48HO Mid Kent Wtr4%

RNS Number:1554J
Competition Commission
17 April 2000


          MID KENT WATER INQUIRY - ISSUES STATEMENT
                              
The Competition Commission has sent issues letters to Mid
Kent Water  and to the Office of Water Services (Ofwat).  An
issues letter  is  sent  to  main parties before the
Commission  has reached  any  conclusions and is designed to
highlight  those matters which have been identified by the
investigating  group for further consideration, and to
ensure that nothing has been missed.

The  issues  statement is being made public to  provide
other interested parties with an opportunity to raise
further points which  they  believe should be considered by
the  Commission. Written submissions should be sent to the
Commission no  later than Wednesday 10 May.

The issues are grouped under two broad questions.  First,
does the  Director's  final  determination enable  the
company  to finance  the  proper  carrying out of its
functions?   Second, does the absence of a licence
modification concerning notified items  operate, or may it
be expected to operate, against  the public interest?

Does the final determination enable the company to finance
the proper carrying out of its functions?

The  Commission  will  wish to discuss whether  Ofwat's
final determination  is  sufficient to ensure the financing
of  the proper  carrying  out of the company's functions  as
a  water undertaker.   It  will also wish to discuss  why
the  company believes  this  is  not  the case and why  the
company's  own proposals are necessary to finance its
functions.



Operating expenditure
1. Is   the  company  able  to  achieve  future  improvements
in operating expenditure efficiency?  If so, to what extent?

2. What  underlying assumptions should the Commission make
about factors such as labour productivity and material
costs?

3. Should   the  Commission  apply  efficiency  targets  to
the company's  total base operating costs or only to
controllable costs?  How are controllable costs defined?

4. What  allowance  should  be  made  for  future  increases
in uncontrollable costs?

5. Do  Ofwat's efficiency targets impose an unacceptable level
of operational risk on Mid Kent?

6. What  weight should the Commission give to the results of
Mid Kent's panel data analysis?

Capital expenditure
7. What  allowance should the Commission make for  the
company's specific characteristics and forecasts?

8. What  allowance  should  the  Commission  make  for
potential 'lumpiness' in the future capital expenditure
profile?

9. What  allowance should the Commission make for  the
increased use of short life assets?

10. How  should the Commission assess the company's economic
level of leakage?

11. In  assessing the need for infrastructure capital
maintenance, should  the Commission rely on Ofwat's
serviceability criteria or should other factors be used?  If
so, which?

12. What    are    the   appropriate   criteria   for
assessing serviceability?

13. Would  Ofwat's  serviceability approach create  a  backlog
of capital maintenance?  If so, what would be the consequences?

14. Does  the  amount allowed by Ofwat for infrastructure
capital maintenance  compromise  the  company's  ability  to
maintain existing leakage performance?

15. Should  all  the additional costs associated with the
Channel Tunnel Rail Link be funded by that project?

Capital maintenance of non-infrastructure assets
16. Has  Ofwat's  final  determination put at risk  the
company's ability to maintain its non-infrastructure assets?

17. Do  each of the capital maintenance projects proposed  by
the company need to be carried out in the next five years
and,  if so,  is  the  capital  maintenance  allowance  made
by  Ofwat sufficient to permit this?

Quality related capital expenditure
18. What  allowance  should the Commission make for  the
specific circumstances   faced  by  the  company  in
replacing   lead communication pipes?

19. Do  the  particular  conditions faced by the  company
prevent Ofwat's industry benchmark cost from being achieved?

Levels of service
20. Is  it  the  case that low pressure problems may be more
wide spread  than  anticipated?  If so, what provision
should  the Commission make for remedying low pressure
problems  faced  by the company's rural properties?


Meter optancy
21. In light of the provisions in the Water Industry Act
regarding free  metering  and  the efficient use of  water,
should  the Commission assume that companies will not
actively promote the take up of meters?

22. Is  the  public interest best served by including within  K
a realistic  forecast of optancy rates, so  as  to  ensure
that customers are fully informed as to the likely change in
bills over the period?

23. What  allowance should the Commission make for  meter
optancy rates?

24. In  terms  of meter location, should the company be
encouraged to choose the immediate least-cost option or the
most economic full-life option?

