SUMMARY OF
GENERAL UTILITIES PLC, THE COLNE VALLEY WATER COMPANY AND RICKMANSWORTH
WATER COMPANY: A REPORT ON THE PROPOSED MERGER
On 7 September 1989 the Secretary of State
asked us to investigate the proposed merger between The
Colne Valley Water Company (Colne), Rickmansworth Water Company
(Rickmansworth) and water enterprises carried on under
the control of General Utilities PLC (GU), the United
Kingdom subsidiary of Compagnie Gnrale des Eaux (CGE).
Colne and Rickmansworth are two of the
29 statutory water companies (SWCs) which, with the ten
water services public limited companies (WSPLCs), supply
water in England and Wales. CGE controls four SWCs including
Lee Valley Water Company (Lee), which has common boundaries
with Colne and Rickmansworth. Colne, Lee and Rickmansworth
have been associated for a number of years in a scheme
to take water from the River Thames. Because of a possible
expansion to this scheme, and other economies which are
expected to result from the proposed merger, the Boards
of Colne, Lee and Rickmansworth have decided that it would
be appropriate to merge. The arrangements would involve
a share exchange being made by Three Valleys Water Services
PLC (Three Valleys) which has been set up for that purpose.
If the merger proposals were accepted, Three Valleys would
be controlled through GU by CGE.
The reference (Appendix 1.1) was the first to be made
under sections 29 and 30 of the Water Act 1989 (the Water Act) (Appendix
1.2) which requires the Secretary of State to refer to the Commission
certain mergers between water enterprises.1
The supply of water and sewerage services in England
and Wales is subject to price control. In order to maintain a balance
between the need to ensure that water undertakers can finance their functions
and the interests of customers in relation to their charges, annual price
increases are limited to RPI plus a factor known as K, set initially
for each water undertaker by the Secretary of State for the Environment.
Future reviews of K (and of the services provided by the industry generally)
will be carried out by the Director General of Water Services (DGWS).
The review process will be based on the assumption that there is a sufficient
number of independently managed companies to enable the DGWS to make
comparisons of efficiency and other criteria between companies and
therefore to set Ks which reflect both the circumstances of the individual
company and of the industry generally.
This assumption is reflected in section 30 of the Water
Act, which provides that in determining, in relation to a merger between
water enterprises, whether any matter operates or may be expected to
operate against the public interest, the Commission are required to have
regard to the desirability of giving effect to the principle that the
number of water enterprises which are under independent control should
not be reduced so as to prejudice the DGWS's ability to make comparisons.
Section 30 also provides that we are to have regard to the desirability
of achieving any other purpose so far only as we are satisfied that the
other purpose can be achieved in a manner that does not conflict with
that principle or that the achievement of that other purpose is of substantially
greater significance in relation to the public interest.
The Commission have concluded that the proposed merger
involves a reduction in the number of water enterprises under independent
control which may be expected to prejudice the DGWS's ability to carry
out his functions under the Water Act. The Commission have also concluded
that certain purposes related to the merger, including cost and financial
savings, cannot be fully achieved without the merger and, therefore,
without prejudice to the DGWS's ability to make comparisons.
The Commission have decided that, unless the cost savings
arising from the merger are made available to consumers as lower water
charges, the purposes of the merger would not be of substantially greater
significance in relation to the public interest than the prejudice to
the DGWS's ability to discharge his duties and could not be brought about
except in a manner which conflicts with that principle. We have therefore
concluded that the proposed merger may be expected to operate against
the public interest.
We have, however, recommended that the merger might
be allowed if the parties undertook to seek a new appointment for
Three Valleys as a water enterprise and to ensure that the benefits of
some 60 million which they expect from the merger were taken into account
in the calculation of a K value for that new appointment. The effect
on the average user at the end of the ten-year period would be that water
charges should be at least 6 per cent lower than if the merger did not
take place.
1 Water
enterprises aare companies which have been given an appointment under
the Water Act as water or sewerage undertakers to provide water, or sewerage
services, in England and Wales. References under sections 29 and 30 are
also subject to an assets test.
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Last Revised: May 1999
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