the incumbent's consent to an inset appointment should be straightforward for entrants; and some suggested that Ofwat guidance should cover what information about the process should be included in access codes. Customer representatives were concerned about customers' rights for redress should the entrants be responsible for poor quality water.

Arbitration

New entrants thought the guidance should recognise that one party to a common carriage agreement might be unwilling to make an agreement. There are difficulties in agreeing what constitutes an unreasonable delay in making an agreement, but Ofwat's decisions on complaints should lead to a framework of best practice.

Terms of Contract

The main questions debated by the attendees were:

• If a customer is dissatisfied with its new supplier should (or could) they revert to the incumbent automatically?
• What would the arrangements be if the new entrant has problems? Some thought that the guidance is too prescriptive and that the important point is that the access agreement should assure appropriate arrangements.

There was general agreement that customers should contact the new entrant for routine enquiries. However, separate arrangements should be made for emergencies.

Customer Service

The presence of new entrants should not have an adverse effect on service quality. However, some customers will see this as adverse and complaints can be expected if the water source changes.

Transfer/Switching

Should companies have common systems to facilitate information transfer? The consensus was that the industry should not incur costs unnecessarily. There was some discussion about the possible roles for Ofwat in this.

Customer bodies expressed concern that new entrants would target only the highest profit/value customers.

National Code and Application Process
National Code

There was general agreement that a national code of best practice will be useful to make common carriage agreements more consistent nationally. Potential entrants felt that the code should be as clear and detailed as possible to minimise unresolved issues, and therefore disputes arising during the application process. However, the code will by necessity cover only the issues where industry-wide agreement can be negotiated, the detail being left to companies' individual access codes. The code should ensure that all suppliers have equal status, and should define the legal responsibilities of the undertakers.

Water UK is studying all the undertakers' codes for consensus, and will consult other stakeholders when it publishes its draft findings.

Stakeholders generally felt that the national code should be advisory until an arbitrator makes decisions about applicants' challenges.

Application Process: Stages

The attendees largely agreed with the proposed contents of each stage. Network operators thought it would be difficult and resource-intensive to provide a calculated/estimated price at the initial application stage. However, potential entrants want as much information as possible early on to assess the viability of an agreement. An indicative price might be acceptable at this stage, and this could either be a standard published price or an individual price.

A potential entrant suggested that feasibility studies should apply only to new supplies rather than existing ones. However, it would also be reasonable to look at feasibility if there is a change of use.

One incumbent wanted to test whether the applicant was a fit and proper supplier. Consumer representatives expressed concern that the incumbent should do this when Ofwat already assesses fitness to supply in awarding the licence. Ofwat's provisional view is that the assessments by the regulator and the incumbent will use different criteria, though it will achieve the same objective and the incumbent is justified in seeking assurance during the application process that the new entrant can operate in a stable way.

Application Process: Information Requirements

Potential entrants thought the incumbent would be able to identify the potential customer(s) from the information they give and take steps to retain them. The delegates agreed that confidentiality agreements are an important protection mechanism, and should include financial penalties for breach of confidentiality. New entrants favoured a single confidentiality agreement industry-wide.

Information requirements for supply to domestic customers were also discussed, and we would welcome written views on the practicalities.

• Is it feasible to approach the incumbent every time a household switches?
• Would it only be feasible to supply groups of households, e.g. a new development?
• There would be more switching in the domestic market. Does this raise any additional issues?

Delegates generally agreed with the timescales suggested in the guidance: four weeks for the initial application and eight weeks for the formal application as long as this represents an average time. The Attendees thought that:

• The incumbent should justify any delays.
• The guidance should include a timescale for acknowledging applications.
• The applicant should give notice of when it intends to submit a formal application.
• Ofwat should compare the suggested timescales with those in NGC and Transco's network access codes.
• Ofwat should act as arbitrator in disputes over time to process applications.

Potential entrants were concerned that the method of calculating fees should be transparent and applicants should only pay for services directly necessary to the application. Potential entrants felt that the first applicants should not pay for development of new systems to deal with future common carriage applications. Some potential entrants thought that subcontracting parts of the application process might increase the cost, others thought it would make costs more transparent.

Pricing Issues

Access Price Components

The guidance identifies the correct components. Incumbents tended to favour indicative prices expressed as ranges, whereas potential entrants favoured the certainty offered by standard prices. Standard prices could be calculated where companies used regional average accounting costs. Some attendees thought that publishing all incumbents' prices on Ofwat's website would involve an unwieldy amount of information. However, publication of all the prices at once removes potential 'first mover' problems.

