Reasons for optimisim include consumer support and Tory policy

How quickly will England see water competition? IPA's Darren Nelson thinks next year, but Wics' Alan Sutherland says don't expect to see anything until at least 2014.

Time has marched on since Martin Cave reported on his independent review of competition and innovation in water markets in April. There was initially almost universal support for at least starting the process towards greater competition, with retail leading the way. In fact, with the exception of the Welsh Assembly Government, stakeholders including Ofwat, the Consumer Council for Water (CCWater), Water UK and Anna Walker's charging review have endorsed the policy.

The government began a 12-week consultation on Cave's recommendations in September. However, only lowering the switching qualification threshold and licence simplification are being properly addressed. The Department for Environment, Food and Rural Affairs does not seem convinced about the strong positive links between competition and environmental benefits, or the very strong positive links between competition and innovation.

Pessimism grows

Perhaps this is why initial optimism on the prospects for competition has given way to pessimism, in some quarters at least. Speaking at the Beesley Lecture earlier this month, Cave himself was less than optimistic about the chances for water competition in the short and even medium term. In particular, he could not see the introduction of any competition reforms in legislation (such as the new Floods and Water Management Bill or amendments to the Water Industry Act 1991) before the next election.

He also seemed concerned that the government might not be that committed to competition, particularly when it comes to the water resource end of the supply chain, and still favours more "central planning" type solutions to resource use and environmental problems. "I am disappointed that the failure to legislate for competition in the water sector means in effect a further significant delay before businesses in England and Wales will have any effective choice in their supplier," he said. "This is bad for them and bad for innovation in the whole sector."

Reasons for optimism

However, there are reasons to remain optimistic. These include:

• Consumer support. CCWater's recent research suggests both business and domestic customers are in favour of competition, particularly to get lower bills
  .

•  Conservative Party support. Speaking at the Water 2009 conference last week, shadow environment secretary Nick Herbert denounced the government's competition consultation as showing a "worrying lack of enthusiasm for professor Cave's recommendations" - particularly the decision to keep a volume threshold on switching. Herbert says competition would be included in the water white paper his party will put before Parliament if it wins the general election (see feature, page 16).
  "Competition has a significant role to play - through mechanisms such as tradable abstraction licences, the legal separation of vertically integrated companies, and improving access for new entrants. We can move closer to understanding and unlocking the true value of water, improve and encourage measures for water conservation, and offer a better deal to customers," he said.

• Environmental pressures. Chief among these is the Water Framework Directive, which many believe cannot be effectively delivered centrally. For instance, in the context of energy, George Yarrow of Oxford University and the Regulatory Policy Institute (RPI) says: "The environmental problems are big, pervasive and complex and it is likely that they can only be tackled effectively by decentralised processes."

• Scotland. Businesses there have been able to switch supplier since April 2008.

• The Competition Appeals Tribunal ruling in the Albion Water vs Welsh Water case. This could put the pressure on to, at least, take steps that could facilitate competition later, such as accounting separation, better cost allocation and transfer pricing and customer bill unbundling.

• Ofwat. The regulator appears to have adopted a very pro-competition stance over the past couple years.

Safety nets

Facilitating competition at both ends of the UK water supply chain would appear to make good economic and environmental sense. Cave's recommendations are well thought out, and largely cautious and practical. Fears over introducing competition into "essential services" like water can be overcome, or at least mitigated, through better selling of the benefits from water competition and through some lateral thinking on other possible reform paths and safety nets. One possibility could be to first make the transition from heavy-handed RPI-X regulation to competition through light-handed monitoring regulation.

Ultimately, while it may not happen before the next election, water competition will start to be facilitated, in at least retail, by Christmas 2010.

Darren Nelson is an associate director at IPA Energy + Water Economics.

Alan Sutherland tells Karma Ockenden not to expect anything before 2014.

Scottish water regulator Alan Sutherland warns that it may take until 2014 to get a competitive water market up and running in England. He says work on the opening of the Scottish market (which took place in April 2008) started back in 2001, and seriously got under way only in 2004.

"While Ofwat can potentially benefit from some of the lessons we learned, there are more companies to deal with. If I were Ofwat, I wouldn't bank on less than four years," Sutherland says, adding this will be especially the case if legislation is needed to get some facets of the competitive market under way.

Threshold "a problem"

Sutherland praises the work of the Cave Review for moving the debate on competition "to how rather than whether" and for endorsing the Scottish model of retail competition. But he believes that excluding low volume businesses from switching (an initial 5 megalitre a year threshold has been set) could be "quite a problem". He notes that some of the earliest switchers in Scotland - the betting chain Ladbrokes, for example - were low volume users.

Despite the differences in the English and Scottish markets, the regulator believes there will be "a large degree of commonality" in terms of the active players. "I am fairly sure Business Stream will want to participate in the English market," he says. He also believes that relaxation of the merger regime "particularly in the retail space, could lead to real economies of scale" that will benefit customers on both price and service.

Retailer splits

Having experienced the split of retailer Business Stream from Scottish Water, Sutherland says separating retail operations south of the border could be fairly quick and simple if firms are as engaged in the process as Scottish Water was. But he warns: "I can imagine one or two companies may seek to procrastinate somewhat" and suggests Ofwat may have to set up some kind of penalty mechanism as a deterrent.

As for Scotland, Sutherland says extending competition to households is a decision for government. However, the regulator is conducting household metering trials. "If it can be shown that competition is cost effective and has environmental benefits, competition becomes a different decision for government," he says.

Further reform

Although there is currently no upstream competition in Scotland as proposed by Cave for England, separating Scottish Water's networks from its resources and treatment operations is under discussion with a view to better cost allocation. If treatment operations are found to be high cost, for example, tackling leakage could be afforded a higher priority. "We have an agenda for regulatory reform," Sutherland explains. "We have to make changes in time for when we next set prices in five years' time."

Sutherland: don't bank on less than four years

Comment on this story

Screen name

Email (For verification only. Your details will not be retained or passed on. Not for publication)

Comment

Report Abuse

Sign up to our free email newsletters