Competition in upstream sewage and sludge markets (PROC/01/0166)
Final Report
Ofwat
Prepared by
London Economics
1
Contents Page
Glossary v 1 Introduction 6 1.1 Overall aims 6 1.2 Background 6 1.3 Approach 8 1.4 Structure of this report 8 2 Market definition 9 2.1 Sector overview 9 2.2 Overall approach to market definition 12 2.3 Precedents 14 2.4 Market definition – upstream sewage and sludge 16 3 ‘Traditional’ sewage treatment 25 3.1 Background 25 3.2 Potential for and barriers to competition 28 4 Sewage treatment for individual households and small communities 32 4.1 Description of the market(s) 34 4.2 Scope for competition 37 4.3 Enabling further competition 39 5 Sludge treatment and disposal 41 5.1 Background 41 5.2 Description of the market 45 5.3 View of competition 51 5.4 Potential competition 55 5.5 Potential measures to increase competition 58 5.6 Conclusions 58 6 Sludge transport 60 6.1 Description of the market 60 6.2 Other factors 61 6.3 Conclusion 61 7 Pre‐treatment and recycling of wastewater 62 7.1 Description of the market 62 7.2 Competition in the market 62
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Contents Page
7.3 Barriers to entry 63 7.4 Scope for more competition 63 7.5 Domestic and commercial wastewater recycling 64 8 Overview of scope and options for increasing competition 66 References 71 Annex 1 Summary of responses to Ofwat consultation July 2007 72 Annex 2 ‘Alternative’ sewage treatment processes 74 Annex 3 Indicators of commercial activity 79 Annex 4 Services Sydney Case 85
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Contents Page
Table 1: Market definition summary 24 Table 2: Large works – details 27 Table 3: Alternative systems for domestic sewage treatment 33 Table 4: The different steps of sludge treatment 47 Table 5: Companies active in elements of the upstream sewage and sludge sector in England & Wales 80 Table 6: ‘Sewage treatment’ companies in FAME, other than the ten main undertakers 81 Table 7: Number of Public tenders in 2009 84
Figure 1: Overview of upstream sewage and sludge activities 10 Figure 2: Proportion of works by works’ size – using number and loads received 26 Figure 3: Proportions of volumes treated 2008/09 (%) 28 Figure 4: Alternative treatment solutions for domestic sewage 35 Figure 5: The market for sludge 42 Figure 6: The market for sludge treatment and disposal 43 Figure 7: The market for raw sewage sludge 44 Figure 8: The sludge treatment sequence 48 Figure 9: Sludge disposal and recycling routes for sewage sludge 49 Figure 10: Sludge disposal processes 49 Figure 11: Anaerobic digestion and CHP 50 Figure 12: A potential market for sludge treatment? 57 Figure 13: Examples of cesspool and septic tank 75 Figure 14: Example of a drainage field 75 Figure 15: Examples of package treatment plants 76 Figure 16: Example 1 ‐ Airflow AF14 77 Figure 17: Example 2 ‐ Clereflo MBR 78
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Glossary
Glossary
Terminology Sewerage undertaker: The 10 regulated water and sewage companies that undertake sewage treatment in England and Wales. Sewerage: The pipeline infrastructure for transporting sewage from source to treatment. Sewage: The physical material (biological).
Abbreviations STW: Sewage treatment works EA: Environment Agency OFWAT: Water Services Regulation Authority (Ofwat) WaSCs: Water and sewerage companies
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Section 1 1BIntroduction
1 Introduction
This final report has been produced by London Economics and is submitted to Ofwat under contract PROC/01/0166. The research was undertaken over a relatively short period between late November 2009 and January 2010. 1.1 Overall aims
The main aim of the research is to provide Ofwat with an independent assessment of: 1) the level of competition that already exists in the upstream sewage and sludge sector; 2) an assessment of the scope for increasing competition in the sewage and sludge markets; and, 3) some options for further developing upstream competition in sewage and sludge markets. By ‘upstream sewage and sludge’ Ofwat mean the treatment and disposal of sewage and sludge and by ‘competition’, Ofwat are referring to ‘in‐the‐market’ competition only. In consequence, the research does not consider benchmarking or franchising approaches to competition or sewerage network activities such as collection and transport of sewage (except insofar as they are relevant to the assessment of in‐the‐ market competition for sewage and sludge treatment and disposal services). The work has not involved the collection of primary data and has been restricted to surveying existing information. Given the short timescales our analysis is not as complete or as comprehensive as a much fuller competition analysis could be, involving the use of tailored industry surveys and so on, but we believe that it should provide Ofwat with a reasonable and sensible basis for taking the policy process forward. 1.2 Background
In 2007 and 2008, Ofwat undertook a review of competition in the water and sewerage sector in England and Wales. Whilst the review focussed mainly on competition in water services, consideration was also given to competition in sewerage services. Following consultation in July 2007, Ofwat proposed in December 2007 that the Government should introduce retail competition in sewerage services under the Water Supply Licensing regime and that Ofwat would further explore the scope for combined sewerage competition.1 More than half of respondents to the
1 Ofwat reached similar conclusions in the second report on their review, published in May 2008. 'Combined competition' is a term from the legislation and means a licence which allows an entrant to compete in retail and common carriage competition.
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Section 1 1BIntroduction
consultation did not agree that combined sewerage competition should be explored further citing costs and lack of benefits to consumers.2 In 2008 and 2009, Professor Martin Cave undertook a review of competition and innovation in the Water sector in England and Wales. The review made a number of recommendations. Those related to the sewerage sector included: the introduction of retail competition for sewerage services alongside water services; a step by step approach to introducing more competition, starting with the introduction of a ‘market‐like framework’ that includes: o an economic purchasing obligation (for both water and sewerage services); o Unbundling the current combined supply licence to allow more specialisation; o The creation of an upstream sewerage and sludge licence alongside the upstream water supply licence created by unbundling the combined supply licence. o Raising the transparency of water and sewerage supply costs at different stages in the value chain; o Introducing an ex ante access pricing framework based on forward‐ looking long run avoidable costs at the water resource zone level.3 for the longer term (post 2015) consideration should be given to the introduction of an independent contracting entity to buy water and wastewater services from suppliers and sell them on to retailers; the review suggested that the advantage of measures to encourage in the market competition would vary across the country and across the value chain, but suggested that at present the risk‐return ratio is too uncertain to proceed further. The aim of our research is to consider what initial steps Ofwat might take in order to increase the scope for in the market competition in the long term, indicating which markets are most likely to be amenable to this type of competition. We have not made any direct assessment of the costs and benefits of upstream in the market competition in our research. Instead we have focussed on assessing the level of existing competition and on options for increasing the level of in the market competition. In order to assist Ofwat, we have made the assumption, for the purposes of this analysis, that competitive arrangements for retail sewerage services will be introduced, as will the extension of revised common carriage arrangements for sewerage as proposed in the Cave Review.
2 Ofwat’s summary of these responses is included in Annex 1. 3 The review does not refer to sewerage costs specifically here, but it may be more appropriate for sewerage costs to be estimated at the sewerage network level.
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Section 1 1BIntroduction
1.3 Approach
Following an initial review of the main activities and processes that make up the upstream sewage and sludge sector we reviewed the literature relevant to competition in this area, searching in particular for precedents for market definitions and competition analysis; and we also used the FAME database and other methods, such as web searches, to obtain an indication of the range of companies active in these markets. We also reviewed stakeholder responses to the various consultation papers that have been issued in respect of competition in the water sector in England and Wales and had telephone conversations to clarify specific questions with one of the water and sewerage undertakers and with the Environment Agency. Using the evidence we gathered, we defined markets in the sector and then assessed the level of competition in each of those markets and considered the options for improving competition in those markets. Our approach to market definition and competition assessment was based on the standard approaches used in competition cases. For each market we consider whether the suppliers of goods or services in that market are likely to have any market power with respect to purchasers, or whether purchasers are likely to have any market power with respect to suppliers. Nevertheless, because many of the activities are vertically related, effective competition in some of the markets may not mean that the final consumer of sewerage services directly benefits from that competition. If there is a bottleneck in the value chain where one or more operators do have market power (e.g. in the sewerage network and/or access to final consumers) then they, rather than the final consumer, may be the beneficiaries of any efficiency gains deriving from competition elsewhere in the value chain. We note the lack of competition and market information in many parts of the sewerage and sludge value chain at present. Given this lack of information our market definitions are analytical tools which we have not applied rigidly. We recognise Ofwat might want to define markets differently for its market reform work, especially as more information becomes available, but the analysis in this report should provide useful information to Ofwat when defining markets. 1.4 Structure of this report
This report is structured as follows: Chapter 2 provides a preliminary view of market definitions within the upstream sewage and sludge sector; Chapters 3 – 7 provide more detailed assessments of the level of existing competition and the scope for increasing competition in each of the markets; Chapter 8 provides a summary of our view of the main options available to Ofwat at present; and, A number of annexes provide supporting information.
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Section 2 2BMarket definition
2 Market definition
2.1 Sector overview
By ‘upstream sewage and sludge’ Ofwat mean the treatment and disposal of sewage and sludge. Retail activities and the collection and transport activities provided by the sewerage network are not the focus of this analysis. For this analysis we have considered a range of activities: ‘Traditional’ sewage treatment; Sewage treatment for individual households and small communities; Sludge treatment and disposal; Sludge transport; Pre‐treatment of trade effluent and commercial wastewater recycling; and, Recycling of wastewater from domestic sources.
Figure 1 provides an overview of how these activities inter‐relate. They include the treatment of wastes from both domestic and commercial (non‐residential) customers. We have included wastewater recycling in our analysis because this is used as a means of reducing the amount of wastewater going for treatment and so can be viewed to some extent as a competing activity. Some companies that provide pre‐ treatment services for trade effluent also provide wastewater recycling services for industrial processes.
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Section 2 2BMarket definition
Figure 1: Overview of upstream sewage and sludge activities
Domestic Trade sewage effluent
Sewage Domestic wastewater Pre‐treatment treatment recycling Commercial wastewater recycling
Alternative sewage STW Sludge treatment treatment
Discharge Discharge Wet sludge De‐watered treatment sludge
Transport and Disposal
Transport and Disposal
Note: STW = Sewage Treatment Works. Small amounts of sludge are also produced at water treatment works and usually transported by road to sludge treatment facilities Source: London Economics Before discussing market definition in the upstream sewage and sludge sector, we briefly outline the main products and processes in the upstream sewage and sludge sector as represented in Figure 1. Further details of these products and processes are presented in the individual chapters, and Annex 2 provides a detailed description of the some of the current technologies available for alternative sewage treatment. The STWs are the sewage treatment works owned and operated by the ten WaSCs in England and Wales. As we discuss in Section 3, 95% of the population in the UK is connected to the public sewer networks that convey sewage from residential (domestic sewage) and non‐residential properties (trade effluent) to the WaSCs' treatment works. Sewage is treated at these facilitates and treated water is then returned (discharged) into the natural environment. Discharge to the natural
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Section 2 2BMarket definition
environment of treated water by the WaSCs is regulated under the Environment Agency's discharge consent process.4 Discharge of trade effluent to the public sewer network requires a trade effluent consent between the non‐residential source and the regional WaSC.5 In order to discharge to the public sewer network under the trade effluent discharge consents, non‐residential sources may undertake some pre‐treatment. Pre‐ treatment by the trade effluent source, prior to discharge to public sewer, can reduce the charges incurred by the non‐residential source.6 In addition, some trade effluent sources may choose to undertake commercial wastewater recycling. Commercial wastewater recycling reduces the volumes for pre‐treatment and volumes discharged to public sewer networks. Instead of discharge to public sewer, some trade effluent sources may elect to undertake sewage treatment as an alternative to discharge to public sewer, and then discharge treated water to the natural environment. In these instances the non‐residential source needs to acquire a discharge consent from the EA. Domestic sources can potentially undertake some wastewater recycling. Domestic wastewater recycling reduces the volume of wastewater entering the public networks, thereby reducing the loads treated by the WaSCs. In situations where connection to public sewer is not possible, alternative methods of sewage treatment are used. These alternative treatment technologies are often used for small communities or individual properties where distance and geography from the public sewer networks makes connection expensive. There are a number of different technologies available in these instances. These include cesspools, septic tanks and package sewage treatment plants. The technologies are summarised in Table 2, section 4 and Annex 2 provides further details of the technologies. Package sewage treatment plants treat sewage such that the resulting treated water can be discharged (returned) to the natural environment. An EA discharge consent is required. Septic tanks collect sewage and store it such that solids are deposited at the bottom of the tank. The resulting liquid may then undergo further treatment in package sewage treatment plants or other technologies such as reed beds or gravel filters before discharge to the natural environment. In some instances EA discharge consents may also be required for septic tanks. Sludge is a by product of the sewage treatment process. Sludge treatment centres undertake sludge treatment either geographically co‐located with the STWs, or at locations separate from the sewage treatment site. Sludge can be transported by road, barge or pipeline. However, road is the most common method in the UK for
4 http://www.environment-agency.gov.uk/business/regulation/32038.aspx
5 http://www.netregs.gov.uk/netregs/63352.aspx
6 The Modgen Formula is used to determine the trade effluent charge. http://www.envirowise.gov.uk/uk/Topics-and-Issues/Water/Water-Tools/Mogden- Formula-tool.html
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the transport of biosolids.7 There are three main types of sludge: primary sludge, secondary sludge and tertiary sludge. These three types are discussed in section 5.2. Sludge is heavy when it contains water (wet sludge) and as such thickening and dewatering processes are generally carried out at the site where the sludge is produced (at the STW). As mentioned above, dewatered sludge may be transported by road or barge to sludge treatment centres (geographically separate from the STW at which the sludge was produced). The sludge will then undergo further treatment before disposal. The transport of sludge for disposal generally takes place via road transport in the UK. An EA controlled waste licence is required in order to transport sludge.8 The main disposal routes are agricultural land spreading, incineration, land filling, forestry and silviculture (the intensive production of forests), land reclamation and combustion technologies which generate energy (a potential substitute for coal or gas).
2.2 Overall approach to market definition
Our approach to market definition is based on the standard approach used in competition cases. This approach is outlined in Box 1.
