"No particular quality of water will be guaranteed but the source of supply will be River Dee water settled at Ashgrove Treatment Works with chemically assisted coagulation determined by raw water conditions."
"The price for non-potable water is similar to prices charged by Dwr Cymru for other bulk supplies."
"As I explained in our meeting on the10 July 2003 we are very unhappy with the current situation in the water supply industry and the lack of any real competition in the established regions. Having raised this matter with OFWAT they suggested that your company offers a realistic alternative to the large established operators. Will you therefore please confirm that you are able to bid for the supply of water to three of our larger plants situated in Wales. Namely, Llanwern, Trostre and Shotton."
"I wrote to you last year underlining our support for Albion and the reasons why the partnership of UPM Kymmene and Albion Water is so important to our UK operations. I wish to reiterate that support. We are very conscious that Albion is still the only active competitor in the market and that Ofwat has consistently failed to address issues relating to the price and non-price terms of water. This gives us some serious concerns about potential conflicts of interest faced by Ofwat. An independent Albion Water under Jerry Bryan will continue to fight vigorously for a better, more competitive water industry. That will undoubtedly make Ofwat's life more difficult… I have seen the business plan for Albion Water created by Jerry Bryan and his responses to the 19 questions from Ofwat. I am very conscious that that plan is based, overwhelmingly, on the supply of regulated water services to the Shotton Paper site. I am also conscious that it assumes a continuation of the current level of support from UPM Kymmene that allows Albion Water to cover its costs whilst it fights for fairer terms from Dwr Cymru. I wish to make it clear that UPM Kymmene is fully supportive of that plan."
"I wish to state that I believe this level of support to be unprecedented in the water industry. UPM has been forced to accept that it is necessary as the only method of ensuring the continuation of an independent Albion Water, which is committed to support UPM's operations in the UK and is determined to fight to deliver the benefits of greater competition."
"[the regulatory system] lacks key features of market competition, most notably the threat of market entry and customer choice. The incentives to increase efficiency, improve the quality of service, introduce innovative practices and drive down prices may, therefore, be somewhat weaker than those provided by direct market competition." … "
"It is necessary for the Commission to determine what the direct costs for the relevant product are. Appropriate cost allocation is therefore fundamental to determining whether a price is excessive. For example, where a company is engaged in a number of activities, it will be necessary to allocate relevant costs to the various activities, together with an appropriate contribution towards common costs. It may also be appropriate for the Commission to determine the proper cost allocation methodology where this is a subject of dispute."
"All mains or conveyors associated with the transfer of raw water either between sources or from source to treatment. Exclude mains carrying water of potable quality on entry to the main."
"Potable water mains The length of all potable water mains. Include all elements of trunk and distribution assets and system ancillaries. Include facilities intended for standby and emergency supplies." "
"Water supply and sanitation services comprise the production of distinct multiple outputs, which could potentially be supplied by distinct markets. For example, the water supply process comprises: abstraction from underground sources and surface sources such as aquifers and rivers; storage (natural or artificial) in order to be able to maintain supplies during times of shortage (i.e. drought situations); treatment to remove natural or other pollutants; bulk transport before and/or after treatment; local storage (to cover diurnal variation in demand); and distribution via a network of mains to consumers. There is also the customer interface retailing, which deals with connections, billing and payment systems."
"Operation, maintenance and power costs of pumps, buildings and equipment used for the transfer of water from treatment to service reservoirs or for boosting to/within the distribution system."
"14. Please provide a breakdown of the actual costs incurred by Dwr Cymru in providing the services requested by Albion Water. How do these actual costs compare to costs calculated on a whole company average basis?"
"However, we accept the Director's submissions that any "bottom-up costs", whether for the Ashgrove system or for supplies to non-potable users generally, would have to be reliable and verifiable. At present, document D21, on its face, would appear to lend some support to the Director's case. However to determine whether Albion's challenge to those figures was correct would seem to us to require further evidence, including possible accounting evidence. The same would be true of any "bottom up" calculation for non-potable users generally. In our view we now need to hear the parties on whether the Tribunal should seek any further evidence on these points, or whether for practical purposes it is sufficient to investigate further the Director's calculation of average non-potable bulk distribution costs, along the lines already indicated."
"to consider whether it is necessary or practicable as a cross-check to consider the stand-alone costs of the supply of non-potable water on a bottom-up basis, either in relation to non-potable users generally or the Ashgrove system in particular."
"The costs of an activity or line of business that would be incurred if the company undertook that activity only. All common costs are attributed to the activity in question."
