The Competition & Markets Authority CMA) has cleared the anticipated acquisition by Macquarie Asset Management of a jointly controlling interest in Last Mile Infrastructure (Holdings) Ltd.

In July 2024 the CMA launched an inquiry into whether the transaction could result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

The CMA has now published its final decision setting out its detailed analysis and conclusions in full.  The CMA has concluded that while the acquisition by Macquarie through its indirectly owned funds, of 50% of the issued share capital of Last Mile Infrastructure (Holdings) Ltd (LMI) is a merger situation, it does not however “give rise to a realistic prospect of a substantial lessening of competition (SLC).”

Macquarie, via Macquarie Asset Management, is active in the UK gas sector through its stake in Cadent Gas Ltd and National Gas Transmission plc and in the water and wastewater sector through its stake in Southern Water. LMI and its subsidiaries design, build, own and operate last mile utilities infrastructure, including gas, water and wastewater connections in Great Britain. Macquarie holds a stake of 87% in Southern Water.

CMA inquiry examined vertical relationship between Macquarie via its interest in Southern Water and LMI

With regard to the water company, the CMA focused on the vertical relationship between Macquarie, via its interest in Southern Water and LMI, which is active downstream in the provision of last mile water and wastewater connections. Southern Water holds a monopoly position in the region and self-lay providers (SLPs) and (New Appointments and Variation entities) NAVs need to apply to Southern Water to join their last mile water connections to Southern Water’s incumbent network in this region. As such, it holds a position of market power and provides an essential input to SLPs and NAVs.

The CMA examined the concern that the merged entity may use its control of an important input to harm its downstream rivals’ competitiveness, including considation of whether Southern Water could leverage its position as the incumbent in the region to provide LMI with certain advantages to the detriment of its rivals in the supply of water connections.

During the course of the inquiry third parties told the CMA that Southern Water could use a range of price and non-price foreclosure mechanisms to discriminate against rival SLPs and NAVs. Several third parties submitted that Southern Water could charge higher prices or set less preferential tariffs to its downstream rivals, for example, when interfacing with the installer or negotiating bulk water supply agreements. Some third parties submitted that Southern Water could deteriorate the services it provides to downstream rivals, for example by engaging with its downstream rivals more slowly, including:

• when responding to connection requests
• entering into bulk water supply agreements
• processing NAV applications.

The CMA also considered whether Southern Water might share certain information with only LMI, which would give it a competitive advantage over rivals, including information that would allow LMI a greater understanding of opportunities, market developments or more efficient pipeline designs that other third parties did not have access to when competing for and completing connections. Such information could enable LMI to implement more efficient connection designs and enable it to make more accurate predictions on future costs and revenues for water connections.

Macquarie and LIM Holdings Ltd submission said regulatory framework would prevent Southern Water from discriminating against rival SLPs or NAVs

Macquarie and LIM Holdings Ltd both submitted that Ofwat’s regulatory framework would prevent Southern Water from discriminating against rival SLPs or NAVs, including via price controls and minimum service standards that in effect require the provision of equivalent services to all SLPs and NAVs.

Ofwat separately told the CMA that its enforcement powers and level of penalties would likely constrain the ability of incumbents from engaging in anti-competitive behaviour.

Some rival SLPs and NAVs told the CMA that Ofwat’s regulations would prevent discriminatory behaviour while others were concerned that the regulations would not prevent all forms of preferential treatment towards LMI. The CMA’s final decision paper states:

“One third party submitted that incumbents have free reign over how they interpret the Water UK templates, and that Ofwat provided limited guidance with respect to its framework and relied to a significant extent on independent providers having sufficient knowledge to be able to negotiate terms with the incumbent. Some third parties indicated that they had observed differences in pricing or service levels between incumbents….

“one third party also submitted that there were inevitable difficulties in the detection of discrimination and gathering of supporting evidence that demonstrated that an incumbent was acting anti-competitively. It cited a lack of a common methodology for pricing, information asymmetry, and a lack of transparency on agreements negotiated with other independents as contributing factors to this outcome.”