7 Pipelines are used when wet sludge is transported between co-located sewage and sludge treatment facilitates.
8 http://www.environment-agency.gov.uk/business/sectors/wastecarriers.aspx
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Section 2 2BMarket definition
Box 1: Market Definition In order to draw inferences about the level of competition or the extent of market power/dominance, it is first necessary to define the relevant market in which competition takes place. The standard economic test of relevant market definition is the ‘SSNIP test’ or ‘hypothetical monopolist test’. This defines the relevant market as the smallest set of products/services and geographic area such that a hypothetical monopolist would be able to impose a small but significant non‐transitory increase in price (SSNIP) above the competitive level, assuming the terms of sale of all other products/services remain the same. The SSNIP is usually taken to be 5‐10% above the competitive price level and lasting for one year. The test is applied to both the product and geographic dimensions of the relevant market and is based on the principle that a relevant market is something worth monopolising. Two types of competitive constraint are employed to inform the SSNIP test: demand‐ side substitution; and supply‐side substitution. Demand‐side substitution involves considering the extent to which consumers would substitute other products/services for the product/service under consideration in the event of a hypothetical monopolist imposing a SSNIP. Supply‐side substitution occurs where suppliers are able to switch production to the product/service under consideration and provide it in the short‐term (typically within a year) without incurring significant additional costs or risks in response to a small and permanent change in relative prices. If supply‐side substitution is feasible then the additional products/services supplied to the market are included as part of the relevant market. Bringing together both types of substitution, the relevant market then comprises of all those products or services (from possibly different geographical regions) that are substitutable in demand or supply. Nevertheless, the circumstances in which we are using our market definitions are different from those that normally apply in a competition case. The aim of our analysis is to provide Ofwat with an assessment of competition across the upstream sewage and sludge sector, together with barriers to competition, that contributes to the development of options for increasing the levels of competition. Our market definitions need to be sufficient to contribute to meeting these goals. In a competition case, on the other hand, the aim of the market definition is to contribute to an understanding of the extent of market power in one specific activity. Although the general principles of market definition that we apply are the same, the market definitions that we conclude are useful for this analysis might not be the same as those used for the purposes of assessing market power in a specific activity in the context of a competition case. We recognise that there is currently very little competition in some parts of the sewerage and sludge value chain and therefore little market information on which to base market definitions. In assessing competition and the scope for increasing competition in the various markets we define it will be important not to be too rigidly restricted by our market definitions. Ofwat will want to consider what the appropriate sewerage and sludge markets are for its future work on market reform. This report provides information which Ofwat can use to define markets
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Section 2 2BMarket definition
appropriately for its market reform work and of course does not bind them to the market definitions given here. 2.3 Precedents
We also undertook a short review in order to see if we could find any relevant precedents for market definitions in upstream sewage and sludge markets. A summary of our findings is provided below. 2.3.1 Germany In Germany, local communes are legally responsible for sewage disposal in their territory. 99.5% of sewage is treated in facilitates operated by individual communes. These communal enterprises are exempt from VAT so that there is very little incentive for private enterprises to enter this market. The new government wishes to introduce more competition, but there is strong resistance by the existing communal providers. Some Länder (regional Governments) are conducting benchmarking exercises between these providers with the aim of improving efficiency. The federal cartel office (the national competition authority) lists no cases in the sector. 2.3.2 USA Wastewater services in the USA are largely provided by local municipalities. The US Environmental Protection Agency estimates that there are about 16,000 community wastewater systems across the USA and that 98% of these are publicly owned. The remainder are investor‐owned. There are some large investor‐owned water utilities that operate nationally, or across several States. They own some wastewater infrastructure themselves and they also operate publicly‐owned municipal systems under contract.9 These investor‐owned utilities face competition at a strategic level in that they may be competing with others to purchase publicly owned or investor‐owned infrastructure networks where these are for sale and they may also be competing for operation and management contracts. They do not, however, generally face competition at the level of individual municipal systems. The US federal competition authorities (US Department of Justice Antitrust Division and the Federal Trade Commission) do not list any directly relevant cases. There are a number of cases, however, that relate to bid rigging in contracts for equipment linked to wastewater treatment.10 There was also one case in Oklahoma in 1998 that related to a municipality withholding water and sewerage services from customers
9 Three of the larger investor‐owned utilities are American Water, United Water and Aqua America. For a period between 2003 and 2006 American Water (the largest such utility in the USA) was owned by RWE and managed through Thames Water. United Water is owned by Suez. 10 For an example, see ‐ http://www.justice.gov/atr/public/press_releases/2001/200149.htm
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Section 2 2BMarket definition
who switched from the municipal electric supplier to a competing investor‐owned supplier of electricity services.11 2.3.3 UK In 2002, Ofwat started an investigation into a complaint by Quantum Waste Management Limited that United Utilities was abusing a dominant position. The complaint related to the transport and treatment of tankered landfill leachate. Quantum provided transport services for the leachate from landfill sites to United Utilities’ wastewater treatment works in the North West of England and in North Wales. In 2001 it had lost some of its haulage business to United Utilities. Whilst Ofwat did not uphold the Quantum complaint, their decision did provide an indication of Ofwat’s view of the relevant market definition and the reasoning behind that view.12 Ofwat concluded that the relevant product market was likely to have been the market for tankered landfill leachate: Landfill leachate was considered to be in a separate market from other types of trade effluent because of its variable composition and consequent treatment difficulties; Tankered leachate was considered to be in a different market from leachate disposed directly into the public sewer for similar reasons – leachate that is tankered has a different composition that is more expensive to treat and its treatment commands a higher price. Unlike leachate disposed into the public sewer, tankered leachate is also outside the regulated business of a water and sewerage company (WaSC). Ofwat concluded that for practical purposes the relevant geographic market was the North West of England and North Wales.13 This is the area in which Quantum operates. United Utilities is the appointed undertaker in the North West of England, but it also owns Hyder, which operates waste water treatment works in North Wales. The main constraint on the size of the geographic market is the high cost of tankering landfill leachate. 2.3.4 Jersey The Jersey Competition and Regulatory Authority (JCRA) found an abuse of dominance in the sewerage services market in Jersey in 2009.14 The case relates to the transport (by road) of waste from septic tanks and ‘tight tanks’ to a sewage treatment facility known as Bellozanne.15 The States of Jersey Transport and Technical Service (‘TTS’) department provides a service that
11 See OECD (2004). 12 See ‐ http://www.oft.gov.uk/shared_oft/ca98_public_register/decisions/unitedlandfill.pdf 13 Though Ofwat considered that in reality, each individual landfill site might have its own market of 30 miles radius, unless there were no treatment sites within this radius, in which case landfill site operators would look further afield (or consider self‐supply of treatment services). 14 See ‐ http://www.jcra.je/pdf/090520%20TTS%20Decision%20public%20version.pdf 15 ‘Tight tanks’ are cesspits and cesspools.
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Section 2 2BMarket definition
transports this waste to Bellozanne (the only sewage treatment works on the island). By restricting access for other potential sewage and sludge transport providers to `Bellozanne, TTS was found to have abused it’s dominant position in the provision of services for emptying and transporting the waste from septic and tight tanks. The JCRA determined that “the relevant product market for the purpose of this Decision is the market for sewerage services. For the purposes of this Decision, the term ‘sewerage services’ means the emptying of waste from septic and tight tanks, the transportation of the waste to the disposal facilities at Bellozanne and the discharge of the waste at those facilities.” 2.3.5 Australia The National Competition Council of Australia was asked in 2004 to declare the relevant product market for collection (retail) and transportation of sewage. This was motivated by an application by Sydney Services to collect and treat sewage in the Sydney area which was collected and treated by Sydney Water the publically owned incumbent monopoly. Sydney Water argued that collection (retail) and transport of sewage through the public pipeline network were in the same market because the blending of the sewage meant it was not possible to estimate the characteristics of the input at the point of collection relative to sewage output ate th treatment plant. This in turn meant that that the treatment providers could not establish prices based on the costs of their respective customers and the amount treated at each sewage treatment works. In 2006, the National Competition Council declared that collection (retail) and transport of sewage were not in eth same product market. This was because heterogeneity of inputs and blending in the transportation network occurs in other sectors such as gas and electricity, and as such it is possible to measure or estimate the volumes and loads and composition of inputs and outputs in order to establish pricing mechanisms to customers served by a competitor. Further details are contained in Annex 4. 2.4 Market definition – upstream sewage and sludge
2.4.1 Product/service market In line with standard market definition practice we take a narrowly defined product market as our starting point and consider whether it is reasonable to expand the scope of the market taking account of both demand and supply substitutability. Typically, sewage treatment in England and Wales is carried out by onee of th ten water and sewerage undertakers using a sewage treatment works that is linked to one of their public sewers. The degree of treatment undertaken at each works varies and may include preliminary, primary, secondary or tertiary treatment. As our starting point we take this 'traditional' sewage treatment as a series of separate product markets, one for each of the four levels of treatment listed above.
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Below, we consider the scope for expanding the scope of this product market in each of the following ways: Including all levels of traditional sewage treatment; Including pre‐treatment of trade effluent; Including recycling of wastewater both commercial and domestic; Including alternative forms of sewage treatment for individual households and small communities; Including sludge treatment and disposal; and, Including discharges to the environment.
Should all stages of ‘traditional’ sewage treatment be in the same market? The degree of treatment that is undertaken at a works depends principally on the legislative and regulatory requirements for the quality of the discharge into the environment and is licensed through the Environment Agency's discharge consent procedures. The quality of the discharge required will depend on the specific characteristics of the receiving environment. The highest level of treatment, for example, may be required where discharges are made to bathing waters or to shellfish growing areas. Consider a potential common carriage system, where a new entrant operator of a sewage treatment works, connected to the public sewer, contracts with their final domestic or commercial customers to treat their sewage and with the water and sewerage undertaker to transport that waste (or an equivalent volume and composition of waste). The level of treatment required at the new entrant’s works may or may not be the same as the level of treatment required at the incumbent’s works. The discharge may be to a different part of the environment and hence may require different levels of treatment. The demand from the final customer for a particular treatment level is unlikely to go further than to expect that the treatment and subsequent discharge complies with all relevant legislation and regulatory requirements. In this case we would expect there to be demand substitution where the new entrant’s works also meets or exceeds these requirements, and is able to do so at similar cost. It may be difficult for a new entrant to provide a higher level of treatment at similar cost however, particularly if the new entrant is also unable to achieve the same scale economies. In some cases differences in the discharge requirements may mean that the new entrant is able to meet its regulatory requirements by a lower level of treatment than the incumbent. In effect this is supply substitution and is more likely to be a reality, though scale may remain an issue. In practice it might be expected that entry is more likely to happen where an entrant sees an opportunity to discharge to a different location that requires lower levels of treatment. We cannot be clear about the extent that these opportunities are likely to be available in practice. Incumbents may already be discharging at the lowest cost discharge point. In situations where return flows of treated water may be valued by the Environment Agency or other agents in the economy (e.g. land‐based aquaculture (fish farms) that may require dilution of nutrient rich water discharged as part of the fish
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Section 2 2BMarket definition
growing process), a price for return flows may create opportunities for new entrants to seek alternative discharge locations in catchments in order to manage flows (and thereby concentrations of salinity, suspended solids, nitrogen, phosphorous etc.) in rivers. To date return flows are not valued however in the future as the Environment Agency considers the future options for valuing and pricing abstraction water return flows could be captured in the economy. Overall, for the purposes of Ofwat’s current analysis we believe that it would be appropriate to include all treatment stages in the same market, whilst recognising that circumstances in some cases may be sufficiently different to warrant a different market definition. At the present time the definition in this respect is unlikely to make any different to the assessment of competition in the market.
Is pre‐treatment of trade effluent in the same market as traditional sewage treatment? In general, the water and sewerage undertaker’s sewage treatment works function such that they are able to treat domestic waste; and commercial waste that has similar characteristics to domestic waste. Where industrial processes produce effluent (‘trade effluent’) which has significantly different characteristics then the water and sewerage undertakers require that the trade effluent is pre‐treated such that the discharge into the public sewer has a composition that is similar to domestic waste.16 In effect, pre‐treatment is at a different level in the value chain and so there is limited scope for demand substitution. An increase in the price for sewage treatment is not likely to lead to a substitution towards pre‐treatment as this is a different service. We understand that some providers of pre‐treatment services are able to treat trade effluent to a standard that enables direct discharge to the environment and so, in some circumstances at least, supply substitution is possible. Whilst this may sometimes be feasible, our understanding is that the norm is for discharge of pre‐treated effluent to the public sewer.17 Overall, we conclude that it would be most appropriate for Ofwat to consider pre‐ treatment services for trade effluent as a separate market from traditional sewage treatment.
Is recycling of wastewater in the same market as traditional sewage treatment? Trade effluent Some industrial customers recycle their wastewater in order to limit the level of both the trade effluent charges and the water charges that they pay. Many suppliers of pre‐treatment services supply comprehensive water and wastewater management services including wastewater recycling. Joint provision of
16 The precise requirements may vary significantly. 17 This outcome depends on the nature of the trade effluent being treated and the scope for obtaining a consent from the Environment Agency for discharges direct to the environment.
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these services (pre‐treatment and wastewater recycling) suggests they may be in the same market. There is scope for demand substitution between these services – increases in the price of pre‐treatment could lead to more recycling . Similarly, increases in the price of trade effluent (discharges to the public sewer) could lead to more recycling. Our initial conclusion is that Ofwat should treat commercial recycling of wastewater as being in the same market as pre‐treatment (given the joint provision of these services) but that Ofwat should not lose sight of the possibility that recycling could now or in the future have the potential to constrain prices for discharges of trade effluent into the public sewer.
Domestic wastewater Domestic wastewater reuse systems are also available. Since these can reduce the amount of wastewater that households discharge to the public sewer then there is scope for demand substitution. The incentives for customers (who are connected to the public sewer) appear limited however. Many are not metered and so do not pay sewerage charges that are linked to volumes. For those households who have water meters the return to the sewer is generally estimated by the sewerage undertakes as a fixed percentage (e.g. 95%) of their water volumes. There is scope for customers to present a case to their supplier for why this fixed percentage should be different in their circumstances (e.g. because of wastewater recycling). The scope for rapid supply substitution from the provision of household water recycling products and services to wastewater treatment appears very low. We suggest that for the purpose of their policy analysis, Ofwat treat domestic wastewater recycling as being a separate market from traditional sewage treatment. There appears to be little likelihood at present that increases in water and sewerage charges would result in substantial increases in recycling, though we should not lose sight of the potential for this to change over time.
Are sewage treatment for individual households and small communities in the same market as traditional sewage treatment? Where access to the public sewer is particularly difficult or expensive a number of alternatives have developed, generally for the use of individual households or small communities. These alternatives include septic tanks, package sewage treatment plants, and passive treatment mechanisms, such as reed beds and chemical and compost toilets. There is a wide range of companies that install and, where necessary service, these alternatives. These systems are a direct substitute for connection to the public sewer and are installed by householders or developers in circumstances where connection to the public sewer is difficult. Building regulations require that consideration should be first given to connection to the public sewer (directly or indirectly) and only where this is not feasible should these alternative mechanisms be used. We note that some sewerage undertakers have also started to replace smaller old sewage treatment works with package treatment works. Given the potential for at
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Section 2 2BMarket definition
least some of these forms of sewage treatment processes aimed at individual households and small communities to provide a competitive constraint on the services provided by smaller traditional sewage treatment works, we propose that Ofwat consider two markets for sewage treatment – one serviced by larger sewage treatment works and one serviced by smaller sewage treatment works. The latter market would include the alternative forms of sewage treatment discussed here. We note that there needs to be a relaxation of the Building regulations for the latter to provide a competitive constraint on traditional small sewage treatment works. We also note that whilst alternative forms of sewage treatment may have the potential to provide a competitive constraint on smaller traditional sewage treatment works, in isolated households and smaller communities, traditional sewage treatment works, even smaller ones, will not be able to provide a competitive constraint on these alternative forms of sewage treatment and so this is likely to constitute a separate market again.
Is sludge treatment in the same market as traditional sewage treatment? All forms of sewage treatment generate biological sludge (or biosolids) as a by‐ product.18 As such the generation of sludge is a complement in production to sewage treatment (they are produced jointly). The subsequent treatment of sludge for disposal can be undertaken in a number of steps using different forms of technology. These steps are thickening, dewatering, stabilisation and disinfection and thermal drying. Each step can be undertaken using different forms of biological, chemical or physical processes.19 In general sludge treatment is geographically co‐located with sewage treatment as there are economies of scale in the co‐location of the technologies. Further, the cost of transporting sludge can be high making it (in some instances) uneconomical to transport the sludge from the sewage (or wastewater) treatment works to a geographically distant sludge treatment facility. Finally, there are co‐ordination requirements between sewage treatment and sludge treatment to account for the type and volume of sludge treatment, and the planned disposal routes (NERA 2008). However, due to the economies of scale in sludge treatment many small sewage treatment plants will transport sludge to a central large scale sludge treatment facility. These sludge treatment facilities are co‐located with large scale sewage treatment works (e.g. Southern Water’s Millbrook Treatment and Recycling Centre and Thames Water Reading Sewage Treatment Works). Further, there are some examples of (de‐watered) sludge being transported from several sewage treatment works to a single sludge treatment facility. Such an example is Welsh Water which is building (using the Norwegian contractor Cambi)
18 Water Framework Directive Information Centre, http://www.euwfd.com/html/sewage_treatment.html. Note that some forms of water treatment also generate sludge. 19 Sludge treatment facilities often produce sludge liquors which require treatment, akin to trade effluent. This treatment is often provided at a sewage treatment works – another synergy between the sewage and sludge treatment facilities.
London Economics February 2010 20
Section 2 2BMarket definition
an anaerobic digestion facility next to their existing sewage facility in Port Talbot South Wales. De‐watered sludge from across South East Wales will be transported for subsequent treatment at Port Talbot. The final output will be high quality sludge cakes for use in agriculture and the generation of electricity and heat which will in turn be used to run the sludge treatment facility with the possibility of some electricity being sold back into the grid.20 A further example is the sludge treatment centre at Great Billing operated by Anglian Water, which receives sludge from at least three other STWs. We discuss this example in greater detail in Section 5.4.2 (p. 55). Therefore, in theory it would be possible for sludge treatment to be supplied by entities other than the sewerage undertaker. In practice however, the feasibility of separate suppliers of sludge treatment may be constrained by the high up‐front costs and economies of scale associated with sludge treatment such thate th most economically advantageous decision is for the sewerage undertakers to also undertake sludge treatment on‐site with large scale sewage treatment works and pooling sludge from smaller sewage treatment works in the region. There is the possibility of treating dewatered sludge as a separate market to wet sludge because the transportation costs of dewatered sludge would be less than wet sludge and hence new suppliers could pool dewatered sludge from multiple and geographically disperse sewage treatment and sludge dewatering works. As such there could be some substitution in supply between sludge treatment operators for the dewatered sludge. Our initial conclusion is that Ofwat should consider ‘traditional’ sewage treatment and sludge treatment up to and including dewatering as in the same market due to their joint provision. However, sludge treatment beyond dewatering could be considered a separate market as once the sludge is dewatered different stabilisation and disinfection and thermal drying processes could be used across different geographic locations, therefore it is possible that different suppliers could enter this market and sludge producers could substitute between suppliers of subsequent processing. The extent to which this is practically feasible will depend on the economies of scale in subsequent treatment (post dewatering), and the possibility of new entrants accessing the de‐watered sludge from the incumbent sewage undertakers. We also considered whether this market is a wider market that includes the treatment of other wastes, such as co‐digestion with wastes from the food industry or the co‐composting of sludge with green waste, for example. Co‐composting already occurs in the UK.21 Co‐digestion already occurs elsewhere in Europe.22 We
20 See http://www.contractjournal.com/Articles/2009/10/06/72345/aarsleff‐lays‐foundations‐for‐sludge‐ treatment.html 21 For an example of a company providing this Service, see http://www.yorwaste.co.uk/services_composting.html 22 For example: “In Europe, wastes from meat processing plants and slaughter houses (abattoirs) are commonly mixed with municipal sludge and manure waste streams in biogas plants (Braun, 2002).”http://www.mnproject.org/pdf/CombinedWasteStreamsReport.pdf; “Therefore, in many municipal sewage sludge digesters, organic wastes are co‐digested on an occasional basis. Some successful examples from sewage treatment plants have been reported in Denmark, Germany and Switzerland.” (2003). http://www.iea‐biogas.net/Dokumente/Potential%20of%20Codigestion%20short%20Brosch221203.pdf
London Economics February 2010 21
Section 2 2BMarket definition
understand that there may be some regulatory barriers for co‐digestion in the UK, such as a requirement for pasteurisation before co‐digestion can occur, though the sewerage undertaker we spoke to did not think that this barrier was sufficient to prevent co‐digestion happening in the UK – they anticipated that co‐digestion would develop. The Anaerobic Digestion Task Group, reporting to Defra, said in July 2009 ‐ “An important area for the growth of anaerobic digestion is in the co‐digestion of other feedstocks with sewage sludge. The water industry has a well established infrastructure of anaerobic digestion plants ande extensiv experience of the technology. However sewage sludge and waste are covered by different regulatory regimes. The Task Group are therefore recommending actions to clarify how to meet the requirements of both regimes when co‐digesting feedstocks. ”23 We propose not to include the treatment of wider wastes in this market for the present but that further consideration should be given to the potential competitive benefits of removing any existing constraints on co‐digestion. If such constraints were removed then there may be potential to consider this market as a much wider market involving the treatment of other waste streams, such as food waste, in addition to sludge. The further development of co‐composting could also lead to an expansion in the definition of this market.
