Apr 5 2012

‘Competition’ in the Water Industry

This is a procrastination blog.  Because I should be doing something else right now that is more important, but I have had a couple of conversations this week about competition and then saw an LSE blog about competition in the water industry.

The LSE blog gave the recent Water White paper an amber light for competition because it says that retail competition for businesses is currently limited based on how much water you use, so the potential market is only 2,200 customers.  What it doesn’t mention is that Ofwat, in its review of Competition in the Water and Sewerage Industries: Part II, states:

“- the WSL regime, which allows about 2,200 customers who are likely to use at least 50ML of water a year to switch supplier.

These forms of competition are useful, but very limited.  The WSL regime is the principle framework for allowing customers to choose their water supplier.  It was introduced in December 2005, but to date has not been successful in enabling any customer to switch their supplier.”

Now, it could be that the WSL regime is ineffective or cumbersome and that is why competition has not resulted in any customers changing supplier.  Or it could be that water is water wherever you buy it, and that competition has limited appeal.

The more I talk to people in the industry, the more I feel that something huge and strategic, like the physical infrastructure of the water network, should be owned by the state.  Perhaps like Network Rail, or the National Grid.  Competition will mean asking companies to compete when they are all selling an identical product, but with very different infrastructure costs.  As the Government subsidy to South West Water has shown, it costs more if you have hundreds of miles of coastline and bathing water to clean-up and protect, than if you are landlocked, like Severn Trent and Thames.  So you have different infrastructure costs, which have to be maintained in a highly regulated industry, but you are going to be competing – on price and service levels?

Considering the furore over recent months about the lack of transparency in the consumer electricity markets, I find the Water White Paper and its ideas for competition myopic.  In a world with the possibility of increased drought and, at the same time, increased flooding incidents, you are introducing competition to a strategic monopolistic industry who’s main infrastructure was built by the Victorians?  It doesn’t make sense to me.

Back to the original quote above – competition has existed, albeit in a limited area, since 2005.  It hasn’t worked.  Is the solution right now really more competition?

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