As part of the 2014 Price Review, Ofwat introduced incentives for water trading. In order to qualify for these incentives, companies must produce and comply with a trading and procurement code. Companies are expected to produce their own code in line with Ofwat’s guidance, which Ofwat then consider and consult on publicly.
Water trading is expected to drive innovative approaches to managing scarce water resources and improve outcomes for water customers. For example, a company could build a new treatment works, but it could be more advantageous to engage a neighbouring company and buy water from them, thus saving costs for new treatment assets.
On 1 March, Ofwat published Thames Water’s draft Water Trading and Procurement Code for public consultation. This is the second such consultation, the first being Welsh Water in November 2015. The document goes into some interesting background surrounding the challenges faced by Thames Water in its catchment area, one which is classified as under “serious water stress”. The additional future challenges for the area, not only climate change but also population growth and the pressures of abstraction licensing changes from the Environment Agency, suggest that water imports may be of more importance to the Thames catchment area in the future.
The Thames Water Code principles stick to high level concepts in the first instance, from which it is intended will flow a more detailed commercial agreement between Thames and a potential trading party. This is similar to the code prepared by Welsh Water – not surprising, since Ofwat approved the proposed Code put forward by Welsh Water. Both also reference the need to audit previous trading agreements, because trades will only qualify for Ofwat incentives where they have been agreed after July 2013.
Key differences include some more detail from Thames Water on how costs for exporting water might be allocated and adjusted in the future. Both Codes however, make reference to Water Resource Management Plan guidance when assessing costs.
As water trading becomes potentially more prevalent, there may well be some interesting legal developments in the future. Having successfully acted for Albion Water in their 2014 Competition Act action against Welsh Water, we are only too aware of the technical difficulties and relationship challenges that can arise should companies get pricing and terms wrong. Such cases demonstrate lessons, especially for larger more dominant companies, in the need to act fairly and consistently when pricing access to their services. In particular it will be of critical importance to ensure that the details of any pricing methodologies and policies don’t leave open avenues for potential competition law challenges.
Should you wish to discuss this, or any other aspect of the water sector, please speak to one of our expert team.