Is sludge transport for disposal in the same market as sewage or sludge treatment? There are many specialist companies in the UK that transport sludge from treatment works for disposal (to landfill, for incineration, to agricultural land etc). Competitive conditions in this market seem very different from those in the sludge treatment market and we propose that Ofwat treat sludge disposal as a separate market.
Are wastewater discharges in any of the above markets? Wastewater is returned to the environment after the sewage and sludge has been treated. In general this is discharged into the environment (typically an inland watercourse or the sea) close to the point of final treatment. The required composition, volume and location of discharge is determined by the Environment Agency through the discharge consents regime. At present we cannot see any purpose in treating this as a separate market. Nevertheless, in some circumstances at least, wastewater may be thought of as having a value in the sense that it is placing an additional volume of water into the environment and this increase in flows may have value.24 If institutional or market mechanisms enabled the discharger to capture some of this value then there might be a potential for a separate market in wastewater discharges to develop. This might happen, for example, if the Environment Agency made payments for discharges (or discounts on fees, under the current regime) whose value reflected the location and timing of the discharge.25
23 See ‐ http://www.defra.gov.uk/environment/waste/ad/documents/implementation‐plan.pdf 24 In some circumstances, e.g. where there is already flooding, this value might be negative. 25 The Cave Review has made some related proposals.
London Economics February 2010 22
Section 2 2BMarket definition
2.4.2 Geographic markets We take as our starting point for the geographic market definition, the sewerage network to which the sewage treatment works in question is connected. Potential alternative, and wider, geographic markets include the water and sewerage undertaker’s area of appointment, an England & Wales market, a GB or UK market and a wider international market. For ‘traditional’ sewage treatment we consider that the most appropriate geographic market, for small and large sewage treatment works, is likely to be the current sewerage network plus any areas close enough to the public sewer to justify potential connection to the network. The scope of the latter is likely to vary according to the circumstances. Alternative sewage treatment is currently restricted to relatively small scale treatment of domestic sewage, where access to the public sewer is difficult or expensive. The market for the equipment (e.g. package sewage treatment plants) is likely to be national (or international), though the market for installing and servicing the equipment is likely to be local or regional. Markets for the treatment of dewatered sludge are likely to be wider in scope than markets for sewage treatment, though still regional rather than national in scope. The economies of scale in the further treatment of dewatered sludge mean that, in spite of the high cost of transportation, it is worth transporting some dewatered sludge from smaller sewage treatment works to large sludge treatment centres. The exact size of these markets will vary across the country, depending on the configuration of sewage and sludge treatment works. Pre‐treatment of trade effluent is undertaken on‐site at large industrial installations and also off‐site at independent treatment works. Industrial wastewater recycling takes place on‐site and is often provided jointly with on‐site pre‐treatment services. The scope for demand‐side substitution is limited, recycling can usually only take place on site whilst for pre‐treatment there may be some scope to tanker waste to independent treatment works though the distance it will be worth tankering is likely to be limited.26 There appears to be much more scope for wider supply‐side substitution with a number of companies providing services over relatively large geographical areas.27 This point would need to be explored further for individual cases, but it may be sufficient to justify a national market. There is little scope for geographical demand‐side substitution for domestic wastewater recycling – inevitable, as the recycling takes place at the customer premises. On the supply‐side we judge that there is much wider scope for substitution. Suppliers of many recycling products are likely to be selling them nationally. Suppliers of related services may have a more regional scope. We suggest that Ofwat treat this market initially as a national market.
26 Ofwat thought this distance might typically be 30 miles for landfill leachate in the Quantum case. 27 For example – Biffa Waste Services and Shanks Waste Services.
London Economics February 2010 23
Section 2 2BMarket definition
The scope for geographical demand‐side substitution for the transport and disposal of waste is very limited – it invariably needs to be collected from a particular site and delivered to the disposal option. There is scope for the disposal option to vary however in line with the relative costs of transport. On the supply‐side there is much wider scope for substitution. The extent of the market is likely to vary according to individual cases, but we believe that it is most likely to be regional or national as a result of the scope for supply‐substitution. Table 1 summarises the product markets and the respective geographical markets.
Table 1: Market definition summary
Product Market Geographic market
Large scale traditional sewage treatment Sewage network
Small scale traditional sewage treatment and Sewage network alternative sewage treatment
Alternative sewage treatment in remote Demand restricted to remote areas/new locations developments not connected to public sewer. Supply of equipment – national or international Installation and servicing – local or regional
Treatment and disposal of sludge Regional markets, wider than sewage networks
Commercial pre‐treatment and wastewater Regional or national recycling
Domestic wastewater recycling National
Transport of sludge Regional or national
Source: London Economics
London Economics February 2010 24
Section 3 3B‘Traditional’ sewage treatment
3 ‘Traditional’ sewage treatment
3.1 Background
More than 95% of the population in the UK is connected to mains sewer leading to a sewage treatment works28, either via a public sewer or a private sewer which then connects to a public sewer. Sewage is conveyed via drains into the public sewer network, which collects and transports sewage from a number of residential and non‐residential properties to sewage treatment works. Domestic sewage can be discharged in eth public sewer with no further consent or treatment, while commercial and industrial premises need to obtain a trade effluent consent29 and may also need to pre‐treat their sewage before discharging into the public sewer. The objective is to make sure that all discharges are broadly comparable to domestic sewage and are not potentially harmful for the environment or public health and are not damaging for sewers and sewage treatment works. In this section we focus on the treatment of sewage discharged directly into the public sewer. According to data published in the 2009 June returns, there are currently approximately 6,400 sewage treatment works operated by the ten regulated sewerage undertakers. These sewage treatment works vary considerably in terms of population they are able to serve and standard of treatment available in the treatment works (whether primary secondary or tertiary). The next figure summarizes the total number of sewage treatment works by size30. As presented in Figure 2, more than half of the sewage treatment works are very small treatment works (Band 1 and Band 2), able to serve less than 500 population equivalent (pe)31. This indicates that most sewage treatment works are only able to serve small developments. Conversely, slightly less than 400 treatment works (6% of the total) are classified as large (Band 6), which means they can treat sewage collected from more than 25,000 customers. The picture is considerably different when we account for sewage loads received rather than overall number of works: large works treat more than 80% of the sewage load collected, while treatment works in Band 1 and Band 2 treat less than 1% of the total load.
28 Similar figures are reported by DEFRA (Sewage Treatment in the UK, 2002) and Water UK (Wastewater treatment and recycling, 2006) and refer to the whole of the UK. 29 Trade effluent is defined by the UK environmental regulators as “any liquid waste (effluent) that is discharged from premises being used for a business, trade or industry.” See http://www.netregs.gov.uk/netregs/63348.aspx 30 Data are drawn from Table 17c of the June Return 2009, as published by the different regulated sewerage undertakers. 31 The OECD defines population equivalent (in waste‐water monitoring and treatment) as “the amount of oxygen— demanding substances whose oxygen consumption during biodegradation equals the average oxygen demand of the waste water produced by one person. For practical calculations, it is assumed that one unit equals 54 grams of BOD per 24 hours.” In Ofwat’s calculations, the biological oxygen demand (BOD) for one person corresponds to 60 grams per day (see for example the size bands for STWs).
London Economics February 2010 25
Section 3 3B‘Traditional’ sewage treatment
Figure 2: Proportion of works by works’ size – using number and loads received
Loads received
82%
8%
7% 2% 0% 0%
Note: Size bands are defined in the June return definitions manual as Size band 1<= 15kg BOD5/day (population equivalent: 0 ‐ 250) Size band 2>15 but <= 30kg BOD5/day (population equivalent: 250 ‐ 500) Size band 3>30 but <= 120kg BOD5/day (population equivalent: 500 – 2,000) Size band 4>120 but <= 600kg BOD5/day (population equivalent: 2,000 –10,000) Size band 5>600 but <= 1500kg BOD5/day (population equivalent: 10,000 – 25,000) Size band 6> 1500kg BOD5/day. Source: London Economics, based on data from June returns 2009 (Table 17c and 17d). Among the category of large treatment works (Band 6) there are significant differences in capacity across sewerage undertakers and also within treatment works operated by the same undertaker. We present summary statistics in Table 2. The proportion of large works within the total operated by each undertaker in its appointed area varies from 2% (Dwr Cymru ‐ Welsh Water) to 15% (Thames Water), while the proportion of load received in large treatment works ranges from 65% (Anglian Water) to 95% (Thames Water). The class of large works cover all works serving more than 25,000 pe and is not homogenous, including works serving medium‐size developments and works serving large urban areas. In fact, the maximum capacity of a single sewage treatment works is about 3.3 million, while the overall average is around 130,000, indicating the presence of a significant proportion of large sewage treatment works (more than two thirds of the total in this category) serving less than 100,000 pe.
London Economics February 2010 26
Section 3 3B‘Traditional’ sewage treatment
Table 2: Large works – details
As % of Average Max Number of As % of Company loads capacity capacity works own works received (000 pe) (000 pe)
Anglian Water 47 4% 65% 94 314 Dwr Cymru 19 2% 70% 141 822 Northumbrian Water 23 5% 87% 121 986 Severn Trent 63 6% 81% 129 1,669 South West Water 16 3% 60% 61 149 Southern Water 43 12% 82% 82 369 Thames Water 52 15% 94% 266 3,280 United Utilities 64 11% 90% 125 1,175 Wessex Water 22 5% 71% 95 751 Yorkshire Water 40 6% 81% 125 547 Total 389 6% 82% 132 3,280 Note: Large works are classified as those with a load> 1500kg BOD5/day. Pe= population equivalent Source: London Economics, based on data from June returns 2009 (Table 17b and 17c). Data from the June returns also specify the treatment available in the various sewage treatment works. From the data it emerges that more than 60% of the sewage treatment works are able to treat sewage to secondary treatment standards, 31% also to tertiary treatment, while in 6% of the sewage treatment works only primary treatment is available. There is also a very limited proportion of sewage treatment works (0.3%) which are classified as sea outfalls. In terms of sewage volumes treated to different standard levels, more than 99% of the sewage load receives at least secondary treatment, while there is a very small proportion of sewage only receiving primary or preliminary treatment. In Figure 3 we present the proportion of volumes32 treated by each regulated sewerage undertaker during 2008/09. There are substantial differences in volumes treated across sewerage undertakers, reflecting the different territory and population they serve.
32 Proportions by connected populations are nearly identical.
London Economics February 2010 27
Section 3 3B‘Traditional’ sewage treatment
Figure 3: Proportions of volumes treated 2008/09 (%)
Note: Total load entering sewerage system (BOD/year) Source: London Economics, based on June returns 2009 (Table 15) 3.2 Potential for and barriers to competition
According to Ofwat’s estimates (2008)33, sewage treatment on its own accounts for around 44% of total cost allocation in the sewerage value chain. This figure indicates that sewage treatment is the largest element of the sewerage value chain by cost, and also underlines the importance of achieving cost efficiency in this segment.
Size of works and relevant market As shown in the previous section, more than 80% of the load is treated in less than 400 (about 6%) of the treatment works, while there is a high number (around 3,000) of micro sewage treatment works (serving up to 250 pe). For the purposes of this analysis we think that it is useful to treat small STWs as being in a different product market to large STWs. This is principally because of the potential for package treatment works to substitute for small STWs (if there is regulatory change), but it is also the case that economies of scale and scope (with sludge treatment centres) may only be achieved at large works. In the rest of the chapter we focus on larger treatment works and review the barriers to competition and explore the scope for introducing competition in large sewage treatment works.
33 Ofwat’s review of competition in the water and sewerage industries: Part II (2008).
London Economics February 2010 28
Section 3 3B‘Traditional’ sewage treatment
Characteristics of the market The process of sewage treatment is characterized by a combination of technical, economic, regulatory and planning/environmental constraints which may act as an incentive or an obstacle to the development of competition34. The following factors may act as a barrier to competition: The market is likely to be localized because of network constraints and high transportation costs, even when we restrict our attention to larger treatment works. Planning and environmental permission (e.g. discharge consent for sewage disposal) may bar the way to the construction of new sewage treatment works. The heterogeneous nature of sewage. Inputs collected may be significantly different in volumes and type, but they are not distinguishable once they enter the transportation network and then reach the treatment works. However, as argued in the case of Services Sydney35, it is possible to establish meaningful prices for sewage collection and treatment services, even if heterogeneous inputs are “blended” in the transportation network. Presence of economies of scale at plant level. Presence of economies of scope from co‐location with sludge treatment centres (for example in terms of reduction of transport costs, coordination of the activities, planning permissions). These factors could hinder the entry of new competitors where an operating site already exists. High set‐up and operational costs – in fact a new entrant needs to either build a new sewage treatment works or negotiate with the existing regional incumbent to take over an extant treatment works. Need for coordination with operators providing sewerage transport. Conversely, a series of elements may provide incentive for competition in sewage treatment: The large importance of the sewage treatment element in the sewerage value chain. This means that efficiency gains in sewage treatment may generate significant reductions in overall costs. We mentioned above that economies of scale at plant level are likely to hinder competition if a sewage treatment works is already in use. However, in areas where sewage is treated at several treatment works, the presence of economies of scale and scope could also favour competition. In fact, new entrants may experience lower average costs if they are able to treat in one plant sewage currently treated at several treatment works. Possible further
34 See also Ofwat’s review of competition in the water and sewerage industries: Part II (2008) 35 As detailed in the Sydney Water Case (Annex 4), competition could be established if it is possible to measure or estimate volumes and composition of inputs and off‐takes and price them accordingly. Similar arrangements are in use in the gas and electricity sectors.
London Economics February 2010 29
Section 3 3B‘Traditional’ sewage treatment
efficiency measures may be available, such as co‐locating a new sludge treatment centre and taking advantage of economies of scope and reduction in sludge transport costs. The possibility of implementing an integrated approach to sewage management, including retail services, sewage treatment services, wastewater recycling and sludge treatment and disposal. Efficiency gains may be available in all elements of the value chain and make it worthwhile entering the sewage treatment market. Future challenges will increasingly shift the focus on sustainable use of resources and better protection of the environment and public health. This could generate scope for competition as companies react to meet environmental and other targets at the lowest possible cost.
Potential for competition Overall it is clear that there is little or no competition at present and we believe that the scope for future competition in services currently provided by large sewage treatment works is more limited than in other parts of the upstream sewage and sludge sector. If the market‐like framework proposed by the Cave Review, including common carriage for sewerage, is introduced then there may be some scope for in the market competition for large scale sewage treatment, though it seems to us that the opportunities may be limited. Perhaps the main opportunities may arise in sewerage networks where there is a significant upward shift in demand (e.g. from new urban or industrial development) that means that new sewage treatment capacity is required. In order to be in a position to provide this additional capacity, a new entrant would need to overcome a number of barriers: Sewage treatment experience/expertise Finance for the capital costs Discharge consent from the Environment Agency Disposal/treatment route for sludge that is generated A ‘customer’ for the treatment service A means of transporting sewage from the customer to the treatment works. Common carriage and an economic purchasing obligation may mean that there are opportunities for new entrants to develop the new treatment capacity required, though bilateral trading arrangements with retailers might be more successful if we believe that independent retailers would be more motivated to seek treatment capacity from outside the main undertakers. If there are significant gaps in technological, organizational or environmental standards in existing sewage treatment facilities, the need for significant investment in upgrading out of date facilities may also open scope for competition. However, given the pressures for efficiency under the current system, it seems unlikely that there will be many opportunities where differences in efficiency or access to more
London Economics February 2010 30
Section 3 3B‘Traditional’ sewage treatment
advanced technology are so significant so as to justify new entry in an incumbent’s market in the short and medium term. Competition might also be more likely to develop where there is scope for optimizing the residual value of the end products of sewage treatment, which are purified wastewater and sludge. If new entrants were able to capture the value of waste water then this might give additional incentives for entry. Values might relate to value in the environment (with the Environment Agency paying for discharges into environments where additional volume is required) or the value to industrial or agricultural processes.36 Similarly, the potential for increasing value in sludge (for various uses) may serve to provide additional opportunities for new entrants.
