Ofwat has launched a new consultation on a draft water trading and procurement code for Dŵr Cymru Welsh Water.

At PR14 the water industry introduced water trading incentives to encourage water trading between incumbent water companies. Companies can only receive the PR14 water trading incentives if they produce, and are compliant with, an approved trading and procurement code.

Dŵr Cymru Welsh Water supplies approximately 800 megalitres (‘Ml’) per day to over 1.3 million household and business customers (more than 3 million people in total), making it the sixth largest of the 10 appointed water and sewerage companies.

The company’s operating area shares a land border with Severn Trent Water and Dee Valley Water, and a water border with Bristol Water (the River Severn estuary) and United Utilities Water (the River Dee estuary). Two other companies also operate as ‘new appointees’ within its area - Albion Water, which serves one industrial customer on Deeside in north Wales, and SSE Water, which serves a housing development at Llanilid in South Wales.

Welsh Water currently has more than 20 bulk water trades already in place with some of these companies. The most significant of these by volume is the Elan Valley bulk supply with Severn Trent Water, where more than 100,000 Ml per year is exported to Severn Trent for it to supply its customers in Birmingham.

The Welsh Government expects water companies operating wholly or mainly in Wales to only agree to sharing resources and water trading where it would not be detrimental to the incumbent company and its customers, particularly where trading might be used to meet demand in England.

Welsh Water: more likely to offer exports than seek imports

According to Welsh Water, its estimated water resource position over the medium term, as set out in its Water Resources Management Plan 2014, suggests that it is  more likely to offer exports than seek imports during this period. Introducing its draft Code, Welsh Water said:

“We believe it is prudent to develop and implement a Code which is in line with Ofwat’s requirements and principles, in readiness to deal with proposals from other companies to trade with Dŵr Cymru.”

The company’s Water Trading Prospectus makes it clear that it is willing to trade with both other water companies and with third parties. However, it believes it is likely that, initially at least, most new water trades will be between water companies as they respond to the water trading incentives introduced by Ofwat in the 2014 price review.

Commenting on the operation of the Code, the draft sets out a series of high-level principles, including:

Assignment - Under no circumstances will the trader be entitled to assign the trade agreement to another party without Dŵr Cymru’s agreement

Compliance - Dŵr Cymru and the trader will take all necessary steps to ensure compliance with such laws and regulations as shall apply from time to time, including the Competition Act 1998

Cooperation-  Dŵr Cymru and the trader will co-operate with each other in the general interests of continuous provision of water and the integrity of the water supply network

Duration - A qualifying trade must operate between April 2015 and March 2020 but may continue to operate after March 2020.

Equal and fair treatment - All parties seeking to trade with Dŵr Cymru will be treated fairly and equally between each other, including in the provision of information

Managing emergencies - Dŵr Cymru will retain primary responsibility for managing emergency procedures relating to all of its water supply system. The trader will be expected to cooperate with Dŵr Cymru in the event of an emergency or security issue affecting the water supply system and the trade between the two parties

Managing imports - Dŵr Cymru operates its system over a number of distinct and separate water resource zones. We will work with the export company to ensure imports of water to Dŵr Cymru are as efficient as possible and costs of infrastructure to enable the import to be made are minimised. Where possible, existing infrastructure will be used

Managing exports - We will work with the import company to ensure exports of water by Dŵr Cymru are as efficient as possible and costs of infrastructure to enable the export to be made are minimised.Where possible, existing infrastructure will be used

Qualifying trade - A qualifying trade will be a new agreement with another water company for Dŵr Cymru to import from or export to that company’s water supply network

Welsh Water: we won't manipulate current trades in order to exploit financial incentives for trading

On ending trades, Dŵr Cymru said it has several current imports and exports with other water companies which Ofwat is already aware of through information submitted by the company, commenting:

“We are aware of the Ofwat requirement for qualifying trades to be new trades beginning in or after July 2013."

"We can assure Ofwat and others that we have no intention of manipulating any of our current trades in order to exploit the financial incentives for trading. We would expect all of our trading partners to take a similar approach to the maintenance of existing trade agreements.”

“If we agreed a new trade, the audit report that we would prepare as part of the compliance process would include evidence to show that the trade was new, not one that had been artificially ended and restarted.”

Deadline for submission of responses to the consultation is 12th January 2016. Following the conclusion of the consultation period Ofwat will then either approve the code or provide reasons for not approving it within six weeks.

Cick here to download Welsh Water’s Draft Trading and Procurement Code

Click here to access the consultation online.