A merger occurs when enterprises will cease, or have ceased, to be distinct because they come under common ownership or common control.
As each of the water companies in England and Wales is effectively a regional monopoly, we use comparative information from companies to:
- ensure that customers are paying a fair price for their water
- identify good performance
- set incentives for companies to improve.
If two water companies merge with each other, this might make it harder for us (‘prejudice our ability’) to carry out these functions. So, a special merger regime applies within the water sector in England and Wales.
The special merger regime applies when two or more water enterprises (each with a turnover that exceeds £10 million) merge with each other. The special merger regime does not apply to water supply licensees (or between a water company and a water supply licensee), which are covered by the general merger regime. Where a water company merges with another business outside of the industry it is known as a change in ownership and these mergers are not subject to the special merger regime.
The special merger regime was amended by the Water Act 2014. This required us to publish a statement of methods that we will apply in assessing future merger references. The changes brought about by the Water Act 2014 require us to give an opinion to the Competition and Markets Authority (CMA) of the merger impacts in phase 1 of a merger investigation.
The Water Act 2014 amendments also allow the CMA to clear a merger in phase 1 of its investigation where:
- the merger is not likely to prejudice our ability to make comparisons between water enterprises, or
- the merger is likely to prejudice that ability, but the prejudice in question is outweighed by relevant customer benefits relating to the merger, or
- there are appropriate ‘undertakings in lieu’ from the merger parties which remedy, mitigate or prevent the prejudicial effect on our ability to make comparisons between water enterprises resulting from the merger.
- Ofwat’s response to the CMA mergers remedy review, October 2017
- Ofwat’s approach to mergers and statement of methods
- Valuing the Impact of Mergers in the Water and Sewerage Sectors and Identifying Undertakings in Lieu Europe Economics (2015)
- Water and sewerage mergers: Guidance on the CMA’s procedure and assessment (CMA49) CMA (2015)
- Statement of intent – An agreement on the working arrangements between the CMA and Ofwat for the special water merger regime Ofwat and CMA (2015)
- Assessing the impact of a merger – spreadsheets developed for the Pennon / Bournemouth merger December 2015