Sea-change on the horizon for water?

Cyrus Mehta, head of EC, Nabarro Nathanson

James Quinney, senior solicitor, Herbert Smith

Richard Temple, senior solicitor, Herbert Smith

AT PRESENT no UK water group can buy or merge with another group worth more than £30m without the deal being referred to the Monopolies and Mergers Comm-ission, now referred to as the Competition Commission.

Companies such as Anglian and Thames Water would like the constraints to be removed to pave the way for expansion at home and abroad.

The water industry is regulated by Ofwat and the Water Act 1989. The Secretary of State is obliged to refer the merger of more than two or three companies to the Competition Commission. The scope for competition is limited; as far as the Government is concerned, the consumer has got to be protected.

After privatisation, the Government has made sure that consolidation has not removed the ability to regulate by making comparisons between the water companies.

If signs of consolidation are beginning to seep through, is this likely to threaten the industry? Is there a malaise inherent to this sector which is crying out for reform, or is the Government right to pursue its strict competition policy?

Cyrus Mehta, head of the EC and Competition practice at Nabarro Nathanson, says: "In most sectors the Office of Fair Trading (OFT), decides if there is a public issue raised by any merger and acquisition, then if there is a substantive issue, the Competition Commission will investigate."

"But the water regime is subject to more restraints than any other sector. Any relaxation would be surprising, particularly as the new Competition Act gives regulators even more powers to control anti-competitive practices."

According to Mehta, lawyers will win regardless of what the Government decides to do. "The implications for lawyers if rules are relaxed will herald a wave of mergers and acquisition deals and joint venture. Even if there is more regulation, there will be more work for competition lawyers."

However, James Quinney, senior solicitor in the competition team at Herbert Smith disagrees. He says: "Even if rules are relaxed there will not be much work for lawyers, the scope for many more water mergers is limited."

But Quinney warns of even more legislation hampering the sector. "When the Competition Act comes into force next March, Ofwat will be able to impose heavy fines with its new powers. If there were any serious anti-competitive behaviour by the water companies, they would be risking serious fines," claims Quinney.

Quinney is also dismissive of the notion that water companies need to amass in size to be able to compete abroad. "The situation with the mergers is not linked as there are not that many opportunities abroad requiring a national champion to be bred at home."

"It is often difficult to convince the competition authorities of such an argument because they take the view that you need to have a truly competitive market at home void of any monopolies before you can become a truly international competitor."

Richard Temple, senior solicitor at Herbert Smith, disputes the approach Quinney takes to international opportunities.

Temple says: "The French water companies are much more successful overseas because they are larger and are able to raise the finance to compete for projects abroad."

He says: "It is a difficult situation to balance. If consolidation is permitted to allow the industry to compete abroad, the consumer's interests might be jeopardised."

However, Temple is optimistic about the future: "There will be more consolidation, already there are a number of utility mergers occurring in different sectors."

He says that one of the reasons competition is limited in this sector is due to the physical problems of water supply. He says: "It would be quite difficult and expensive to shift water around the country by laying down a national network of pipelines akin to gas and electricity."