36 The practice of sewer mining in Australia is an example of where the value of wastewater is captured by new entrants who realise the Value through its use in the irrigation of agricultural land.
London Economics February 2010 31
Section 4 4BSewage treatment for individual households and small communities
4 Sewage treatment for individual households and small communities
Background Connection to public sewer is the preferred option for domestic sewage treatment and disposal whenever possible. The Building Regulations 2000, Drainage and Waste Disposal37, states that foul water should be drained into (in order of priority): a public sewer, a private sewer communicating with a public sewer, a septic tank or other sewage treatment system or, if none of the above options is practicable, a cesspool. New residential developments are asked to connect toc publi sewer, or explore all possible solutions for discharging into the public sewer (for example via pumping) when the development is not in the immediate proximity of a public sewer. Connection to public sewer implies a close monitoring of discharges: sewage is collected and carried to sewage treatment works for treatment and disposal by the appointed sewerage provider. Currently more than 95% of UK population is connected to a traditional sewage treatment works. However, in some cases (especially for small communities or individual households not in proximity of the public sewer) connection to public sewer is not a viable option, given the high costs associated with it. In these cases alternative solutions for sewage treatment and disposal are available. The solutions vary in complexity and degree of sewage treatment and the possibility of discharge. The most common alternative solutions for residential sewage treatment are summarised in Table 338, and some examples are described in Annex 2.
37 Available at http://www.planningportal.gov.uk/uploads/br/BR_PDF_ADH_2002.pdf 38 See the EA “Pollution prevention guidelines ‐ treatment and disposal of sewage where no foul sewer is available: PPG4”
London Economics February 2010 32
Section 4 4BSewage treatment for individual households and small communities
Table 3: Alternative systems for domestic sewage treatment
Solution Description Treatment Discharge
Cesspools Watertight tank installed No treatment of sewage onsite, sewage need to be No possibility of direct discharge. Cesspools are underground and used for storing tankered to a sewage treatment works for only used for storage and require regular sewage. treatment. emptying. They are the least favoured option and must be yused onl when no other option is feasible.
Septic tanks Formed by one or (more often) Allows settlement of solids (sludge) and some The effluent is passed into a drainage field for two/three chambers, with a tank treatment thanks to the natural bacterial action. further treatment and disposal (subject to a that holds the sewage and allows Further treatment can occur in package sewage percolation test). Liquids are absorbed in the the deposit of solids at the treatment plants, reed beds or gravel filters before ground, while micro‐organisms in the soil filter bottom of the tank. discharge into the environment. Sludge needs to any remaining organic matter, making it safe to be pumped out and carried away for disposal. discharge to the environment. A discharge consent is often needed (depending on volumes discharged and other conditions).
Package sewage Different types available, but Aerobic treatment occurs in the bio‐zone, where Sewage is treated to a standard that makes it treatment plants they are usually formed by a bacteria and other micro‐organisms use oxygen to possible to discharge directly to a watercourse settlement zone and a treatment break down the organic matter in the sewage. In or a drainage field. In the former case a zone (or bio‐zone). Require some cases, to meet consent limits, further discharge consent from the EA is always electricity for usage. treatment may be required (for example using required. reed‐bed systems).
Source: London Economics based on Environment Agency guidelines (PPG4)
London Economics February 2010 33
Section 4 4BSewage treatment for individual households and small communities
As described in Table 3, additional treatment may be required before discharge to drainage field or watercourse. The most common systems are passive treatment systems, such as reed‐bed or wetland system. Reed‐beds rely on the capacity of reed or other plants to absorb and transfer oxygen from the leaves to the roots. Sewage is therefore purified by micro‐organisms present in the roots. In some cases the addition of a reed bed is a legal requirement and EA consent is always required for a discharge from a reed‐bed to a watercourse or drainage field. The different options imply different characteristics in terms of initial cost and maintenance. For example a cesspool implies low purchase costs, but requires frequent tankering, while a septic tank requires less maintenance, involves sewage treatment but can only be installed when a suitable surface for a drainage field is available. A package treatment plant has higher purchase and installation costs, and requires an electrical power supply for its usage, but doesn’t need frequent servicing and gives a much cleaner discharge flow, which can be also discharged to a watercourse (subject to the EA consent). Package treatment plants for non‐industrial usage can vary considerably in dimension, composition (number of tanks), technologies used in the process and final destination of use39. In particular package treatment plants can accommodate the needs of single households, small residential communities and also commercial activities such as hotels, caravan parks, and nursing homes. Although there may be considerable variation in frequency and volume of discharge, all these activities will generate a flow of discharge that can be treated using package treatment plants. 4.1 Description of the market(s)
The provision and servicing of residential sewage systems include different stages. Different actors are likely to be involved in the provision of services in the different stages of the process. In Figure 4 we provide a diagram of the main stages involved.
39 See A2.3.1 for examples of different applications of package treatment plants.
London Economics February 2010 34
Section 4 4BSewage treatment for individual households and small communities
Figure 4: Alternative treatment solutions for domestic sewage
Process Market
System design and manufacturing National/international suppliers providing technical solutions
Retailing (provision and installation) Regional/national retailers
Emptying (including transportation) Local waste carriers/service providers and maintenance
Treatment and disposal Local sewage/sludge treatment centres
Source: London Economics There is likely to be a significant degree of variability in the services a company is able to provide: while some operators might focus on one element of the chain, others may be able to provide integrated wastewater management solutions, covering different aspects and services. In the following sections we present a preliminary view on competition in the different markets. 4.1.1 Design and manufacture It is likely that national and international companies are able to compete for the supply of alternative sewage solutions40. Firms would normally supply a wide range of solutions, ranging from cesspools to large package treatment plants and other related products. There are no specific regulatory barriers to enter the market, but package treatment plants supplied in the UK have to comply with European standards. Entry of new operators in the market is possible, but is likely to require medium‐term planning, given set‐up costs and the time required, for example in terms of attracting skilled engineers and designers, equipping oneself with the necessary production facilities and earning a reputation in the market. Nonetheless, competition is likely to be effective in this sector even in the short‐term, considering that other international suppliers and engineering and design companies are already active in neighbouring sectors (for example companies designing and supplying large scale sewage works) could enter the market if they consider it lucrative.
40 Manufacturers providing popular solutions for domestic sewage treatment are: Kingspan Environmental (Klargester, and Entec ), Conder, WPL, Balmoral Tanks. Examples of other manufacturers are BioKube, Biodigester, Marsh Industries, Black Hat Systems, Bio‐Pure, EnSo International (Ocean range), KEE Process.
London Economics February 2010 35
Section 4 4BSewage treatment for individual households and small communities
4.1.2 Provision and installation In most cases manufacturers would not provide the delivery and installation directly but would rely on a network of merchants and installers. Many retailers are able to carry out both services (sale and installation), while some companies only act as merchants and rely on a network of installers. While some merchants only supply and install products from one manufacturer, other merchants act as independent retailers and are able to offer a variety of products from a range of manufacturers. The presence of vertical agreements (such as having a network of certified installers) seems to be directed to establish a presence in the final market and act as quality assurance rather than having direct harmful effects on competition. In fact, some installers are accredited with more than one manufacturer and are also normally able to supply products from other manufacturers (without licensing agreements). The presence of numerous distributors and installers indicate that the retailing market operates mainly on regional basis (which would also guarantee effectiveness in the provision of post sale services), but with no specific barriers to the provision of services from operators based in other areas. In fact, retailers are likely to compete for the provision of products on a national basis if the margin on the sale can offset transport costs. From this preliminary analysis emerges that, in general, competition for the provision and installation of domestic sewage solutions seems to be effective. For smaller products (septic tanks or small package treatment plants), the final buyer may also be able to install the product without requiring external assistance. 4.1.3 Emptying and maintenance Once installed, cespools, septic tanks and package treatment plants require periodical emptying. For cesspools, emptying and tankerage of sewage is needed at periodic intervals during the year, while septic tanks and package treatment plants typically need to be de‐sludged once a year. Removal and transportation services can usually be arranged for one‐off emptying or contracted for regular servicing and are carried out by licensed waste carriers. Package treatment plants also require periodical maintenance (while cesspools and septic tanks require little ongoing maintenance, but may require cleaning). Maintenance of package treatment plants is typically carried out by the installer or similar operator. British Water has developed a training and accreditation scheme for service engineers and there are currently around 80 accredited engineers within each region in England and Wales41. The market for the provision of maintenance services for package treatment plant is usually local or regional. While the two activities (maintenance and emptying) can be carried out by different operators, larger firms are able to provide a comprehensive service, covering maintenance and emptying and also provision and installation of the package treatment plant.
41 See http://www.britishwater.co.uk/ptp_engineers/Accredited_Service_Engineers.aspx. Some of them work for the same firm,
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Section 4 4BSewage treatment for individual households and small communities
Barriers to entry in the market for emptying and transportation of sewage and sludge are relatively low: waste carriers need to apply for a licence with the EA42 and need to possess the necessary operational equipment (e.g. tankers). In some cases also local councils provide removal and tankering services. Considering the characteristics of the market (high number of operators, significant transport costs, limited size of individual customers, and possibility of emergency intervention) competition is likely to occur locally. 4.1.4 Treatment and disposal Sewage and sludge collected in domestic plants needs to be road tankered to sewage or sludge treatment centres. Sewage collected can therefore be transported to those treatment works43 that accept domestic tankered waste44. The choice of the treatment work is likely to depend on distance and discharge costs. Charges for treating tankered domestic sewage are not regulated and are published by the sewerage companies under their charges scheme45. Ofwat, also publishes yearly a summary table with charges from the different sewerage undertakers46. Charges usually depend on the load strength (classified as weak, medium and strong), reflecting the difference between sewage from cesspools and septic tanks, and can also include a fixed fee per individual tanker. Charges for tankered domestic sewage can considerably vary across different sewerage undertakers47. Solid residuals have to be tankered to sludge treatment centres, which are operated by the regulated sewerage utilities48. 4.2 Scope for competition
Cesspools, septic tanks and package treatment plants are the possible solutions when connection to the public sewer is not available. However, the competitive interactions between these solutions are likely to be limited, given that they have different characteristics and are used to meet different needs. The installation of a package treatment plant is a potential solution if discharge to a watercourse (or drainage field) is possible. The use of a septic tank is only allowed when there is the
42 The application is relatively inexpensive (£152 to register as a waste carrier or broker and £104 for renewal), straightforward (a form to be filled in online or sent by post) and is normally only refused if the applicant has previously been convicted of a relevant offence or provide false or incomplete information. 43 While the overwhelming majority of STW are operated by the regulated sewerage undertakers, there are also other centres that can accept and process tankered domestic sewage (see for example http://www.tradebe.com/web/uk/seccions/02_SERVICES/01_Hazardous_Waste/03_Physyco_Chem_treatment /Bridgend/Bridgend.html). 44 Typically, around 5% of total works owned by each sewerage undertaker accept tankered domestic sewage (we were able to gather information published by 5 sewerage undertakers: Severn Trent, Southern Water, United Utilities, Wessex Water and Yorkshire Water).
45 http://www.ofwat.gov.uk/regulating/reporting/custchgs2009-10/rpt_tar_2009-10alternative#tankered 46 See http://www.ofwat.gov.uk/regulating/reporting/custchgs2009‐10/rpt_tar_2009‐10alternative 47 Charges for weak loads vary from £0.92/m3 to £10.43/ m3, for medium loads from £5.06/m3 to £12.73/m3 and for strong loads from £7.83/m3 to £25.85/ m3. 48 We are not aware of any sludge treatment centres being operated by other firms.
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Section 4 4BSewage treatment for individual households and small communities
possibility of discharge to a drainage field. If neither option is available, the only solution is to install a cesspool. In this sense competition is likely to be restricted by physical and regulatory constraints and would in many cases occur within each category of solutions. Next, we explore if any of these solutions could potentially be an alternative to “traditional” small sewage treatment works, when connection to public sewer is or may be available. Cesspools and septic tanks incur significant transport and disposal costs and so are unlikely to provide a viable alternative when discharge to the public sewer is feasible. Package treatment plants can provide a similar service to sewage treatment works in terms of population served, discharge standards, possibility of monitoring the activity and the need to remove sludge at periodical intervals. Their capacity can vary considerably, from plants suitable for less than 10 people to systems suitable for hundreds or even thousands of full‐time residents or equivalent population49. This implies that the capital and operating costs of such solutions can be shared across the residents of a small community. Large package treatment plants can potentially be a feasible alternative to the class of small “traditional” treatment works. In fact, around 3000 (47%) sewage treatment works operated by regulated sewerage undertakers serve a population equivalent of up to 250 people, while a further 11% serve a population equivalent of between 250 and 500 people. In many cases these sewage treatment works serve a single residential development and are situated in close proximity to the development itself. Under current regulation50 there is little or no scope for competition between firms providing package treatment plants and the local sewerage undertaker: connection to public sewer is the preferred option and it is virtually impossible that a discharge consent will be issued when connecting to public sewer is a reasonable option (or if a property is already connected to public sewer and wishes to detach from it). However, from an economic perspective, there may be potential for competition between traditional sewage treatment works and package treatment plants: For new or expanding developments it may be more cost‐effective to install and maintain a epackag treatment plant even when connection to public sewer is available. For existing developments, the residents (or a third party) might decide to install a package treatment plant, rather than having to rely on the local sewerage undertaker. This could occur for small developments, but, in principle, also for groups of households in bigger developments, as long as there is a suitable watercourse for discharge in proximity of the properties.
49 Package membrane technologies are able to serve up to 5,000 pe (http://www.conderproducts.com/files/Clereflo‐MBR.pdf and 0), while it is also possible to install multiple plants (http://www.conderproducts.com/casestudies/cs_saf_treatment_web.pdf and http://www.klargester.ie/pdf/Klargester%20AirFlow%20AF10H‐14.pdf). 50 See “The Building Regulations 2000, Drainage and Waste Disposal”
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Section 4 4BSewage treatment for individual households and small communities
4.3 Enabling further competition
We suggest that Ofwat investigate further: The scope for amending the Building Regulations, which state that connection to public sewer is always the preferred option and alternative treatment should be only considered if connection to the public sewer is not reasonably practicable. The impact that such an amendment might have on competitive conditions in the market for small sewage treatment works. A first step could be to re‐open the cost‐benefit thinking that underlay the original decision to include the relevant requirement in the Building Regulations. The Building Regulations have been amended a number of times over the years. As far as we can tell from the material available on Defra’s website, this requirement may have been introduced around 1989 or 1990. The earliest documents on their website do not go back far enough for us to be sure. At that time it seems likely that little in‐depth consideration would have been given to the potential impact on competition of introducing the requirement. We would imagine that the Environment Agency would face an increase in monitoring costs if the requirement were removed, though these might be payable by the operators51 of the treatment plants under the discharge consent regime and so internalised into their decision about whether to install a package sewage treatment plant. If initial capital costs are not prohibitive and there are limited economies of scale for plants serving small communities, there may be opportunities for competition in the market. Where it is economically viable and environmentally acceptable (i.e. subject to discharge consent) to install and operate a package treatment plant on the same sewer network as the existing treatment works new competitors may be interested in entering the market52. Examples of potential new entrants are other sewerage undertakers and waste management companies providing installation, maintenance and emptying services. It is also possible that a group of residents might decide to replace the appointed sewerage undertaker and commission the installation of a package treatment plant. In order to understand the scope for competition, it may also be useful to explore further the relative capital and operating costs of standard small sewage treatment works and package treatment works. Appointed sewerage undertakers (or their contractors) already make use of package treatment plants to replace life‐expired STW or to expand existing capacity53. This suggests that alternative treatment systems may be a more cost‐effective solution in some cases. Understanding the
51 Currently the EA levies two charges on discharges into watercourse: the Application Charge, which is fixed and divided in two rates, Standard and Reduced, and the Subsistence Charge, which depends on four different factors (type of receiving waters, volume, content of discharge and a fixed financial factor). For more information see http://www.environment‐agency.gov.uk/static/documents/CFD_scheme.pdf 52 We are assuming that common carriage develops in the sewerage sector as proposed in the Cave Review. 53 For example see http://www.conderproducts.com/files/Campbeltown%20Case%20Study.pdf and http://www.copa.co.uk/products_detail.asp?wastewaterId=870
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Section 4 4BSewage treatment for individual households and small communities
circumstances in which they are more cost‐effective will enable a greater understanding of the scope for competition. For example, are they only viable when an existing STW is life‐expired, or are they sufficiently competitive to be viable where an existing STW is still operating?