Use of System

Potential entrants and customer representatives thought that Ofwat should advocate one pricing method: average accounting costs, ECPR or LRMC. However, others thought that initial flexibility is useful, and case law would set the precedent for price calculation method. Average accounting costs could be a useful benchmark, against which incumbents could be asked to justify using other approaches.

Should access prices be consistent with the way incumbents charge themselves? Some thought this principle equated with the requirement for consistency with final tariffs, but others disagreed.

There was some support for Ofwat's suggestion that the rate of return element of cost should be allocated consistently with the implicit allocation made in customers' bills. Others thought that it should be allocated to assist the objective of ensuring that entry is efficient.

Connection and Network Extension/Reinforcement

Some delegates thought that a short connection time is more important than providing published charges. Connection charges should be consistent with requisition charges, with no free-rider effects or overpayment for connection/network extension.

Indicative charges for network extension would fall over a very wide range depending on the circumstances.

Leakage, and Top-up Supplies

There might be a different basis for calculation of leakage allowances for each part of the network, e.g. bulk and local distribution. There was debate whether leakage calculation should be based on the economic level of leakage or the Ofwat leakage target for each year.

The basis of charging for ongoing top-up supply should be consistent with tariffs to the end customer, discounting the retailing charge.

Standby Supply

The guidance does not suggest that incumbents publish their standby charges, though some thought that indicative prices would be useful. Some delegates thought that the incumbent should be able to choose whether or not to offer standby supply (as stated in the guidance). The guidance should note that entrants might also be able to buy standby supplies from a third party.

Operational Issues

The attendees felt that the guidance should explain the benefits customers could gain from common carriage. The format should include case studies and problems encountered in practice, for instance a comparison with inset appointments.

Water Quality and Sampling

Should the new entrant meet the incumbent's standards exactly or make sure that the water entering the system is compatible? The new entrant should agree acceptable tolerance levels with the incumbent. The incumbent should prove that these standards are at the same level as its own. Only one potential entrant thought that a requirement to match standards is unreasonable and the new entrant should only have to meet the minimum quality standards.

The guidance should clarify who is responsible for sampling at the tap, and for enforcing the Water Quality (Water Fittings) Regulations.

Network Management and Control

The delegates agreed that the incumbent should maintain responsibility for its network. The guidance should give full weight to this fundamental point, mentioning the need for pressure and flow control.

The new entrant and incumbent should exchange information on:

• The existing network arrangements
• Network operation and the location of difficult areas of the network
• High and low cost areas

Drought and Resource Planning

The potential entrant should give the incumbent information about the potential yield of its source. However, the incumbent should not request too much information or use delaying tactics, particularly if the source is small and the information is unlikely to have much effect on the company's overall resource plan.

The guidance should state who would be responsible for common carriage where an inset appointment is gained in the customer's area. The guidance should also note that drought and resource planning issues are linked to issues of supplier of last resort, new versus existing demand, the Environment Agency's Catchment Abstraction Management Strategies and the EC's Water Framework Directive.

Maintenance and Serviceability of Assets

Work on the network might cut off the supply either at the source or at the customer's premises. How should the incumbent compensate the entrant or its customers for failure to supply? The incumbent should try to minimise the impact of planned maintenance by negotiating supply interruptions for times when customers (especially large users) have reduced demand. Access codes should indicate the types of maintenance, and the severity and compensation associated with each type.

Metering and Flow Balancing

The text of paragraph one should be reworded, as some delegates felt that it may not be reasonable to expect entrants' outputs to be measured for small users or households.

The incumbent may receive benefits or disbenefits at any given time (from an entrant's over- or under-supply) depending on whether the system is in balance. Will the value of the water change depending on the level of imbalance? The attendees thought there should be a symmetrical compensation scheme and agreed timetables for rebalancing depending on which parts of the network the entrant uses.

Emergency Procedures

Delegates felt that entrants should take part in, and be familiar with, the incumbent's emergency procedures (including training) but the incumbent should retain overall responsibility. Entrants should be able to demonstrate their own effective procedures before being allowed access. National security bodies should also be included as a liaison body.

Secondary Connections

Secondary connection would probably be rare, and stakeholders thought it should only be allowed if the incumbent is confident that it can maintain network control. The undertaker should be involved in any applications for secondary connection.

General Comments

• Should Ofwat provide specific guidance for common carriage in sewerage services? Ofwat welcomes responses on this subject, and when the industry might need specific guidance.
• The measure of fitness of a company to supply should include a measure of financial ability to fund emergencies or problems in the interim period before a supplier of last resort can take over.