Water competition threat recedes

Photo source: Ofwat

Ofwat is to take a step to step approach to introducing competition into the water sector the regulator confirmed at its briefing to the City of London earlier this week. Readers of this blog wont be surprised by this news  - it was predicted back in March. It confirms that the medium-term risk to financeability  that some analysts had feared has reduced.

“At this stage , we are focusing on those areas of the value chain that are least asset-intensive, and where there will be little impact on investors’ confidence or the cost of capital,” said Ofwat Chief Executive Regina Finn.

This pragmatic approach is to be welcomed. There is no appetite from consumers for competition although value for money is key. The current disparity in water bills across the country is becoming an increasingly  sensitive issue especially in the South West.

In the next step Ofwat will be building on the ideas in the Cave review and looking at the potential for upstream water reform in particular water abstraction licensing. The underlying problem for the regulator is that there is no actual value for water, the price consumers pay reflects what has been done to get water to the tap but not the value of water itself. Given the very high fixed costs and low marginal cost this is unsolvable. It is only in areas like water supply where marginal costs can help inform decisions. The marginal cost of developing new water supplies varies dramatically across the country from almost zero in areas of surplus water to over 100p /m3 in water stressed areas. Focusing on valuing water better in these areas can help the industry to make better decisions and take a sustainable approach.