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Section 5 5BSludge treatment and disposal
5 Sludge treatment and disposal
This section contains a discussion of competition in sludge treatment and disposal. After discussing an economic framework for sludge treatment we provide a brief description of the market including basic facts about the position of sludge treatment in the treatment cycle and the technologies used in the process. This is followed by a characterisation of the current state of competition in the market and a discussion of potential barriers to competition. Finally, we explore the potential for competition and possible measures to increase it. 5.1 Background
Sludge is the semi‐solid residue left over from the treatment of sewage (and trade effluent, storm water etc.). The composition of sludge depends on the pollution level of the sewage it is derived from, as well as on the technical characteristics of the treatment processes used. Sludge can contain a wide variety of matter, some of which can be usefully reused (organic matter, elements such as nitrogen, phosphorus, potassium, calcium, and inert matter such as silt, sand, gravel). The rest is made up of various pollutants, such as heavy metals, organic pollutants, and pathogens. While pollutants make up only a small proportion of the volume, they detract from the value of the rest. For sewage treatment work (STW) operators sludge thus constitutes a waste product as well as a resource. The fact that it is automatically produced as a by‐ product of sewage treatment means there is a constant supply of sludge (although actual volumes can fluctuate with the composition of the sewage and with the sewage treatment processes used). Whether there is an economic demand for it (and hence whether there is a market for sludge as such), however, is a priori less clear. Sludge is not produced for its commodity value. As the Cave Review pointed out, “at the present time, the provision of water and sewage treatment, sludge treatment and disposal and infrastructure is dominated by the local, vertically integrated, monopoly incumbent.” This section introduces a simple framework for analysing the potential for market power and competition in the market for sewage sludge. It serves to illustrate that a) market participants have an incentive to be efficient even in the absence of open competition; and b) there are no theoretical reasons why competition in sludge treatment and disposal services should not work. In the following we assume that sewage treatment can be easily separated from sludge treatment (for simplicity we ignore benefits of co‐location at this point). The following graphic (Figure 5) shows a simple ‘market for sludge’. The supply curve (S) for sludge is vertical as sludge is a by‐product of the sewage treatment process that is generated at an approximately constant rate (i.e. sludge constitutes a fixed proportion of the raw sewage, the size of which depends on the composition/source of the sewage and the technology used for treating it). Consequently, the operator of an STW cannot increase or decrease the amount of sludge his plant generates in
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Section 5 5BSludge treatment and disposal
response to price signals; the quantity of sludge produced (Q) is the same at any price (P).
Figure 5: The market for sludge
P S
pay
price:
P+ processors
positive
B: sludge 0 Q
P‐ price:
pay D’ STW negative
A: D
Source: London Economics. While the price does not determine the amount of sludge being produced, it does determine the form of potential competition in the market. Specifically, we can distinguish two situations:
A: negative price – a market for treatment and disposal A negative price (P‐) means sludge is a ‘discommodity’, a good that people will pay not to have. This gives rise to a market not for the good itself, but rather for the service for its disposal. The price P‐ is thus paid by the STW operator to the provider of sludge treatment and disposal services. Since the STW operator is the buyer in this market, any potential market power rests with the treatment provider. (We assume there is no buyer power in this market: given that STWs have to dispose of their sludge, it is unlikely that they can depress prices below the competitive level by threatening to switch to alternative treatment providers.) As shown above, a negative price does not affect the quantity of sludge. In this market this is reflected in a vertical demand function for treatment services (Figure 5). The STW, which continuously produces a given amount of sludge, demands treatment and disposal services for this sludge regardless of price (at least over a plausible price range; the STW cannot choose not to get rid of the sludge).
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Section 5 5BSludge treatment and disposal
Figure 6: The market for sludge treatment and disposal
P D S3 P3 S2
P2
S1 P1
Q
Source: London Economics. The price is determined not by the quantity demanded, but solely by the cost at which treatment services can be offered (treatment companies would be willing to treat more sludge at a higher price, but demand is fixed). The different supply curves (S1 ‐ S3) can be interpreted as different treatment processes, S1 being the most efficient.
B: a positive price – market for raw sewage sludge Where the price for sludge is positive, i.e. sludge can be sold to treatment providers, the STW operators have potential market power. However, as we have already seen, the supply of sludge does not depend on price, which means market power cannot be exercised (although the supply might not be completely price‐inelastic to the extent that STW operators choose the level of treatment the sludge receives before arriving at the sludge treatment facility; there are sewage treatment technologies which are aimed at minimising sludge production but they tend to increase the cost of sewage treatment). Even a monopolist is subject to competitive pressures from the demand‐side, as the sludge needs to be disposed of. The price that treatment providers are willing to pay again depends on the efficiency of the treatment process, in this case how much value can be extracted from the sludge.
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Section 5 5BSludge treatment and disposal
Figure 7: The market for raw sewage sludge
P S
P3
P2
3 P1 D D2 D1 Q
Source: London Economics.
The potential for market power and competition Which of the two scenarios reflects reality? Our research shows clearly that currently the price for sludge is, in fact, negative. Sludge is above all a waste product and businesses offering disposal services have to be compensated by sludge producers. However, it is not clear that this is the natural state of affairs in the market. There is a distinct possibility that the value of sewage sludge as a commodity is going to increase so far as to make it possible for ‘sludge producers’ to extract net value from it (although this might be extracted further upstream). Sludge has a calorific value similar to that of lignite. Although the cumulative energy balance is currently worse for sludge, due to the energy consumed in the sewage and sludge treatment processes up to the digestion stage, better technology and a rise in the price of substitutes could make sludge an attractive source of energy. Similarly, the attractiveness of sludge (and sludge products) in agriculture is reportedly increasing as alternative sources of fertiliser compounds are becoming more expensive. While sludge for use in agriculture has long been given away for free, we have been told that it is increasingly being sold, albeit still for a very low price of about £1‐2 per ton (note that this does not mean that sludge has an overall positive price; once the processing costs are subtracted, this would still represent a net cost for the producer; it is conceivable, however, that the price can become positive when all the value contained in sludge is extracted, including chemicals, inert matter, electricity etc.).
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Section 5 5BSludge treatment and disposal
Whether the price of (raw) sludge is positive or negative directs the flow of compensation. If STW can demand a price for sludge, this gives them potential market power, especially given that STW operations are currently regional monopolies. However, there are strong arguments that the exercise of market power is exceedingly unlikely. First, supply of sludge is fixed. It cannot be reduced in order to drive up prices. Secondly, even if sludge were a commodity with a positive value, it is highly unlikely that there would be no close substitutes, i.e. other sources of energy or fertiliser, which would limit market power from the outset. It is equally unlikely that providers of sludge treatment are able to exercise market power. There is an upper bound to the price of sludge treatment because of the fact that STW can always resort to carrying out the sludge treatment internally. While this is a hypotheticalt argumen in most markets, in the sewage market it is highly relevant as STW operators have the know‐how, the technology and the sites necessary to provide sludge treatment. An analogous argument holds if sludge has a positive value and there is only one treatment provider (i.e. a monopsonist). In this case, the fact that the STW operator can substitute with on‐site sludge treatments sets a lower bound for the price of sludge. Based on the preceding discussion, market power does not appear to be an important concern in the market for sludge and sludge treatment. On the contrary, STW operators and treatment providers always have a regulatory incentive to choose the most efficient sludge treatment process available (arguably, competition could further increase the incentive). This is independent of whether the two functions are carried out by the same entity, or whether sludge treatment is outsourced to dedicated sludge treatment facilities. Competition in the form of a choice of providers of sludge treatment thus does not seem to be a prerequisite for an efficient market in the sector. At the same time, there are no theoretical reasons why competition between treatment providers should not be possible and competition might be expected to increase the incentives for efficiency beyond those generated by regulation. Sludge treatment has none of the natural monopoly characteristics that are evident in sewage treatment. 5.2 Description of the market
Before discussing the state of – and potential for – competition in the market, we provide a brief overview of the sludge treatment process, starting from the separation of sludge from the sewage and ending with disposal. This illustrates that sludge treatment providers have a considerable degree of discretion about the type of process they employ and how the treated sludge is used or disposed of after treatment.
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Section 5 5BSludge treatment and disposal
5.2.1 Sludge treatment processes and disposal routes Sludge originates primarily from two sources:54 treatment at STWs of sewage which includes domestic sewage, industrial mixed with domestic sewage and run‐off; and treatment at industrial sites of trade effluent. The sewage treatment process generates three main types of sludge:
Primary sludge generated after pre‐treatment of sewage (removal of voluminous items via screening, sieving, blasting, oil and fat extraction; this then goes to land fill) and physical and chemical treatments (removal of solids, grease and scum via physical methods of sedimentation and/or flotation and chemical methods of coagulation and flocculation which speeds up sedimentation process); Secondary sludge generated after biological treatment (bacterial decomposition of biological features, typically via biological filters, activated sludge plants, sequencing batch reactors, rotating biological contactors or submerged aerated filters). Can be mixed with primary sludge to create Mixed Sludge. Tertiary sludge which undergoes biological and chemical processes to remove Phosphorous, Nitrogen and suspended solids, usually required in environmentally sensitive regions.
These three types of sludge (primary, secondary and tertiary) then go through sludge treatment processes. The main sludge treatment processes are the following (EC Sludge Disposal report 3, 2001): thickening dewatering stabilisation and disinfection thermal drying. Their characteristics are summarised in Table 4.
54 Freshwater treatment also generates a small amount of sludge. Our discussion concentrates on the sludge generated from sewage.
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Section 5 5BSludge treatment and disposal
Table 4: The different steps of sludge treatment
Source: EC Sludge Disposal report 3 (2001) Some forms of sludge treatment, especially thickening and dewatering, are typically carried out at the point where the sludge is produced, i.e. at the STW. The thickened/dewatered sludge can then be transported to dedicated sludge treatment facilities. The higher the water content, the heavier the sludge so the main objective of thickening and dewatering is to facilitate transport and further processing. Sludge is also frequently dewatered after anaerobic digestion in order to reduce haulage costs to the final disposal/recycling destination, and also to minimise storage volumes – sludge can only be put on agricultural land at certain times of the year. Sometimes sludge is subsequently re‐watered at the treatment facility to give it optimal consistency for use in anaerobic digestion; in other cases (or subsequently), thermal drying can be used to create completely dry matter (granules) that can be incinerated or used in agriculture, liming, road construction, land reclamation, etc. Sludge will typically undergo several treatment processes in sequence. A simplified picture of the treatment sequence is given in Figure 8 below. The EC’s Sludge Disposal report 3 (2001) lists anaerobic digestion, composting, lime stabilisation, dewatering and thermal drying as the main processes used in the UK. According to
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Section 5 5BSludge treatment and disposal
industry sources approximately 70% of the UK’s sludge is currently anaerobically digested.
Figure 8: The sludge treatment sequence
Chemical stabilization
Source: Based on Bresters et al. (1997), Sludge Treatment and Disposal – Management Approaches and Experiences. European Environment Agency Environmental Issues Series, 7. The main sludge disposal processes as listed in the EC Sludge Disposal report 3 (2001) are the following: Agricultural use (landspreading) – approximately 1% or less of nitrogen fertiliser use comes from sludge while 60% comes from mineral fertilizers and 39% from animal manure in the UK. For phosphorous, 5% comes from sludge, 40% from mineral fertilizer and 55% from animal manure. Incineration types include mono‐incineration when sludge is incinerated in dedicated incineration plants, incineration with other wastes, or co‐ incineration when sludge is used as fuel in energy or material production. Landfilling includes mono‐deposits, where only sludge is disposed of, and mixed‐deposits (most commonly observed), when the landfill is also used for municipal wastes. Landfill rates have reduced Forestry and silviculture. The term forestry is mainly used when considering amenity forests, or mature forest exploitation. Silviculture is more specifically used when referring to intensive production. Land reclamation use of sludge as a substitute to bringing in new topsoil or inorganic fertilisers to restore plant growth in degraded areas. Used in the UK. Combustion technologies – wet oxidation, pyrolysis and gasification. Figure 9 shows the relative importance of the different disposal rules, while Figure 10 shows the processes in sequence.
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Section 5 5BSludge treatment and disposal
Figure 9: Sludge disposal and recycling routes for sewage sludge
Source: EC Disposal and recycling routes for sewage sludge report 4 (2002)
Figure 10: Sludge disposal processes
Note: Wet oxidation is unusual in the UK. Source: Bresters et al. (1997)
5.2.2 Anaerobic digestion Anaerobic digestion is an increasingly important part of the sludge treatment process. The reason is its potential as an energy source. The digestion process, which also stabilises the sludge, produces biogas, principally methane, which can be used
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Section 5 5BSludge treatment and disposal
to generate heat and power, which also reduces the amount of methane released into the atmosphere, where it acts as a powerful greenhouse gas. Anaerobic digestion produces three types of material: biogas, liquors (nitrogen‐rich fertiliser) solid organic materials (can either be used without further pre‐treatment as a soil improver or further processed to yield a compost, which could be used in a growing media for use in horticulture and landscape activities). Biogas production is seen as extremely attractive by industry, to the extent that some sludge treatment providers are starting to see themselves as energy businesses. The figure below shows a schematic overview of a modern anaerobic digestion plant.
Figure 11: Anaerobic digestion and CHP
Source: Jenbacher (www.jenbacher.com). The energy and heat generated by sludge digestion is typically used to power the treatment facilities themselves, but sometimes excess energy is exported. Technological advances could increase the efficiency of energy generation from sludge significantly. The Economist (January 2nd 2010) reports that new digestion methods can raise the amount of methane produced in the process by 30%, with even greater increases possible with co‐digestion of sludge with other feedstocks, especially food waste. The brief overview provided above shows that sludge can be transformed from a mere waste product into a valuable commodity, the main sources of value being
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Section 5 5BSludge treatment and disposal
heat and power generation from biogas and uses in agriculture55, landscaping and construction. Our impression is that currently none of these generates enough value to make the commercial exploitation of sludge on its own a profitable economic activity. However, the potential exists and may be on the brink of being realised. This constitutes the backdrop for competition in the market for sludge treatment and disposal. 5.3 View of competition
This section discusses our view of the current state of competition in the market for sludge treatment in the UK, including barriers to competition. 5.3.1 The state of competition Sludge treatment in the UK is currently carried out exclusively by the water and sewage undertakers. To our knowledge, there is no competitive market in sludge treatment and disposal. Nonetheless, as we discussed earlier, this does not mean that sludge treatment is carried out inefficiently. Sewage undertakers have an incentive to control the cost of sludge treatment. Our impression is that because of this, sewage undertakers are active in the development and commercialisation of efficient treatment processes, including anaerobic digestion. Some sewage undertakers further incentivise efficiency by organisationally separating sludge treatment from sewage treatment within the business, i.e. by setting up semi‐independent entities to run their sludge treatment facilities. The fact that these measures are seen as very effective by the industry suggests that efficiency gains in sludge treatment are possible. However, the fact that the UK market is currently served exclusively by vertically integrated sewage undertakers suggests that there are barriers to competition. Given the potential for efficiency gains (which would attract demand from sewage undertakers) and the promise of profits from the sale and/or exploitation of (treated) sludge, the absence of competition needs to be explained. 5.3.2 Barriers to competition The market for the treatment and disposal of sludge has not traditionally been organised along competitive lines. Sludge production used to be a simple extension of sewage treatment, with very little additional processing required. More stringent environmental legislation increased the importance of sludge treatment, but as this usually predated the privatisation of the sewage (and water) industry, the sludge treatment function was quite naturally integrated with the sewage treatment process. This history might explain why competition in the sludge market was not
55 A risk factor in assessing the value of sludge is that agricultural use of human waste is sometimes seen as controversial. Should, for example, supermarkets decide not to sell food produced with the help of sludge anymore, sludge disposal to agriculture could collapse whatever its intrinsic “value”. Sludge treatment would then be governed by its ultimate disposal route.