CMA assessment

The CMA’s assessment points out that incumbents have:

• have a general duty to grant connections to their network
• have a duty to avoid undue preference or undue discrimination in the connection of premises or pipelines operated by SLPs/NAVs to their network
• are subject to quality of service standards
• must follow specific conditions set by Ofwat when setting charges for connections (which include a requirement not to restrict or distort or prevent competition)

 CMA - "in certain instances Ofwat has left it open to incumbents to determine how best to fulfil their obligations"

The CMA also notes that not all of the applicable regulation specifies the precise service levels that Southern Water must provide and that “rather in certain instances Ofwat has left it open to the incumbents to determine how best to fulfil their obligations, and mechanisms such as D-MEX have been developed to incentivise good performance.”

The decision paper states:

“Given the frequency and repeated nature of interactions that take place between the incumbent and SLPs and NAVs, the CMA considers that the risk of potential breaches is higher for water connections than for other utilities.”

Based on the evidence, the CMA considered that the merged entity may have some ability to foreclose rival SLPs and NAVs, particularly given that:

i. Southern Water has the market power to engage in a foreclosure strategy;

ii. Southern Water’s input is necessary for SLPs and NAVs to provide their services; and (iii) existing regulation may not eliminate all ways in which Southern Water might disadvantage rival SLPs and/or NAVs and thereby impact their competitiveness downstream.

Breach by a WOC or WASC of obligations under the Water Act or its licence may result in enforcement action by Ofwat

However, Macquarie and LMI submitted that the merged entity would have no incentive to foreclose rivals because it would face costs for breaching Ofwat’s regulations, pointing out that any breach by a WOC or WASC of its obligations under the Water Act, or its licence, may result in enforcement action by Ofwat, including:

• enforcement orders to the incumbent to ensure its compliance
• acceptance of enforceable undertakings in which the incumbent would commit to take forward actions to ensure compliance
• financial penalties of up to 10% of its annual turnover

They also told the CMA that rivals have accessible and low-cost mechanisms to alert Ofwat to any breaches of law or regulation and that SLPs and NAVs are “well placed to identify discriminatory behaviour.” In addition, they submitted that a foreclosure strategy would also result in low D-MEX scores, which would in turn have significant financial and reputational consequences, particularly as the financial consequences are set to increase from April 2025 following changes introduced in Ofwat’s 2024 Price Review.

Ofwat "would investigate if it saw a pattern in complaints it was receiving from SLPs/NAVs"

Ofwat submitted that SLPs and NAVs are able to compare the prices and service levels they have received against those received by their rivals given that these are published online by the incumbent itself (for prices) and by Water UK and Ofwat (for service levels, averaged across all NAVs and/or SLPs).

In addition, it submitted that it regularly meets with stakeholders, enabling them to raise any concerns, and that in any case companies could make complaints about an incumbent’s behaviour.

Ofwat also submitted that it would investigate if it saw a pattern in the complaints it was receiving from SLPs/NAVs, which may lead to enforcement action. The regulator added that under section 18 of the Water Act, it has a duty to pursue enforcement action against potential breaches of licence conditions and has in the past considered and taken action against incumbents.

Based on the evidence, the CMA concluded that the merged entity does not have the incentive to pursue a foreclosure strategy against rival SLPs and NAVs and that despite the potential benefits from securing contracts downstream, the costs of foreclosure are high, particularly given:

• the likelihood that any foreclosure strategy would be detected by rivals or the developers they serve
• once detected, enforcement action from Ofwat could lead to significant financial penalties
• foreclosure would likely result in additional financial losses

While the CMA considers that Southern Water has the market power to engage in a foreclosure strategy, and that its input is critical to downstream rival’s ability to compete in its area, the paper says the CMA believes that the merged entity “does not have the incentive to pursue an input foreclosure strategy against rival SLPs and NAVs in the markets for the installation and adoption of last mile water connections in the Southern Water region.”

“Accordingly, the CMA considers that the merger does not give rise to a realistic prospect of an SLC as a result of input foreclosure in the

(i) installation; and

(ii) adoption of last mile water connections in the Southern Water Region,” the paper states.