Water retail competition is a distraction

One of the subjects in the forthcoming water White Paper expected this summer is bound to be competition, especially after retail competition was proposed by both Ofwat and the independent Cave Review. This week Deloitte published a new report on retail competition. This confirmed what many of those in the industry already thought, that introducing competition is an expensive process and that the benefits are very limited so it fails the cost benefit test.

Competition may have worked in other industries like energy and telecoms but water is a very different market. It does not have a national network that allows physical transfer, secondly it would need major consolidation from the twentyone current businesses into about six if benefits are to be achieved.

What is far more important to the sector is securing low cost finance for the massive investment needed. Here any move to retail competition could cause debt and equity investors to lose confidence. Any resultant increase in finance costs would dwarf savings from retail competition. Secondly the new Service Incentive Mechanism puts a heavy premium on customer complaints and handling. The experience in the energy sector shows that competition is far from universally popular and certainly wont decrease the number of complaints. Rather than worrying over competition it would be much better to focus on innovation and finding ways to delivery the capital programme more cost effectively.     

White Paper on future of water industry announced

The announcement by Richard Benyon, Minister at DEFRA that the Government will produce a water white paper in Summer 2011 should be welcomed. A clear long term vision for the sector is absolutely vital with the increasing challenges of climate change, population growth and rising expectations.

Affordability of water has become a political issue (don’t make the mistake of underrating it), as highlighted by the Walker report. Its particularly vital in the South West where it is reaching a political crescendo. This also impacts on the contentious issue of water metering and the costs inherent in the massive investment required for the Thames Tideway project. Those who think that competition is likely to be the salvation are likely to be disappointed. Richard Benyon makes clear that the Cave review is integral to the process but there is no suggestion that the industry will be restructured just some tinkering around large water users and abstraction.

The other major issue is diffuse water pollution. The relatively easy point sources have largely been tackled. Now with the Water Framework Directive the emphasis is moving to the much more difficult diffuse pollution sources. This will require major investment. With the transformation in the number of people surfing (and all year round) and campaigns by papers like the Sunday Times the pressure to improve will only increase.

Central to resolving all these issues is clear political direction. The water industry needs to grasp the opportunity presented by the development of the White paper to get involved in the debate and shape the future of the industry.