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Section 5 5BSludge treatment and disposal
explored by water and sewage undertakers even after privatisation. In fact, such ‘habitual barriers’ have been cited However, more substantive reasons for the absence of competition have also been identified. The main barriers to competition in sludge according to NERA (2008) are the following: There are economies of scale associated with the co‐location of sewage treatment and sludge treatment and disposal. The cost of transporting sludge from sewage treatment works to separate sludge treatment is high. Some co‐ordination is required between the sewage treatment facility and sludge treatment to account for the type and volume of sludge that is treated. Costs of disposal depend on the distance the sludge cake is transported. All of these suggest that co‐location of sewage and sludge treatment facilities gives the owners of such combined facilities an important competitive advantage. Since all sewage undertakers traditionally carry out their own sludge treatment, this a) translates into an incumbency advantage vis‐à‐vis new entrants, who have to overcome the co‐location advantage; and b) also explains the lack of competition for sludge treatment between existing sewage undertakers, which already have their own facilities in place. A further barrier to competition between integrated sewage and sludge undertakers in adjacent regions could be hydraulic: it has been put to us that the location of major STW is often in the centre of a water undertakers area of operation, i.e. furthest away from the watersheds which also typically mark the boundaries to other undertaker’s territories. This maximises the distance between potentially substitutable sludge treatment facilities. Note, however, that the practical relevance of this argument is uncertain. For example, the actual location of major STW is also determined by the location of population centres. A further barrier that has been reported is regulatory.56 Given its potential of greatly increased energy production from sludge, co‐digestion is an obvious point of entry for new competitors (which might include large companies engaged in municipal waste management which would be able to match STW on economies of scale). However, in the UK it is required that food waste is pasteurised before co‐digestion, which increases the energy consumption (and hence the cost) of the process. Moreover, the mixing of sludge with other types of waste means that the resulting mix is subject to greater restrictions when it comes to disposal, which also reduces the attractiveness of this option. Finally, industry sources told us that the originators of sludge, i.e. the sewage undertakers, retain a ‘duty of care’ for their sludge, with potential liability for breaches of environmental rules even if the sludge treatment is outsourced to another company. This risk (and any costs associated with the monitoring necessary
56 “The Seat of Power”, The Economist, January 2nd 2010
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Section 5 5BSludge treatment and disposal
to mitigate it), gives a further incentive to keep sewage and sludge treatment integrated. Barriers to competition exist in sludge treatment. However, the barriers listed above would not appear to be insurmountable. An important driver of evolution in the market structure is likely to be the increasing attractiveness of sludge that is driven by a) greater cost effectiveness of sludge relative to demand side substitutes (other energy commodities, fertilisers etc.) and b) increasing environmental regulation that favours recycling and CO2 reduction and makes traditional disposal routes (landfilling, incineration) less attractive. In the following section we discuss the potential for competition to develop in the market.
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Section 5 5BSludge treatment and disposal
Box 2: Competition in sludge treatment in the Netherlands: the example of Swiss Combi The Netherlands have one of the most stringent sludge treatment and disposal regimes in the European Union1, as well as a unique institutional setup. In the Netherlands, about 390 sewage treatment plants are operated by the 26 Regional Water Authorities (Waterschappen or Hoogheemraadschappen), governmental bodies that are responsible for water quality (including sewage treatment) and flood defences, among other things, but not the supply of water. Sewage collection and transport is the responsibility of local municipal authorities. Sewage treatment accounts for about half of the budget of the Regional Water Authorities.2 By outsourcing almost all of their sludge treatment and disposal, Regional Water Authorities play a central role in driving competition. Competition is strong and normally opportunities are advertised in the EU Journal, attracting companies from far and wide. The example of Swiss Combi, a subsidiary of Wessex Water that is active in the sludge processing and disposal market, demonstrates how the system works. Swiss Combi is currently operating 2 sludge drying facilities in the Netherlands (in Friesland and Groningen) under 15‐year contracts with the Regional Water Authorities, which were awarded through a competitive tendering process. The length of the contracts is deemed necessary owing to the large sunk cost incurred by building the facilities. Swiss Combi uses a thermal drying process that transforms the dewatered sewage sludge into hard, dry granules which are used in cement production to lower its CO2 intensity. Since the contracts came into force, a Regional Water Authority in a neighbouring area has also decided to outsource its sludge treatment and disposal to Swiss Combi, which suggest that entry is effective in bringing down the cost of sludge treatment. An important factor facilitating the entry of new competitors into the market for sludge treatment in the Netherlands is the liability regime. In the Netherlands any duty of care associated with the safe disposal of sewage sludge passes to the entity carrying out the treatment and disposal. In the UK, on the other hand, the water company that produces the sludge would retain a duty of care even if the sludge treatment were outsourced. This creates a potential misalignment between the objectives of the sludge treatment operator and the water company. The risk of liability and the cost of monitoring mean that the incentive to outsource sludge treatment is reduced for UK water companies. 1 See the EC’s Sludge Disposal Report (2001), available at http://tinyurl.com/yh78tyn 2 See de la Motte (2004), WaterTime National Context Report – Netherlands. WaterTime, D10h.
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Section 5 5BSludge treatment and disposal
5.4 Potential competition
Competition is possible in the market for sludge treatment and disposal services. We can say this with certainty, as there are examples of competitive markets in this area in other countries (a case study from the Netherlands is provided in Box 1 (above). In addition, current industry practices and technological developments suggest a greater role for competition is emerging. In this section, we discuss the potential for competition and reasons why the barriers to competition outlined above might be overcome. Specifically, we see potential for competition between existing providers of sludge treatment for sludge from other sewage undertakers as well as potential new entry of dedicated sludge treatment providers. 5.4.1 Separation of sludge and sewage treatment It is argued that the benefits of co‐location and associated economies of scale are an important factor preventing competition in the market. However, economies of scale (and differences in efficiency between different sludge treatment processes) can weaken the advantage of co‐location and enable competition to take place. Certain stages of sludge processing are difficult to separate from the sewage treatment processes. This is primarily true for dewatering, but also for stabilisation and sanitisation, all of which transform sludge to enable it to be transported to other locations where it is treated further or used. But for most treatment processes there are no technical reasons why sludge and sewage treatment should not be separated. While co‐location of sludge treatment facilities and sewage treatment works is always likely to yield some benefits in terms of lower transport costs, economies of scale in sludge treatment (perhaps also a minimum efficient scale of the necessary treatment facilities) mean that co‐location is not always the appropriate choice. That this is the case is shown by the fact that the water and sewage undertakers do in fact transport sludge from small STW to larger sludge treatment centres. However, these central sludge treatment centres are normally located at the site of a major STW, which means that at least some of the sludge is generated on site and does not have to be transported over longer distances. While this appears to suggest a certain cost advantage of sludge treatment plants co‐located with existing STW over stand‐alone sludge treatment plants, in practice this will depend on the location relative to the feeder STW, i.e. whether economies of scale can be realised even without a ‘captive’ supply of sludge from a co‐located STW. The Dutch example cited above as well as industry sources in the UK certainly confirm that stand‐alone sludge treatment centres are a possibility. 5.4.2 Transport costs Could such a plant be built by a new entrant? If economies of scale are sufficiently large, or new technologies are used that significantly increase the energy yield from sludge, and the location of the plant is well chosen (i.e. within reach of multiple STWs), the possibility cannot be excluded. But whether sludge treatment is provided by a stand‐alone operator or an incumbent, whether competition can take place will
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Section 5 5BSludge treatment and disposal
depend on the cost of transporting the sludge from where it is produced to the treatment centre. In the UK sludge transport over longer distances is almost exclusively by road. Over short distances, e.g. within STW, transport is by pipeline. Barge transport is possible in certain areas57, but plays a minor role. The question how far sludge can be transported determines the scope for competition. There is no definitive answer to this question. Whether transporting sludge over longer distances is efficient depends on the direct transport costs as well as on the price of sludge (or of esludg treatment). The better the price for sludge (or the lower the cost of treatment), the further it can be transported economically. As a first approximation of the scope of competition, we looked at the distances over which sludge is currently transported from minor STW without their own sludge treatment facilities to larger STW where their sludge is treated. Currently, to our knowledge, transport like this only happens between facilities operated by the same sewage undertaker. Based on press reports, we identified the STW at Great Billing, operated by Anglian Water, as the site of a sludge treatment centre which serves a number of smaller STW in the vicinity. The following picture shows the location of the Great Billing STW and the STWs from which it receives sludge for treatment. Currently, the maximum distance over which sludge is transported is 54 km (linear distance), from the STW at Flag Fen.58 We assumed this to be the maximum radius over which sludge can be economically transported and extrapolated from this a total catchment area of 108 km diameter. As Figure 12 shows, the supply radius thus extends into the service areas of two other water and sewage undertakers, Severn Trent Water to the West and Thames Water to the South. We further identified two large Severn Trent Water STW that lie within the catchment area (Rugby Newbold and Finham Coventry). Based on the linear distance to the Great Billing sludge treatment centre, it is theoretically possible that these two STW could deliver their sludge across the boundary to the facility operated by Anglian Water.59 It should be noted that this example is purely theoretical. There could be numerous valid reasons why the two STW do not deliver sludge to Great Billing, including the proximity of other sludge treatment centres to the West, inadequate transport links (we only looked at linear distance), etc. However, the example shows that large sludge treatment centres have significant catchment areas, which means that transport costs are unlikely to be a barrier to competition in the form of well‐located facilities.
57 For example, Southern Water uses barges to transport sewage sludge on the River Itchen (http://tinyurl.com/ydz4emu) 58 According to Ofwat, Anglian Water is planning to build a sludge treatment centre at Flag Fen in the next 10 years (and wanted to build it sooner). This might indicate that the economic transport range for sludge is in fact less than 54 km. 59 Note that this is purely hypothetical – both these sites currently have their own sludge treatment facilities.
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Section 5 5BSludge treatment and disposal
Figure 12: A potential market for sludge treatment?
Flag Fen STW Corby STW Rugby Newbold STW 108 Broadholme STW
Finham Coventry km STW Great Billing STW
Note: point locations on the overview map are approximate. Distances and relative locations were measured using Google Earth. Sources: Severn Trent Water, Anglian Water, Water UK (2007), Google Earth.
Competition for tankered sludge of course depends on the availability of capacity at the treatment centre. However, this is unlikely to be a binding constraint. Sewage treatment centres typically have some overhead capacity, e.g. for tankered trade effluent that is delivered periodically. A related argument is the problem of co‐ordinating sludge deliveries. In theory, this could be a significant barrier, as STW need to dispose of the sludge they produce constantly and reliably. Again, however, it is likely that storage capacities, either at the originating STW or at the treatment centre will be sufficient to ensure a smooth disposal process. Perhaps the most important barrier to the entry of stand‐alone treatment providers is the planning process together with the environmental licensing associated with setting up a sludge treatment facility. It is here that existing sites have a strong incumbent advantage, which might be difficult to overcome in practice. However, this should not preclude competition for sludge between treatment centres co‐ located with existing STW. Even though the fact that the existing STW each have their own sufficient sludge treatment facilities at the moment, it would seem that competition could develop as soon as efficiency differences between different treatment centres become apparent. Given this environment, which seems to be conducive to competition in principle, the removal of regulatory barriers could provide a crucial stimulus to the development of competition in the market.
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Section 5 5BSludge treatment and disposal
5.5 Potential measures to increase competition
There is currently very little evidence of competition in the sludge treatment market in the UK. On the one hand, this is surprising. Competition between independent provider and vertically integrated water companies can be observed in other countries, e.g. in the Netherlands. There are no a priori reasons why a competitive market should not exist, especially since STW operators already seem to have incentives to achieve maximum efficiency in sludge treatment. On the other hand, the changing market environment (increasing energy prices, stricter environmental regulation) and ingrained risk aversion (arguably encouraged by environmental regulation) mean that competitive opportunities are not explored. There is evidence that this market is developing. Reasons are regulation on the one hand (requirements that more sludge is recycled, less landfill disposal) and increasing attractiveness of sludge as an energy source or for use in agriculture relative to other commodities (rising oil prices etc) These factors may suggest that competition will emerge naturally as the environment changes to contain greater incentives. However, some of the barriers we identified are regulatory, and removing these could be crucial for establishing competition in the market. The most important regulations we identified concern the mixing of sludge and other types of waste. This would potentially enable a market increase in the efficiency of the co‐digestion process, which is seen as one of the most promising areas of the sludge treatment market.60 A market for co‐digestion of sludge and other types of waste would be attractive not only for sewage undertakers and specialised sludge treatment providers, but potentially also for other waste disposal companies. Even more important for establishing a sludge treatment market is the unambiguous transfer of liability when sludge treatment is outsourced. Any residual liability justifies sewage undertakers persisting in treating only their own sludge. 5.6 Conclusions
We see definite potential for competition in sludge treatment and disposal. Increasing prices for energy and other sources of fertiliser might make sludge more attractive relative to its substitutes in the future (in fact, according to industry sources, with respect to fertiliser this is already happening). Together with advances in technology, especially anaerobic digestion to produce biogas, this means that many in the industry expect sludge to become a profitable business in the near future. This should naturally spur competition and attract entrants to the industry. However, a factor that might limit the commercialisation of sludge is the uncertainty surrounding the continued acceptance of the recycling of sludge to agriculture. This
60 According to Ofwat, the Defra task group on anaerobic digestion has recognised the need for regulatory change in this area and is working on an implementation plan with the EA.
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Section 5 5BSludge treatment and disposal
is likely to encourage STW operators to maintain control of disposal routes through vertical integration in order to hedge against the risk that a major disposal route might suddenly be closed off. Economies of scale exist, but are tempered by transport costs: while it is desirable to have large sludge treatment facilities, the cost of transport means that there will be an optimal size for treatment facilities that allows for a large number of sludge treatment facilities in the UK market. Benefits of co‐location with sewage treatment facilities are also real, but can evidently be overcome (see the Dutch example). The most relevant barrier to new entry is probably the planning process. But even this should not preclude competition between incumbents, who already transport sludge over considerable distances for treatment. Regulatory barriers to co‐digestion currently appear to impede the development of energy production from sludge. The extent of this impediment is difficult to judge, but is seems likely that improvements in the regulatory regime would encourage competition. However, it should be remembered that there are already regulatory incentives to maximise the efficiency of the whole treatment cycle, including sludge treatment and disposal. The welfare effect of more competition could thus be less pronounced than in markets were incumbents enjoy greater market power.
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Section 6 6BSludge transport
6 Sludge transport
6.1 Description of the market
Transport of sludge in the UK is mostly by road, although transport by other means (e.g. barges, trains) is also possible and practiced in other countries. A relatively small proportion of sludge is pumped from outlying works to centralised sludge treatment works through mains up to several miles long. Both transport of wet sludge to the main sludge treatment centres and transport of thickened sludge or dried cake for final disposal is usually contracted out. Contract terms are based on unit rates for volume‐miles or tonne‐miles. Day rates for different sizes of tanker are also sometimes used. Competition in tthe marke for sludge transport is thus akin to competition in the general road‐haulage market. A general view of barriers to entry for road haulage is encapsulated in the following extract from an OECD document: “Two main market segments can be distinguished in the road freight industry (Biggar, 2001). Truck‐load (TL) freight, on which this paper focuses, accounts for the largest part of the industry. It is characterised by few economies of scale and scope and a substantial scope for competition in the relevant markets, defined as transportation services between two locations within a certain period of time. This is because freight services consist mainly of flows of goods between firms, which involve a relatively low time‐sensitivity and an efficient vehicle size that is typically small relative to market demand. Less‐than‐truckload (LTL) freight comprises services in markets where flows are relatively sparse (e.g. flows to individuals) and timeliness is important and, therefore, loads at each point in time may be smaller than the efficient size of vehicles. In this segment, including for example parcel or express delivery services, economies of scale and scope can be important and there is a tendency towards hub‐and‐spoke operation. Although this market segment tends to be more concentrated, effective competition can emerge, especially when sustained by competition policy enforcement.”61 Our understanding is that the market for sludge transport is more akin to the ‘truck‐ load freight’ segment described above. As such, it is likely to be characterised by low economies of scale and low barriers to entry.
61 Boylaud and Nicoletti (2001) “Regulatory Reform in Road Freight,” OECD. http://www.oecd.org/dataoecd/30/49/2732085.pdf Accessed on 21 December 2009.
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Section 6 6BSludge transport
6.2 Other factors
Two factors which may mitigate this are the more specialised nature of sludge transport (compared to most freight) and the fact that a licence from the Environment Agency is required to transport sludge.
Specialised nature of sludge transport It is not clear that the first factor is sufficient to make any significant difference; the main investment required would be a vehicle suitable for carrying sewage sludge as opposed to a vehicle suitable for carrying other material. The vehicle suitable for carrying sewage sludge may be more expensive and maye hav fewer alternative uses. It seems to us unlikely that this factor would be sufficient to provide a significant greater barrier to entry (though we have no direct evidence to support this).
Environment Agency licences A licence to transport sludge (as well as other controlled waste) can be obtained from the Environment Agency. The process is simple. All that is required is a 7‐page registration form providing basic information about the applicant and his business. The current charges (2009‐10) for registering as a carrier or broker of controlled waste are:62 Registration of carriers and brokers: £152 Renewal of registration: £104 6.3 Conclusion
There is no evidence that the market for sludge transport is not functioning as a competitive market. Its characteristics place it in the Truck‐load (TL) freight segment of the road haulage market, which is generally recognised as being highly competitive. There are few special requirements for sludge transport. The liquid content of the sludge determines the type of vehicles that can be used for transport, but no specialist equipment that would represent a sunk investment is necessary. Companies wishing to transport sludge need to register with the Environment Agency, but this registration is not so burdensome as to constitute a serious barrier to entry.
