REGULATORY: Natural resources and keeping your head above water in the EU

by King & Spalding

[author: Suzanne Rab]

Regulatory and competition law probes in the natural resources sector

Regulatory and competition issues are at the top of the business agenda for natural resources, energy, and multi-utility companies active in the EU. Despite regulatory convergence in some areas (e.g., unbundling and cost of capital), there remain a variety of sector-specific issues.

For example, a number of recent competition law interventions in the water sector in the EU and UK have shown that a sector that historically has not been exposed to the full rigours of competition is nevertheless subject to competition issues. This article reviews three current cases: the European Commission (Commission) launch of competition law proceedings against several French water companies; an investigation by UK Water Services Regulation Authority (Ofwat) alleging abuse of dominance; and the ongoing UK merger control review of the acquisition of Cambridge Water plc by South Staffordshire plc, owner of South Staffordshire Water plc. Many of the issues raised are not unique to the water sector and share similarities with EU and UK competition and regulatory intervention in other utilities and in the energy sector in particular.

European Commission opens proceedings against French water companies

On 18 January 2012, the Commission announced the opening of formal proceedings to investigate whether the French water companies SAUR, Suez Environnement/ Lyonnaise des Eaux, and Veolia, together with their trade association, have infringed the EU prohibition on anticompetitive agreements in Article 101 of the Treaty on the Functioning of the EU (TFEU). [1]

The Commission is investigating whether the undertakings have unlawfully co-ordinated their behaviour on the French water and waste water markets, in particular in relation to their prices charged to final customers. The opening of proceedings means that the Commission is now treating this case as a matter of priority, though no firm finding on infringement has been made.

The Commission’s action follows a similar investigation of energy companies in relation to unlawful agreements under Article 101 TFEU. On 8 July 2009, the Commission announced that it had imposed a fine of EUR 553 million on each of E.ON (and its subsidiary E.ON Ruhrgas AG) and GDF Suez AG for market-sharing in the French and German gas markets. [2] The Commission found that the companies infringed Article 101 TFEU by an agreement not to sell gas transported from Russia over a jointly-owned pipeline into their respective home markets.

Ofwat sends statement of objections to Anglian Water alleging abuse of dominance

On 12 December 2011, Ofwat announced that it had sent a statement of objections to Anglian Water, a UK water and sewerages company. Ofwat suspects that Anglian Water has abused its dominant position (contrary to the Chapter II prohibition of the UK Competition Act 1998, which is the UK national law equivalent provision to Article 102 TFEU and which has some similarities with section 2 of the Sherman Act in the U.S.). [3]

The statement of objections sets out Ofwat’s allegations that Anglian Water imposed an unlawful ‘margin squeeze’ in relation to its pricing for providing water and sewerage services to a development site in Milton Keynes in the UK.
Alleged abuse of dominance through margin squeeze has also been raised against companies operating in the energy sector. For example, on 18 March 2009, the Commission announced that it had decided to accept binding commitments under Article 9(1) of Regulation 1/2003 from RWE to address the Commission’s concerns that RWE may have abused its dominant position in the gas transport market by refusing to supply gas transmission services and imposing a margin squeeze. [4] Under the commitments, RWE agreed to divest its West German gas transmission system business to a suitable purchaser.

UK Office of Fair Trading refers water merger to the Competition Commission

On 5 January 2012, the UK Office of Fair Trading (OFT) referred the acquisition of Cambridge Water plc by South Staffordshire plc, owner of South Staffordshire Water plc, to the UK Competition Commission for an in-depth investigation. [5] The Competition Commission must report by 20 June 2012. This is only the second mandatory reference of a water merger made by the OFT since the UK Enterprise Act 2002 came into force.

Mergers between UK water companies are governed by a special statutory regime. Under the Water Industries Act 1991, as amended by the Enterprise Act 2002, the OFT is under a duty to make a mandatory reference to the Competition Commission of anticipated or completed mergers between two water enterprises unless: (i) the value of the turnover of the water enterprise being taken over does not exceed GBP 10 million; or (ii) the only water enterprises already owned by the acquirer each have turnover that does not exceed GBP 10 million.

Where these thresholds are exceeded, the OFT must make a reference regardless of any competition issues. Following reference, the Competition Commission must consider whether: (i) a water merger has taken place or there are arrangements in progress which, if carried into effect, would result in a water merger; and (ii) the water merger has or may be expected to prejudice the ability of Ofwat to carry out its functions under the Water Industry Act to make comparisons between different water enterprises (for example, in the context of regulatory reviews and price determinations). The consequence of the low turnover tests is that, currently, all UK water mergers will be subject to a mandatory reference and in-depth review.

Up to now, consolidation in the English and Welsh water industry has been challenging. However, in 2007 the Competition Commission approved such a water merger. The Cave Review (2009) and ongoing government review and consultation may also bring about regulatory changes. Among the proposals are an increase in the turnover test for water mergers that are subject to merger control, a development that could create merger opportunities.

There is no equivalent special statutory regime for the review of other utility mergers in the UK. Energy mergers will be subject to the normal UK merger control procedure [6] and will be assessed on competition law grounds as to whether they may be expected to substantially lessen competition in the UK. However, in practice and in addition to providing input to the OFT (and, if appropriate, the Competition Commission) on competition issues, the UK energy regulator (Office of Gas and Electricity Markets (Ofgem)) and Ofwat will consider a transaction more generally to assess whether it raises any regulatory concerns. When a utility is being acquired, the sector regulators will also seek to satisfy themselves that a new owner has the operational, financial capacity, and probity to assume the role of a network owner.

Implications for transactions in the EU natural resources, energy, and utilities sectors

Despite challenges presented by the regulation of utility companies and the increasing trends of intervention by competition authorities, there continues to be appetite among national and overseas buyers in owning and acquiring such companies. This may, in part, reflect their potential relatively stable (albeit capped in certain cases) revenue streams.

Quite apart from “usual” due diligence that any potential acquirer will need to undertake (including, for example, employment, environment, litigation, real estate, etc.), it is also important to consider actual or potential non-compliance with competition law, regulatory, or licensing requirements.

Due diligence in relation to potential infringements of general competition law is high stakes in view of the potential penalties, including fines of up to 10 per cent of global group turnover, and potential damages actions from third parties who can show that they have been harmed. In this regard, it is noted that water companies and transmission owners and operators may, by definition, be found to occupy a dominant position where they are each a monopoly in their appointed area. They will therefore be subject to the prohibition against abuse of a dominant position.

These recent and ongoing cases are a reminder that companies active in the natural resources, energy, and utilities sectors and investors weighing opportunities will need to assess complex competition law and regulatory issues impacting the value of their potential investment.

[1] Commission press release IP/12/26.
[2] Commission press release IP/09/1099.
[3] PN 05/11: Ofwat investigates Anglian’s pricing to ‘Fairfields’ development in Milton Keynes.
[4] Case COMP/B-1/39.402 — RWE foreclosure. Commission press release IP/09/410.
[5] OFT press release 01/12.
[6] UK merger control applies where either of the following tests are met: (a) the target’s UK turnover exceeds GBP 70 million (approx. USD 109 million) (turnover test); or (b) the merger would result in the creation or enhancement of at least a 25 per cent share of purchase or supply in the UK (share of supply test).

Suzanne Rab
+44 20 7551 7581

View Profile »

The content of this publication and any attachments are not intended to be and should not be relied upon as legal advice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

Written by:

King & Spalding

King & Spalding on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.