"THE PRESIDENT: To give you a "for instance", our understanding, which may be completely imperfect, is that when doing the work necessary for the regulatory accounting guidelines it is necessary to take out some of the non-potable costs, for example. So, presumably one might suppose that there are already in existence some documents that illustrate how that is done which begin to throw some light on some of the background cost issues, for example. So, as I say, we are not particularly enthusiastic about embarking on new worked up material now rather than seeing what there is in terms of historical data already existing, both from a point of view of saving costs, and from a point of view getting, as far as we can, a feel for what the situation was at the time. MR ROBERTSON: Yes, that was our understanding that we are carrying on this exercise looking at it historically."
"It is not a charging basis" (Day 3, p.32). Similarly, at Day 3, pp. 32 to 33, Mr Jones accepted, in relation to "stand-alone" costs: "we would not advocate that as a method for us to set our tariffs for a regulated water business, that is correct"
"We accept that within the sector of largely household customers it would be extremely difficult to determine different costs of supply for differently situated customers, and that for social and practical reasons the principle that tariff customers should pay the same charges irrespective of their precise location is well established and long standing. It has long been accepted, for example, that the rural customer should pay the same as his urban counterpart, or vice-versa, even if different costs of supply could be identified."
"to the extent that undertakers' tariffs reflect a geographical averaging of costs, access… charges should generally be set to avoid the unwinding of the associated cross-subsidies."
"An exception to this is when infrastructure is exclusive to the customer(s) being charged and we count this situation as a special circumstance."
"We do not believe that Dwr Cymru was unreasonable to assume that the cost of transporting non-potable water in bulk was the same as the cost of transporting potable water."
"[ECPR] can be summarised by a simple equation in which the access price is given by the incumbent's final product price less the costs it would avoid by providing access. For example, a new entrant wishing to access an incumbent's arterial and local distribution network would be charged the difference between the incumbent's final product price and the avoidable costs of resources, treatment and customer service."
"Access prices calculated under an ECPR approach may be perceived as being more favourable to undertakers than prices derived from other approaches, including some alternative retail-minus approaches. This is because ECPR allows the undertaker to produce prices that fully compensate it for the net losses that it would incur when providing a common carriage or wholesale distribution service, as compared with continuing to supply the final customer itself…"
"In our view, a main and normal benefit of competition is to provide an incentive to relate the structure of prices to the structure of costs, and hence to reduce prices to users as a whole"
"Allocative efficiency is obtained when you have prices close to cost – the actual cost of supply". "
"is ECPR appropriate when the main goal is to avoid abuses by dominant undertakers?"
"-[ECPR] required too tough a test for entry- the entrant's full costs had to be lower than the incumbent's incremental costs (because use of the rule allows incumbents to recover their full costs but entrants will not necessarily do so) -using BT's tariff as a basis for setting the interconnection charge gave BT an advantage because it could take the initiative in setting tariffs -because charges are based on the incumbent's costs, the entrant can end up contributing to the incumbent's inefficiency." … "
"[Q] I had always understood, and maybe we have moved away from the original argumentation of Professor Baumol, but his point about price regulation was that you need some sort of regulatory framework to ensure that "monopoly rents" – whatever one means by that exactly – were taken out of the system. That was his argumentation. [A] Again it is the point that the ECPR or the margin squeeze test, or any related rule like that, does not have any mechanism to control retail prices. We want to get both objectives to happen, which is prices close to cost, which is what I called "allocative efficiency", and if you also want productive efficiency then you need two instruments, one is ECPR and one is retail price regulation"
"Q …But, if the price includes, for example, costs inefficiencies on an upstream market, they would be passed through, would they not? A. Remember, it is the price. That is all. I don't know how the price is determined. Q Exactly. Also, fixed costs inefficiencies on the downstream market. They would be passed through as well, would they not? A. Fixed cost inefficiencies? Q Yes. Supposing the incumbent was in fact inefficient on the downstream market, ECPR would say, "
"The price for non-potable water is similar to prices charged by Dwr Cymru for other bulk supplies."
"On12 December 1996 we provisionally decided that a price of 26p/m³ would be given to the parties as indicative of the price we would determine formally, if required to do so. In calculating this indicative figure, we had regard to the prices charged by Dwr Cymru to an associate, Hyder Industrial, for non-potable water (an equivalent of 28.39p/m³), the prices charged by Dwr Cymru to six non-potable large users including Shotton itself between approximately 26p/m³ and 29p/m³, and Dwr Cymru's estimated LRMC (approximately 26p/m³ )."
"Common carriage is one route through which competition can develop."