62 See http://www.environment‐agency.gov.uk/business/sectors/wastecarriers.aspx.
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Section 7 7BPre‐treatment and recycling of wastewater
7 Pre ‐treatment and recycling of wastewater
7.1 Description of the market
In general, the water and sewerage undertaker’s sewage treatment works function such that they are able to treat domestic waste; and commercial waste that has similar characteristics to domestic waste. Where industrial processes produce effluent (‘trade effluent’) which has significantly different characteristics then the water and sewerage undertakers may require that the trade effluent is pre‐treated such that the discharge into the public sewer has a composition that is compatible with standard sewage treatment processes.63 Pre‐treatment of trade effluent can occur on‐site at an industrial premises or it can occur at independent treatment works. In the latter case, the effluent to be treated is generally transported by tanker. As far as we understand, these pre‐treatment services are not generally provided by the WaSCs, but are provided by other companies, who often provide a wide range of waste management services. The composition of trade effluent varies widely with the nature of the processes through which it is produced. Often, pre‐treatment involves the use of physical and chemical methods of treatment, though sometimes it can involve biological treatment as well. Trade effluent that has been pre‐treated can be transported to a sewage treatment works, either by discharge directly to the sewer at the pre‐ treatment site or by tankering to the nearest sewage treatment works. A consent from the licensed sewerage undertaker is needed before any trade effluent discharges are made to the public sewer. These govern the composition and volume of the effluent that is discharged and determine the type of pre‐treatment that is required. Industrial wastewater recycling services often seem to be provided alongside pre‐ treatment services as a package of closely linked services for industrial customers.64 For this reason, we are treating commercial wastewater recycling services as in the same market as pre‐treatment services for the purposes of this analysis. We are treating domestic wastewater recycling as a separate market – this is discussed separately at the end of this Chapter. 7.2 Competition in the market
Most commentators seem to believe that competition in the market for pre‐ treatment and commercial wastewater recycling services does exist. Web searches
63 The precise requirements vary significantly. 64 For some examples of companies that provide these services , see http://www.rockbourne.net/waterenv.html?gclid=CIL79aStuJ8CFRth4wod8Gcxyw; http://www.kurion.co.uk/ http://www.huber.co.uk/solutions/wastewater‐reuse.html
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Section 7 7BPre‐treatment and recycling of wastewater
and investigation of the FAME database also suggest that there are a number of UK based operators that provide these services. In general, they appear to provide a wide range of waste management services with treatment of various types of liquid wastes being one of those waste management services. Companies operating industrial processes that produce trade effluent also have the option of developing their own on‐site pre‐treatment. Ofwat has previously investigated a part of this sector through its investigation of the Quantum case. In that analysis, Ofwat made reference to seven companies active in the pre‐treatment of landfill leachate in the North West of England and to a number of wastewater treatment works operated by the WaSCs that were capable of accepting landfill leachate for treatment. Ofwat also refer to discussions with other operators active in the waste treatment sector in the North West of England who did not treat landfill leachate. 7.3 Barriers to entry
For an industrial producer of trade effluent the main options for pre‐treatment are to install on‐site treatment facilities dedicated to treating the trade effluent produced or to tanker the waste for pre‐treatment at an independent treatment works. If the trade effluent requires pre‐treatment (i.e. it cannot be discharged directly to the public sewer or into the environment) then the producer of the effluent has little further choice other than changing its processes so as to eliminate or change the composition of the effluent. The decision between the two options will depend on the nature of the treatment required, the extent to which on‐site treatment can be introduced together with other mechanisms (e.g. recycling) to reduce the amount and composition of effluent produced; the costs of tankering and the availability of suitable independent treatment works in the vicinity. The main barriers to installing an on‐site dedicated treatment works are the capital costs;65 regulatory requirements (e.g. planning, hazardous waste regulations etc); the required treatment and engineering skills and experience; and the need to obtain a trade effluent consent for discharge to the public sewer. The Quantum investigation suggested that the latter might take anywhere between 2 months and 2 years. On‐site treatment may also make it more difficult to achieve any economies of scale in treatment that are available. 7.4 Scope for more competition
As there is already competition in this market, the scope for increases in competition is likely to be more limited than in other parts of this upstream sector. Nevertheless there may be measures that can be taken to make competition easier.
65 Ofwat’s analysis of the Quantum case, for example, suggests that for the treatment of landfill leachate capital costs may be in the region £200,000 to £1,000,000.
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Section 7 7BPre‐treatment and recycling of wastewater
We have not taken any in‐depth review of potential measures, but note that in their response to the DETR consultation on competition in 2000, the Chemistry Society made one interesting point: That the COD removal requirements in the UWWTD are based on a percentage removal during the STW process. This means that the amount of pre‐treatment of COD that is feasible is limited because it affects COD compliance at the WWTW. In other words, more pre‐treatment may make compliance with the UWWTD requirements at the sewage treatment works more difficult. They suggested that compliance with an emission standard instead, would allow more COD removal to take place during pre‐treatment. This might reduce the cost of trade effluent discharges for those who are operating pre‐treatment works.
7.5 Domestic and commercial wastewater recycling
Domestic wastewater reuse systems are available on the market from a range of alternative providers. They can reduce the amount of wastewater that households discharge to the public sewer. One type of system reuses the water from washbasins, baths and showers (‘grey water’) for the purposes of flushing toilets. Systems typically include some form of filtration and treatment and a pump.66 An alternative is to use rainwater harvested from the roof for the purposes of flushing toilets (as well as for use in the garden). Similar systems are also available for use in commercial premises. The incentives for domestic customers (who are connected to the public sewer) to install these systems appear limited at present. Many are not metered and so do not pay sewerage charges that are linked to volumes. For those households who have water meters the return to the sewer is generally estimated by the sewerage undertaker as a fixed percentage (e.g. 95%) of their water volumes. Nevertheless they may still have incentives to reuse wastewater, not because they save on sewerage charges, but because the recycled wastewater is used in place of fresh water and so they achieve a saving on their metered water charge. There may also be scope for customers to present a case to their supplier for why this fixed percentage used for calculating metered sewerage charges should be different in their circumstances (e.g. because of wastewater recycling). We have not proposed any specific measures to increase competition in this market as there is already competition. The most likely reasons for this market to expand are:
66 Some examples of the Systems available and the companies active in this market are: http://www.aquatekltd.co.uk/products/water%20recycling%20management/ http://www.awwp.net/rainwaterharvesting.htm http://www.aqua‐lity.co.uk/index.php?id=1
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Section 7 7BPre‐treatment and recycling of wastewater
if householders have more incentives to recycle wastewater. Increased levels of household metering (even if it is only water metering), as proposed in the Walker Review, may well contribute to providing these greater incentives. If Building Regulations or other measures encourage or require the inclusion of recycling and reuse systems in new residential and commercial developments.
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Section 8 8BOverview of scope and options for increasing competition
8 Overview of scope and options for increasing competition
The aim of this piece of research for Ofwat was to consider what initial steps Ofwat might take in order to increase the scope for competition in upstream sewage and sludge markets, indicating which markets are most likely amenable to in the market competition. The research focuses on an assessment of the level of competition in the markets and possible options for increasing the level of in the market competition; it does not assess directly the costs and benefits of upstream in the market competition. For the purpose of this research upstream sewage and sludge is defined as the treatment and disposal of sewage and sludge. Retail activities and the collection and transport activities provided by the sewerage network are not the focus of this analysis. We made the assumption, for the purposes of the analysis, that competitive arrangements for retail sewerage services would be introduced, as would the extension of revised common carriage arrangements for sewerage as proposed in the Cave Review and consulted on by the Government in September 200967.
The relevant markets We have identified seven separate product markets in upstream sewage and sludge. Given the lack of competition and market information in many parts of the sewerage and sludge value chain at present we have not applied our market definitions rigidly. We recognise Ofwat might want to define markets differently for its market reform work, especially as more information becomes available. The seven product markets are the following: Large scale traditional sewage treatment; Small scale traditional sewage treatment and alternative sewage treatment in situations where connection to the a sewerage network is feasible; Alternative sewage treatment for remote communities and new developments not connected to public sewer; Sludge treatment and disposal; Transport of sludge; Commercial pre‐treatment and wastewater recycling; and, Domestic wastewater recycling.
For each of these markets we assessed the level of competition and options for improving competition.
67 http://www.defra.gov.uk/corporate/consult/cave-review/
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Section 8 8BOverview of scope and options for increasing competition
Large scale traditional sewage treatment In the analysis we differentiate between large sewage treatment works and small sewage treatment works serving small housing developments and populations. This differentiation is made because we believe alternative forms of sewage treatment, such as package sewage treatment works are a substitute for small treatment works. As such the analysis of competition and options for improving competition in traditional sewage treatment focuses on large treatment works connected to the main public sewer network. Overall we believe that there is relatively limited scope for competition in this market. The main constraints on potential competition come from the geographic (localised) pipeline network for transporting sewage from the source/customer to the sewage treatment works; duplication of networks would be costly and inefficient. Further, the cost of transporting sewage by alternative method (road, rail or water transport) is very expensive due to the water content increasing both volume and weight. Further, the presence of economies of scale at the plant level means average costs are lower when treatment is undertaken in large scale plants as opposed to smaller separate plants. There may be opportunities for competition in situations where there is a significant increase in demand (shift upward in demand) for sewage treatment due to population tgrowth tha means that additional sewage treatment capacity is required however, there still remain a number of obstacles the new entrant would need to overcome even when there is significant population growth. There may be opportunities for competition where there are significant differences in technological, organisational or environmental standards in existing sewage treatment facilities. However, given the pressure for efficiency under the current system, it seems unlikely that such opportunities exist in the short to medium term. In situations where return flows of water are captured in the value of water such that there is price for return flows to the environment for dilution. Or in situations where there is a value of recycled wastewater in industrial or agricultural processes (sewer mining), then prices for these goods could encourage entry in some instances.
Market for services provided by smaller sewage treatment works From our analysis we believe that there is potential for off‐the‐shelf package treatment plants to substitute for small treatment works in small communities. From the water company June Returns we observe that there are some 47% of sewage treatment works operated by regulated sewerage utilities that serve population equivalents of up to 250 people, while 11% serve a population equivalent of between 250 and 500 people. From the information we have collected, package treatment plants can serve several hundred people and in fact are already used for new developments where connection to the public sewer is not feasible. Further regulated sewage undertakers sometimes use them as the most economic option in some areas. While we propose that there is potential for competition in this market, it appears that the Building regulations of 2000 create a barrier to this form of competition.
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Section 8 8BOverview of scope and options for increasing competition
The regulations of 2000, provide that discharge to the public sewer (or to a private sewer that discharges into the public sewer) should be undertaken where feasible. Other options such as septic tanks and package treatment works should only be considered when discharge to the public sewer is not possible. In order to explore this further we have undertaken an initial investigation to understand the motivation behind these regulations, and while there may certainly be good reason for the requirements, at this time we have been able to find any information that explains these motivations. However, our investigation suggests that these provisions within the building regulations may have been introduced around 1989/1990 at which time the impacts on competition may not have been given much thought. We suggest that Ofwat investigate the origin of these requirements further and consider the scope for re‐assessing the costs and benefits of these provisions, taking full account of the competition impacts.
Alternative sewage treatment for remote communities and new developments In remote communities and new developments without connection to sewer, package treatment plants and small traditional sewage treatment works are not substitutes. We therefore recommend that Ofwat consider alternative treatment works in regions without public sewer networks to be in a different market to small scale treatment works and package treatment plants where connection to public sewer is possible. Alternative treatments include cesspools, septic tanks and package treatment plants. Due to different characteristics of these solutions (e.g. a package treatment plant needs to be located near a watercourse or drainage for discharge while a septic tank must only be used where discharge is not feasible), we believe that competition is likely to be restricted by physical and regulatory constraints.
Market for sludge treatment and disposal Increased competition in the market for sludge treatment is possible and could involve existing sewage undertakers as well as new entrants. The commercial environment looks likely to increase the attractiveness of the market which would make the market more conducive to competition. The use of sludge as an energy source is seen as especially promising by the industry. That competition is already possible under present conditions is shown by the example of the Netherlands, where outsourcing to independent sludge treatment providers is common. Economies of scale and especially the advantages associated with co‐locating sludge and sewage treatment facilities represent barriers to competition. However, efficiency gains due to co‐location should not deter competition between sewage undertakers who own co‐located facilities. That competition for sludge delivered from remote sewage treatment works is possible is further shown by the fact that transporting sludge over sizeable distances is common practice in the industry, although transport costs mean that competition is likely to be restricted to regional markets.
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Section 8 8BOverview of scope and options for increasing competition
Competition from stand‐alone sludge treatment providers also seems feasible, especially where the location of facilities is within reach of several sewage treatment facilities (some of whom may currently treat their own sludge). This way, entrants could use economies of scale to their own advantage. However, new entrants may face substantial obstacles in the planning process. Another potentially important barrier to competition is regulation that restricts the mixing of sludge with other types of waste. Such mixing could significantly improve the anaerobic digestion process and increase energy generation from sludge. As such we recommend that Ofwat investigate the regulatory barriers to co‐digestion of sludge with other waste such as industrial food waste. In addition, incumbents already face strong incentives to minimise the cost of sludge treatment and disposal, and risk aversion, arguably encouraged by environmental regulation, might have impeded outsourcing of sludge treatment in the past. However, since we expect the economic outlook for sludge to improve, this could change quickly. Overall, the barriers to be competition appear to be low.
Sludge transport The market for sludge transport is akin to the market for general road haulage. The market for general road freight can be disaggregated into two main market segments, of which sludge transport is akin to the "truck‐load freight" market which is characterised by few economies of scale and low barriers to entry. As such in principle the market is competitive and indeed we do observe a mixture of self transport and contracted out transport by the regulated sewage undertakers in England and Wales. There may be two factors that mitigate competitive pressures in sludge transport. The specialised nature of sludge transport such that a specialised vehicle may need to be purchased which is different to vehicles used for other road haulage. We have no evidence that this is the case, and as such we do not think this would be a large barrier to competition in this market. Environment Agency requires licences for the transport of controlled waste including sludge, the process, however, is not onerous nor very expensive, and as such is unlikely to act as a barrier to competition. We therefore conclude that there is no evidence that the market for sludge is not operating as a competitive market.
Pre‐treatment and commercial recycling The indications are that this market is competitive with a range of independent providers of treatment services as well as the presence of self‐supply for some generators of effluent, though there is scope for competitive conditions to vary across the country. We have not provided specific suggestions for measures to improve competition, though we note one suggestion linked to the requirements of the UWWTD made by the Chemistry Society in 2000.
Domestic wastewater recycling The indications are that this market is competitive with a number of suppliers of two main types of domestic recycling systems. Incentives for householders to install
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Section 8 8BOverview of scope and options for increasing competition
these systems are limited, particularly for unmetered households. Any expansion of metering following the Walker Review, or the introduction of requirements (e.g. in the Building Regulations) to include recycling systems in new properties, is likely to contribute to expanding the size of this market.
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9BReferences
References
Bresters, A. R., Coulomb, I., Deak, B., Matter, B., Saabye, A., Spinosa, L. and Udvik, Å. Ø. (1997), “Sludge Treatment and Disposal”. European Environment Agency ‐ Environmental Issues Series, 7. Boylaud and Nicoletti (2001). “Regulatory Reform in Road Freight”, OECD. http://www.oecd.org/dataoecd/30/49/2732085.pdf Accessed on 21 December 2009. Cave, M. (2009). “Independent Review of Competition and Innovation in Water Markets: Final report”. Cave, M. (2008). “Independent Review of Competition and Innovation in Water Markets: Interim report”. de la Motte, R. (2004), WaterTime National Context Report – Netherlands. WaterTime, D10h. European Commission (2002) Disposal and recycling routes for sewage sludge report 4 http://ec.europa.eu/environment/waste/sludge/sludge_disposal.htm European Commission, (2001), Sludge Disposal report 3 http://ec.europa.eu/environment/waste/sludge/sludge_disposal.htm Gray, J. and Gardner, A. (2008) “Exploiting the unspeakable: Third‐party access to sewage and public‐sector sewerage infrastructure” in “Troubled Waters ‐ Confronting the Water Crisis in Australia’s Cities” edited by Patrick Troy. ANU E Press. NERA. (2008) "Financial implications of competition models Water UK", December. OECD. (2009) "Roundtable on competition and regulation in the water sector", Working Party No.2 on Competition and Regulation. Ofwat. (2008). “Ofwat’s review of competition in the water and sewerage industries: Part II”.
