Water industry executives and investors have been digesting last month’s Competition Commission report on the merger of South East Water (SEW) and Mid Kent Water (MKW). The transaction is the first merger of water companies to have been reviewed since 2002. It is also the first time the Commission has looked at a water merger under the Enterprise Act 2002, meaning that this is the first case in which it has had the power to make the final decision and to impose remedies. In light of the high levels of corporate activity that have recently taken place in the water industry (and with speculation of future deals rife), the transaction has been eagerly anticipated as something of a test case for future deals.

In the UK, water mergers are subject to a special merger control regime (contained in the Water Industry Act 1991) that is intended to protect Ofwat’s ability to make comparisons between water companies. Having the ability to compare the performances of water companies forms a cornerstone of Ofwat’s regulatory activities, in particular with regard to regulating prices. Price regulation is a necessary part of Ofwat’s function given that water companies operate in local monopolies, largely immune from competition for the supply of water (and sewerage) services to customers in their licensed area. Prices are capped by Ofwat on a five-yearly basis, in light of its assessment of the income needed by each water company to meet its minimum service obligations and to earn a reasonable return for investors. Making comparisons between water companies forms an important element in setting the price cap.

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