"If, however, the 'minus' is calculated on the cost saved by the incumbent in supplying only one less customer, it is likely that there will be very little "minus" to subtract from the retail price, leaving little or no margin for the new entrant. Thus, when the first or second customer switches from the incumbent to the new entrant, the incumbent may "save" very little cost. On the other hand, if the new entrant were supplying a significant proportion of the incumbent's former customers, the avoided costs of the incumbent would presumably be greater, leaving a greater "minus" to be subtracted. But at this point a kind of chicken-and-egg problem presents itself, because if there is no margin with which to supply the first one or two customers, it is difficult for the new entrant to enter the market with a small initial customer base, and then build up from there."
"Extending competition is expected to deliver the following benefits: Choice – at present, customers cannot choose to remove their custom from an unsatisfactory supplier, as there is only one undertaker in their area. New entrants should bring wider choices of tariff and services to attract specific customers. Keener prices – from new entrants and through competitive pressure on incumbents. Services – there may be scope for niche marketing in other areas in which incumbents have not previously concentrated. Some new entrants may offer to provide multi-utility supply packages and other services. Competition provides an incentive to provide a service which matches customers' requirements, in order to obtain and keep customers. Innovation – new entrants may offer new ways of doing things, bringing ideas from other industries, which may bring service and environmental benefits. For example, there should be incentives to find ways to develop previously unusable/uneconomic water sources, and to use existing resources more efficiently. Efficiencies – competitive pressures on undertakers and the incentives on entrants should encourage greater efficiencies, which drive keener prices and better overall value for money."
"Vigorous competition between firms is the lifeblood of strong and effective markets. Competition helps consumers get a good deal. It encourages firms to innovate by reducing slack, putting downward pressure on costs and providing incentives for the efficient organisation of production."
"THE PRESIDENT: Could I just, on the last topic, Mr Hope - you have been very patient, so thank you very much for your help - go back to this basic point? Is it not the case that the new entrant is effectively bearing two sets of overheads, his own and the incumbent's? In those circumstances would a new entrant have to be not merely as efficient as the incumbent but super-efficient in order to make any realistic stab at entering in an effective way? Would that be a fair way of putting it? A. I think it would. It is perfectly possible that you could have a side-by-side comparison comparing the costs of supplying a particular customer, say a particular large user customer; you could see a potential entrant being able to make that supply at lower cost than the incumbent. But if the outcome is that the total cost of supplying all customers, not just the customer who is subject to competition, but if the cost of supplying all customers would be higher in the event of entry then that is something that the efficient component pricing rule and, we think, the Cost Principle would prevent."
"Stranded assets have not proved to be a significant barrier to competition in other industries. Ofwat expects that they should not be a barrier in the water industry either."
"Ofwat believes that there are no significant cross-subsidies between eligible and ineligible customers."
"unlike household customers cross-subsidies have been largely unwound"
"117. Where the operator is dominant in the product or services market, a price squeeze could constitute an abuse. A price squeeze could be demonstrated by showing that the dominant company's own downstream operations could not trade profitably on the basis of the upstream price charged to its competitors by the upstream operating arm of the dominant company. A loss making downstream arm could be hidden if the dominant operator has allocated costs to its access operations which should properly be allocated to the downstream operations, or has otherwise improperly determined the transfer prices within the organisation… 118. In appropriate circumstances, a price squeeze could also be demonstrated by showing that the margin between the price charged to competitors on the downstream market (including the dominant company's own downstream operations, if any) for access and the price which the network operator charges in the downstream market is insufficient to allow a reasonably efficient service provider in the downstream market to obtain a normal profit (unless the dominant company can show that its downstream operation is exceptionally efficient)."
"The statement in MD 163 that an undertaker should charge entrants as it would charge itself summarises our thinking on discrimination as it applied to common carriage. In theory, this would mean charging a third party in the same way that the undertaker would charge itself if it had separate distribution and production (resource and treatment) businesses. Because undertakers do not have separate businesses in this way, in practice it meant that undertakers should not set access prices for charging their competitors that were inconsistent with their final retail tariffs, without objective justification"
"6.1 A margin squeeze may occur in an industry where a vertically integrated undertaking is dominant in the supply of an important input for a downstream market in which it also operates. The vertically integrated undertaking could then harm competition by setting such a low margin between its input price (e.g. wholesale price) and the price it sets in the downstream market (e.g. retail price) that an efficient downstream competitor is forced to exit the market or is unable to compete effectively. 6.2 To test for margin squeeze, it is usual to determine whether an efficient downstream competitor would earn (at least) a normal profit when paying input prices set by the vertically integrated undertaking. 6.3 In practice, in order to determine whether an efficient downstream competitor would make a normal profit, the test is typically applied to the downstream arm of the vertically integrated undertaking. Therefore, the test asks whether, given its revenues at the time of the alleged margin squeeze, the integrated undertaking's downstream business would make (at least) a normal profit if it paid the same input price that it charged its competitors. 6.4 A test for margin squeeze might require assessing the accounts of a 'notional business' as in practice the integrated undertaking's downstream business may not have separate accounts from its upstream business and would not usually treat its input prices as a cost in the same way that an independent downstream competitor would. Therefore, the details of how costs and revenues are allocated and/or calculated will depend on the circumstances of each case. For example, a margin squeeze investigation may raise issues such as the measurement and allocation of costs and revenues (both between products and between upstream and downstream operations), the appropriate rate of return, and the appropriate time period over which to measure profitability. 6.5 If there is evidence that a vertically integrated dominant undertaking has applied a margin squeeze and that it harmed (or was likely to harm) competition, this is likely to constitute an abuse of that dominant position."