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Annex 1 Summary of responses to Ofwat consultation July 2007
Annex 1 Summary of responses to Ofwat consultation July 2007 This Annex provides an extract from Ofwat’s Part I review of competition,68 providing Ofwat’s summary of responses to one of the July 2007 consultation questions on sewerage competition. “Question 20: Do you think combined competition for the provision of sewerage services is possible and/or desirable? Please give reasons for your response.69 There were 25 respondents to this question and more than half of them did not agree that combined competition for the provision of sewerage services should be considered. They highlighted several difficulties and questioned whether there were any benefits to be gained by doing so. The barriers mentioned included the lack of customer benefits and high costs. Although several respondents thought that combined sewerage competition was a possibility there was agreement that a significant amount of work would need to be done before this could happen and some doubt that the benefits that this type of competition could bring would outweigh the costs. A number of respondents noted the fact that on‐site effluent treatment already exists as an option and that disposing of waste via tanker is also an alternative. The following additional points were made: • Two water undertakers and a licensee argued that there is not an effective way of introducing combined sewerage competition without radical restructuring of the industry, which would not be efficient, and there are unlikely to be significant customer benefits. There are also more immediate issues to resolve in the WSL regime. • One water undertaker pointed out that the characteristics of wastewater vary significantly between customers, especially between domestic customers and trade effluent customers. The cost consequences of having to treat different types of effluent are generally quite significant. • Another water undertaker noted that the complications associated with such an activity would mean the costs associated with this, and the potential risks to the environment and public health would place significant constraints on any developments in this market. • Water UK felt that competition could exist if water undertakers operated a ‘singlebuyer’ system through which they commissioned new entrants to build and/or operate waste water treatment works for waste water delivered by the water undertaker’s network to the treatment work. That could lead to efficiencies in waste treatment but would not, by itself, provide customers with a choice of supplier.
68 Ofwat (2007) Market competition in the water and sewerage industries in England and Wales ‐ Part one : Water Supply Licensing, Appendix One, December 2007.
69 'Combined competition' is a term from the legislation and means a licence which allows an entrant to compete in retail and common carriage competition.
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Annex 1 Summary of responses to Ofwat consultation July 2007
• Another stakeholder thought that an entrant could provide a private sewer for a single customer or group of customers, which then discharges into a public sewer. If this is a significant proportion of the cost of the sewerage service for those customers, then a commercial offering might be appropriate. • Another stakeholder felt that there is no reason for inhibiting the development of such a market if the demand exists and if there are entities willing to serve it. • Another water undertaker stated that it is possible that Ofwat opens up the market and leaves it up to licensees to identify any unforeseen opportunity for competition. To do so, Ofwat needs to clarify customers’ risks associated with sewerage competition and ensure that the current regulation effectively communicates these risks. Our response At this stage we do not propose to consider WSL competition in the receipt, treatment and disposal of sewage to the public sewer system. There is already a market for the provision of onsite treatment services. The option suggested by Water UK can already exist, in that undertakers have economic incentives to procure and operate treatment works as efficiently as possible.”
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Annex 2 ‘Alternative’ sewage treatment processes
Annex 2 ‘Alternative’ sewage treatment processes
In general sizes can vary considerably, given that these solutions are used for a variety of residential accommodations, from single households to residential developments. In the next sections we present information gathered from different providers and manufacturers of sewage storage and treatment solutions70 and from Environment Agency and British Water publications71. A2.1 Cesspools
Sizes of standard cesspools supplied vary normally from 1,000 litres to 84,000 (both providing larger sizes upon request). The manufacturer reports to be able to offer a capacity up to 275,000 litres. The British Standard code of practice recommends a minimum capacity of 45 days storage for cesspools and British Water calculates as 200 litres the daily sewage load of a standard residential dwelling. That means that for a single house accommodating two persons, a cesspool with a minimum capacity of 18,000 litres is recommended (with an increase of 6,800 litres for each additional user) 72. A2.2 Septic tanks
Standard sizes are almost identical to those reported for cesspools. The estimated capacity for up to four users is estimated as 2,700 litres (and should be increased by 180 litres for each additional user).
70 For example see www.drainstore.com, www.biotank.co.uk, www.conderproducts.com, www.balmoral‐ group.com and www.pollution.kingspan.com 71 See the Environment Agency “Treatment and disposal of sewage where no foul sewer is available: PPG4” and British Water “Code of Practice – Flows and Loads –2, Sizing criteria, Treatment Capacity for Small Wastewater Treatment Systems (Package Plants)” 72 For guidance on sizes see The Building Regulations 2000, Drainage and Waste Disposal
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Annex 2 ‘Alternative’ sewage treatment processes
Figure 13: Examples of cesspool and septic tank
Cesspool Septic tank
Capacity: 18,000 L 2800 L
Source: www.drainstore.com
Figure 14: Example of a drainage field
Source: The Building Regulations 2000, Drainage and Waste Disposal
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Annex 2 ‘Alternative’ sewage treatment processes
A2.3 Package treatment plants
A wide range of package treatment plants is available on the market, ranging from systems that are able to treat and discharge sewage from single households to package sewage treatment systems able to serve hundreds (or even thousands, especially for commercial applications) of residents or population equivalent. Size, number of tanks and technology used in the treatment may differ considerably across package treatment plants.
Figure 15: Examples of package treatment plants
Balmoral CAP (Continuous Aeration Plant ) Capacity: 6-12 PE (3800-6000 L)
Conder NSAF 25-50 treatment plant Capacity: 25-50 PE (9500-18300 L)
Source: www.balmoral‐group.com and www.conderproducts.com
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Annex 2 ‘Alternative’ sewage treatment processes
A2.3.1 Applications of package treatment plants
Example 1 ‐ Klargester Airflow AF14 High‐Capacity Manufacturer: Klargester (http://www.kingspanenv.com/) Location: South Wales Capacity: 360+ persons Description from website: A camping & caravan holiday park. Waste produced by various sources – Toilet blocks, showers, sink stations, and the owners’ accommodation (4‐bedroom house), located on site.
Figure 16: Example 1 ‐ Airflow AF14
Source: www.kingspanenv.com
Example 2 ‐ Conder Clereflo MBR Manufacturer: Conder (http://www.conderproducts.com/) Capacity: up to 5000 pe Description from website: use Kubota Membrane Bioreactor (MBR) process. The Clereflo MBR also meets and exceeds some of the most stringent discharge standards in the world ‐ therefore treated effluent can be reused for irrigation of: plants, woodlands, gardens and golf courses. The quality of the discharge produced is less than: 5mg/l BOD, 5mg/l SS, 5mg/l NH3.
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Annex 2 ‘Alternative’ sewage treatment processes
Figure 17: Example 2 ‐ Clereflo MBR
Source: www. conderproducts.com
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Annex 3 Indicators of commercial activity
Annex 3 Indicators of commercial activity A3.1 Relevant companies indicated in the FAME database
We analysed the FAME database in order to assess the level of company activity in the upstream sewage and sludge sector. FAME is a database produced by Bureau van Dijk and is based on all company accounts (public and private limited companies) submitted to Companies House in the UK. The databases enable an analysis of the number of companies active in a sector (based on SIC codes); the allocation of a company to a region of the UK (e.g. England & Wales) based on the location of the registered head office; and the analysis of the financial data submitted through the company accounts. The level of information that companies are required to submit to Companies House varies, with smaller companies required to submit less. This means that for some financial indicators there can be many missing observations. Turnover and employee numbers can often be missing, for example, because small companies are not required to submit this information to Companies House. Whilst SIC codes are included in the database, our experience is that these are not always reliable and so to analyse the companies of interest to us, we supplemented information from the SIC codes with information included in the activity description field and also with information from company websites. Using this approach, with FAME data from Summer 2009, we were able to distinguish three broad categories of relevant company: 1. ‘Traditional’ sewage treatment; 2. Small scale sewage treatment (e.g. households, small developments who operate their own facilities); 3. Road transport of sewage, sludge and biosolids. We were unable to obtain a clear picture of which companies are active in sludge treatment, pre‐treatment of trade effluent or in wastewater recycling. There is no separate SIC code for sludge treatment and the activity descriptions did not in general distinguish between sewage and sludge treatment. The results of our analysis are presented in Table 5.They show that there may be 22 companies active in sewage treatment. Ten of these companies are the traditional sewerage undertakers. Of the remaining 12, further investigation suggested that four did not provide sewage treatment services.73 Further details of the remaining seven companies are provided in Table 6.
73 These four (all NAVs) were: Independent Water Networks Limited, Peel Water Networks Limited, SSE Water Limited, Veolia Water Projects Limited
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Annex 3 Indicators of commercial activity
Table 5: Companies active in elements of the upstream sewage and sludge sector in England & Wales
Number of active companies 2009 Total turnover 2007 (£000’s) Total assets 2007 (£000’s)
N Mean Median n % Mean Median n %
Sewage treatment 17 603,267 620,550 16 94% 3,091,576 2,655,400 17 100%
53 Micro sewage treatment 57 (120) 4.6 (3.8) 2.5 (2) 32 (64) 56% (53%) 12.8 (8.1) 2 (3) (113) 93% (94%)
Transport 74 8,812 697 14 19% 2,411 419 65 88%
Note: The numbers in brackets include companies administering a sewage system for small developments/residential estates, but where not necessarily managing and maintaining a sewage treatment plant Source: London Economics based on FAME database: Bureau van Dijk
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Annex 3 Indicators of commercial activity
Table 6: ‘Sewage treatment’ companies in FAME, other than the ten main undertakers
Company Name FAME Trade Description London Economics Note
Licensed sewerage undertaker for Knowle ALBION WATER LIMITED Collection, purify etc of water. Village, Hampshire. Includes a sewage treatment works at Knowle.
BREY Utilities is the Ministry of Defence’s contract partner for Package A of Project Contract with Brey utilities limited for water and waste Aquatrine ‐ a 25 year Public Private Partnership BREY SERVICES LIMITED water services covering the areas of Wales and the south to deliver water and wastewater services across west of England. the defence estate; A joint venture between Kelda Water Services and Earth Tech Engineering
Biffa Ltd is involved in waste management in UK integrated waste management business, comprising general; Biffa Waste Water (BWW) offers BIFFA LIMITED collection, treatment and recycling, and disposal services for treatment of aqueous organic services. biodegradable effluent, utilising a number of licensed facilities.
The initial focus was the provision of services to Prime subcontractor engaged by coast to coast water the UK Ministry of Defence (MOD); C2C Services limited to operate and maintain the ministry of defence Ltd now provides a full range of water and C2C SERVICES LIMITED (mod) facilities under project aquatrine package c a 25 wastewater operation, maintenance, design and year contract, awarded to coast to coast water limited build services anywhere in the country for public by the mod, water and wastewater. and private sector clients. Established by Severn Trent and Costain; owned by ST
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Annex 3 Indicators of commercial activity
Table 6: ‘Sewage treatment’ companies in FAME, other than the ten main undertakers
Deliver water and wastewater services in Wales, KELDA WATER SERVICES (WALES) Maintain and operate waste water assets in south Wales in partnership with Dwr Cymru; same group as LIMITED and Hereford on behalf of Dwr Cymru. Yorkshire Water.
The company operates different sites in the UK TRADEBE GWENT LIMITED (TRADEBE Transportation and disposal of liquid waste. where they treat of industrial and domestic and LIMITED) liquid waste.
Holding company whose subsidiaries are engaged in waste management development and operation of Same group as SWW, but having, among other VIRIDOR WASTE MANAGEMENT LIMITED landfill sites, generation of electricity from landfill gas activities, 3 in house liquid waste treatment and fixed term contracts with local authorities for the facilities. treatment and disposal of waste.
Source: London Economics based on FAME database: Bureau van Dijk
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Annex 3 Indicators of commercial activity
Our analysis of FAME is unlikely to provide a full picture of the activity in the upstream sewage and sludge sector in Wales, as it is reliant on a level of detail in the activity descriptions and in the SIC codes that is not always present. It is also based on companies that have their registered head offices in England or Wales and so does not include any companies who are active in England or Wales but whose head offices are elsewhere. Nevertheless this analysis does show the following: The limited activity by companies other than the undertakers in traditional sewage treatment, though there is an indication of the potential for new entry; The relatively higher levels of activity amongst companies capable of transporting sewage and/or sludge waste and amongst small companies (probably owned by residents) who run small scale sewage treatment plants for individual properties or small groups of properties.
A3.2 Public tendering activity
In order to provide a further indication of commercial activity in the upstream sewage and sludge sector we also undertook some analysis of relevant publicly tendered opportunities. We used a public tendering portal to search for tenders issued in 2009 using the search words “sewage treatment” and “sewage sludge”.74 An indication of the outputs of our search is provided in the table below.
74 The portal we used is www.sell2wales.co.uk. Although this is organised by the Welsh Assembly government, it includes tenders from across the UK.
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Annex 3 Indicators of commercial activity
Table 7: Number of Public tenders in 2009
Tendered activity Tendering organisation
Local authority Developer WaSC
Sewage TP Design & build 1
Operation of sewage or sludge 2 2 2 treatment plant
Sludge transport 4
Sludge transport & disposal 1
Supply of treatment equipment 1
Sludge TP Design & build 3
Sludge treatment service 1
DBFO general waste treatment 1 (inc. Sewage)
Source: London Economics analysis of www.sell2wales.co.uk
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Annex 4 Services Sydney Case
Annex 4 Services Sydney Case In 2004 Services Sydney asked the National Competition Commission to declare75 sewage transmission and interconnection services operated by Sydney Water, the local incumbent and owner of the sewerage network(s). Services Sydney wanted to provide retail and treatment services in the Sydney Area and needed access to a service for the transmission of sewage via Sydney Water’s sewage reticulation network and to an interconnection service, to connect its own main trunk sewers to Sydney Water’s reticulation network at interconnection points. The interconnection points were to be located in proximity of the three main Sydney Water sewage treatment works (treating around 80% of total sewage in the area) and were intended to convoy sewage from Sydney Water's network to the Services Sydney sewage treatment works (yet to be built) 76.
The proposal The main reason for the new entrant to seek access to these services was the consideration that there were significant margins for improvement upon Sydney Water’s existing and planned sewage management strategy. Services Sydney based its plan on the following elements77:
Inefficiency of the existing system . About 80% of all sewage entering Sydney Water’s reticulation network was processed in three major coastal sewage treatment works and discharged through ocean outfalls, after preliminary or primary treatment. . Sydney Water’s long‐term strategic plan for sewage was based on maintaining and upgrading the existing facilities (sewers and sewage treatment works) and retaining the current structure of the sewerage system including using deep ocean outfalls as primary point for wastewater discharge. . Services Sydney considered this plan to be inefficient and exceedingly expensive (due to the out of date state of service facilities and theh hig operating costs of using deep ocean outfall facilities) and potentially environmentally dangerous, given the low level of treatment provided by the three major treatment works before discharge into the ocean.
75 "Declaration is a pathway available under Part IIIA of the Trade Practices Act 1974 (Cth) for third parties to share the use of certain infrastructure facilities of national significance (ie to have a service provided by a facility declared)." http://www.ncc.gov.au/index.php/making‐an‐application/declaration 76 For information on the case and all relating documentation see http://www.ncc.gov.au/index.php/application/services_sydney_pty_ltd/. 77 See Services Sydney proposal and Chapter 7 (by J. Gray and A. Gardner) of “Troubled Waters‐Confronting the Water Crisis in Australia’s Cities”(2008), available at http://epress.anu.edu.au/troubled_waters/pdf/whole_book.pdf
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Annex 4 Services Sydney Case
Alternative solution proposed Services Sydney developed an alternative proposal for the sustainable use of water resources in the Sydney area. The proposal included: . the construction of new, more efficient, sewage treatment works and the immediate reduction (and potential elimination) of the amount of contaminated sewage discharged through ocean outfalls; . the introduction of competition in the collection of sewage, based on providing a service similar to Sydney Water, and attracting customers through competitive prices and higher environmental standards of treatment and recycling; . the treatment of wastewater to tertiary levels and the recycling as environmental flows into rivers; in the mlonger ter high quality recycled water could potentially be treated to drinking water standards; . the generation of renewable energy as a by‐product of the sewage treatment process.
Issues Sydney Water opposed Services Sydney proposal on the grounds that transport and collection of sewage are part of the same market and a price for transport services can only be set in ”a purely arbitrary way because the end product bears no resemblance with the input product”78; Sydney Water also believed that the set up costs necessary to establish the necessary regulatory and monitoring mechanisms were substantial. Marsden Jacob Associates (MJA), in advice for Sydney Services, argued that heterogeneity of inputs and “blending” in the transportation system occurs in other sectors, such as gas and electricity, where there is effective competition in place. The major point is not that the outputs have to bear resemblance with the inputs, but rather than it is possible to measure or estimate volumes and composition of inputs and off‐takes. MJA noted that Sydney Water already had in order a price differentiation scheme reflective of sewage treatment costs for different categories of customers79. Such classifications are based on measuring or estimating volume and load characteristics and can be applied to establish reflective pricing mechanisms to customers served by a competitor supplier. Services Sydney also asserted the practical feasibility of monitoring and controlling the amount of sewage treated at its wastewater treatment works at the interconnection points. Being able to measure or estimate the characteristics of inputs and outputs it is therefore possible for each treatment provider to treat volumes and loads corresponding to its customers’ inputs or alternatively to establish meaningful
78 See http://www.ncc.gov.au/images/uploads/DEWaSSSu‐014.pdf 79 Separating household (whose product is considered largely homogenous) from non‐household customers and classifying non‐household customers according to type and level of load.
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Annex 4 Services Sydney Case
compensation mechanisms based on costs of the respective customers and the amount treated at each wastewater work.
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