The demand curve of the typical firm in a two-firm market lies entirely below the long-run average-cost curve, so there is no quantity at which the price exceeds the average cost of production.
No matter what price the typical firm charges, it will lose money.
The firm’s demand curve lies below the average-cost curve because the average-cost curve is steep, reflecting the large economies of scale for water provision.
The second firm-with half the market-would have a very high average cost and wouldn’t be able to charge a price high enough to cover the cost of building the pipe system in the first place.
Therefore, the second form will not enter the market, so there will be a single firm, a natural monopoly.