"106. The Commission's practice in previous decisions has been to hold that there is an abuse of a dominant position where the wholesale prices that an integrated dominant undertaking charges for services provided to its competitors on an upstream market and the prices it itself charges end-users on a downstream market are in a proportion such that competition on the wholesale or retail market is restricted. 107. In the case of the local network access at issue here, there is an abusive margin squeeze if the difference between the retail prices charged by a dominant undertaking and the wholesale prices it charges its competitors for comparable services is negative, or insufficient to cover the product-specific costs to the dominant operator of providing its own retail services on the downstream market. 108. In such a situation, anticompetitive pressure is exerted on competitors' trading margins, which are non-existent or too narrow to enable them to compete with the established operator on retail access markets. An insufficient spread between a vertically integrated dominant operator's wholesale and retail charges constitutes anticompetitive conduct especially where other providers are excluded from competition on the downstream market even if they are at least as efficient as the established operator."
"126. … The margin squeeze test seeks to compare charges for two particular services at different commercial levels… The method used to determine whether there is a margin squeeze in this case is based on the principle that the established operator's tariff structure must enable competitors to compete with that operator effectively, and at least to replicate the established operator's customer pattern. It must not be assumed that the competitors' customer structure and range of services will necessarily be more profitable than those of the incumbent. The primary consideration here is the effect on market entry by competitors …"
"140. Where wholesale and retail services are comparable, as described above, a margin squeeze occurs if the spread between DT's retail and wholesale prices is either negative or at least insufficient to cover DT's own downstream costs. This would mean that DT would have been unable to offer its own retail services without incurring a loss if, during the period under investigation, i.e. since 1998, it had had to pay the wholesale access price as an internal transfer price for its own retail operations. 141. As a consequence the profit margins of competitors are squeezed, even if they are just as efficient as DT. This means that they cannot offer retail access services at a competitive price unless they find additional efficiency gains. A margin squeeze imposes on competitors additional efficiency constraints which the incumbent does not have to support in providing its own retail services."
"By proving the existence of a margin squeeze, the Commission has therefore done enough to establish the existence of an abuse of a dominant market position."
"The tariff will include the following:- Customers, using over 50Ml/annum, will be given the following benefits:- detailed water management data advice on efficient use of water and benefits of seasonal use leakage monitoring Additional benefits for users over 250Ml/annum:- water efficiency audits"
"(i) advice on water and waste water conservation … (k) development of innovative tariff structures and supply options that enable customers to reduce their costs of using water."
"(q) water conservation advice would be customer-specific … (s) Account managers are often assigned to large customers."
" • Water conservation advice: although undertakers have a statutory duty to promote the efficient use of water to customers this activity will also become the responsibility of the licensee for its customers."
"241. Increasing competition may offer potential for improving eligible customers' water efficiency. Studies have found that industrial sites can typically reduce their water use by up to 50% by using relatively simple and inexpensive measures. However, it is evident that a lot of these opportunities are not currently being taken up. As well as improving their environmental performance, water efficiency activity may benefit customers through reduced water bills, and can provide savings on associated costs such as pumping, heating and effluent discharge. 242. Competition could provide a spur for undertakers and new entrants to offer customers greater assistance in reducing their water consumption and thus saving on their water bills. A number of companies already offer whole site utilities management and water demand management services, whereby for a fee (or on a shared savings basis) they manage and reduce the water consumption of large users. These types of services might be expected to increase as licensees seek to enter the industry and offer customers new and improved customer service packages, and as undertakers seek to retain their existing customers."
"Because undertakers do not have separate businesses in this way, in practice [MD163] meant that undertakers should not set access prices for charging their competitors that were inconsistent with their final retail tariffs, without objective justification."