25. Should  meters  mainly be installed externally  to
facilitate easier reading and the detection of leaks?

26. What  allowance  should the Commission make for
the  cost  of installing meters?

27. Does Ofwat's licence modification provide the
company with  an appropriate degree of certainty as
to the outcome?

28. Is  it  desirable  that Ofwat should have
discretion  in  the application of the Notified
Item mechanism?

29. Does  the  mechanism adequately protect the company
from  the financial  consequences of meter optancy
levels  above  those provided for in the determination?

Rate of return and cost of capital
30. What is a reasonable rate of return for the company?

31. Does Ofwat's final determination enable the
company to secure a  reasonable return on its
capital and to finance  the  proper
carrying out of its functions as a water company?

32. Has   Ofwat  been  influenced  by  recent,  short
term  market conditions  and has it given undue
weight to short  term  trend data?   If  the
Commission were to use  projections  based  on
historic  data would these provide a more reliable
and  stable basis upon which to determine price
limits?

33. Is   Ofwat's   approach  likely  to  lead  to
cyclical   price fluctuations?   If so, would the
use of medium to  longer  term historical averages
have helped to smooth them out?

34. What allowance should the Commission make for the
risk faced by the company?

35. What assumptions should it make about the equity
risk premium?

Financial indicators
36. Which, if any, financial indicators should the
Commission take into account in setting K?

37.  What level of dividends should be assumed in
projections  of financial indicators?

Current cost depreciation
38. Should  the  Commission follow Ofwat's approach  of
using  an industry  wide  view  of assets and
applying  "industry  mode" asset characteristics,
and what use should it make of company-specific
data?

39. Should  the  Commission apply an adjustment  to
Current  cost depreciation for Broad Equivalence?

Ofwat's approach to setting price limits
40. Has  Ofwat set price limits which are sustainable
only in  the short term?

41. Will  interim  price increases be needed before
2005;  if  so, under  which  provision in the
company's  licence  would  this occur?

42. Will prices in the next quinquennium be higher than
they might otherwise be?   If so, would this be undesirable?

43. What  account  should the Commission take of  the
quality  of service  and likely prices for future
customers and in  future quinquennia?

44. Is  the  final  determination based on
assumptions  that  are either  unachievable or
could only be achieved at the cost  of failing to
comply with quality legislation and reduced
quality of service?

45. What  are  customers' preferences and what account
should  the Commission take of  them?

46. How   sound   is  Ofwat's  comparative  analysis
of   service standards?    Does   it   provide  an
appropriate incentive framework?

47. Has  Ofwat used the annual monitoring of service
standards  to modify  'K'  in  a way which extends
beyond the parameters  of yardstick   competition
for  which   they   were   originally developed?
If so, is this undesirable?

48. Has  a  further  dimension  of risk  been
introduced  by  the prospect  of market
competition in the provision of the  water
services;  if so, to what extent is it relevant
to  the  next quinquennium?

49. Is  Ofwat's  reduction  in the price  of  water
to  customers incompatible with the Environment
Agency's resource management aims?

Does the absence of a licence modification
concerning notified items  operate, or may it be
expected to operate, against  the public interest?

50. Would  any, and if so what, modification to the
mechanism  for dealing with notified items be in
the public interest?

51. What  are the adverse effects of such a
modification not being made?

This  press  notice  is  also  available  on  the
Competition Commission website:
www.competition-commission.org.uk/quest.htm or from
the  Reference  Secretary (Water inquiries),
Competition Commission, New Court, 48 Carey
Street, London WC2A 2JT.

Notes to Editors:
1.   The references were made by the Director
General of Water Services,  under sections 12 and
14 of the Water Industry  Act 1991 on 7 February
2000 (see Ofwat press release PN 04/00).



2.    The  function  of  the  Commission  in  the
section  12 reference  is to determine the value
of the adjustment  factor and  the infrastructure
charge, consistent with the Director's statutory
duties  under the Water Industry  Act.   Under
the section  14  reference, the Commission is
asked  to  determine whether  the  fact  that the
company's licence  has  not  been modified  in
the manner proposed by the Director  General  is
against the public interest.

3.   The  Commission will submit its report to
the  Director General by 6 August 2000.

4.   Enquiries should be directed to:
Francis Royle, Press Officer  Tel: 020 7271 0242


END

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