"The competitor acts as a middleman, driving down the costs of supply. This has brought benefits with companies responding by introducing large user tariffs"
"66A Wholesale water supply by primary water undertaker (1) This section applies where- (a) a licensed water supplier requests its primary water undertaker to provide it with a supply of water for the purpose of supplying water to the premises of its customers in accordance with the retail authorisation; and (b) the premises are in the area of the undertaker. (2) Where this section applies, it shall be the duty of the primary water undertaker, in accordance with an agreement or determination for such period and containing such terms and conditions as may be provided for under section 66D(2) below- (a) to take any such steps- (i) for the purpose of connecting the premises in question with the undertaker's supply system; or (ii) in respect of that system, as may be so provided for in order to enable the undertaker to provide the requested supply; and (b) having taken any such steps, to provide that supply."
"66C Wholesale water supply by secondary water undertaker (1) This section applies where- (a) a qualifying licensed water supplier- (i) requests a water undertaker other than its primary water undertaker (the "secondary water undertaker") to provide a supply of water for the purpose of the supplier supplying water, using the primary water undertaker's supply system, to the premises of the supplier's customers in accordance with the retail authorisation; and (ii) requests its primary water undertaker to permit it to introduce that water into its supply system; and (b) the premises are in the area of the primary water undertaker. (2) Where this section applies- (a) it shall be the duty of the secondary water undertaker, in accordance with an agreement or determination for such period and containing such terms and conditions as may be provided for under section 66D(2) below- (i) to take any such steps in respect of its supply system as may be so provided for in order to enable it to provide the requested supply; and (ii) having taken any such steps, to provide that supply; and (b) it shall be the duty of the primary water undertaker, in accordance with an agreement or determination for such period and containing such terms and conditions as may be provided for under section 66D(2) below- (i) to take any such steps specified in subsection (3) below as may be so provided for in order to enable the licensed water supplier to make the introduction of the requested supply of water into the primary water undertaker's supply system; and (ii) having taken any such steps, to permit the introduction of that supply of water into that supply system. (3) The steps mentioned in subsection (2)(b)(i) above are steps- (a) for the purpose of connecting the premises in question with the primary water undertaker's supply system; (b) for the purpose of connecting that system with the secondary water undertaker's supply system; or (c) in respect of the primary water undertaker's supply system."
"66E Section 66D: costs principle (1) The costs principle referred to in subsection (3) of section 66D above is that the charges payable by a licensed water supplier to a water undertaker, under the agreement or determination mentioned in that subsection, shall enable the undertaker to recover from the supplier- (a) any expenses reasonably incurred in performing any duty under sections 66A to 66C above in accordance with that agreement or determination, and (b) the appropriate amount in respect of qualifying expenses and a reasonable return on that amount, to the extent that those sums exceed any financial benefits which the undertaker receives as a result of the supplier supplying water to the premises of relevant customers. (2) In subsection (1) above "qualifying expenses" means expenses (whether of a capital nature or otherwise) that the water undertaker has reasonably incurred or will reasonably incur in carrying out its functions. (3) For the purposes of subsection (1)(b) above, the appropriate amount is the amount which the water undertaker- (a) reasonably expected to recover from relevant customers; but (b) is unable to recover from those customers as a result of their premises being supplied with water by the licensed water supplier. (4) Nothing in subsection (3) above shall enable a water undertaker to recover any amount- (a) to the extent that any expenses can be reduced or avoided; or (b) to the extent that any amount is recoverable in some other way (other than from other customers of the undertaker). (5) In this section "relevant customers" means customers to whose premises the licensed water supplier is to make any supply of water in connection with which the agreement or determination mentioned in subsection (1) above is made."
"Competition can deliver benefits for customers through keener prices, more innovation and improved service quality. But competition must be consistent with the Government's wider policy objectives for the water industry. It is important for the framework and scope of any further competitive activity to be tailored to the particular circumstances of the industry and the needs of its customers [50] ." - Mr Elliot Morley (Minister for Environment and Agri-Environment): "
"It is interesting that when one looks at the cost principle as set out in proposed new section 66E of the Water Industry Act, one sees that the Government appear to have decided in advance how the access pricing will work, before we have examined the options. The Government have said that the measure will be retail-minus on the basis that the only costs to be offset against the retail price - the retail element being the appropriate amount that the water undertaker reasonably expected to recover from relevant customers - are avoidable expenses. None of the profit element of those avoidable expenses or the water undertakers' upstream fixed costs will be offset against the retail price. It seems that the cost principle is designed to minimise the extent to which new entrants can enter the market". [53] - Mr Elliot Morley, the Minister, in reply to Mr Lansley: [54] "