Competition

The UK has one of the most competitive water markets in the world. The water companies in England are all privatised. In Wales the water company is a mutual not for profit organisation, while in Scotland its a nationalised industry. The water service in Northern Ireland has recently changed to being a government owned limited company (GoCo). What better proving ground exists in the world for comparing the benefits of each system?

  Source: The Economist, data from OFWAT, Environment Agency, Scottish Executive, Northern Ireland Office. Note data is from before establishment of GoCo in Northern Ireland and dates back to when Scottish water was established so figures are an illustration of differences only and should be treated with caution

The water industry in England and Wales is a highly regulated oligopoly. In order to promote some competition the regulator - OFWAT - draws comparisons across the industry sector. This comparison covers the obvious financial and capital investment areas. However it also covers the levels of service provided to customers.

The Government has attempted to open up "real" competition where customers can choose their supplier. This started under the government's Competition Act 1998, which took effect from 1 March 2000 . This does allow large users - those consuming more than 250 m litres a year- to negotiate supply from third parties. So far over seven ""inset" agreements have been signed, to provide alternative supplies to large users including one new licensee. However 20 years after privatisation there is still hardly any competitive challenge to Britain's 10 regional water monopolies. Competition will slowly continue to increase with "common carriage " from the water companies now published and Water Act 2003. For more detail on the Competition Act see Competition

Recently Professor Martin Cave has led an independent review of competition and innovation in the water markets. The Final report was published in April 2009. Currently DEFRA is consulting on the Cave Reviews recommendations and possible new legislation.

One of the major proposals is to force all large water companies to legally separate their retail business and eventually allow all business users to choose their water supplier. However this idea has a number of significant practical issues and its by no means clear it would significantly benefit customers. It is proposals for introducing upstream market forces that may have the most enduring impact on the industry. Cave estimated that these measures could account for £1.3 billion of the £2.5 billion net present value that the review's recommendations could deliver over 30 years. However competition in utilities is getting a bad name with the problems in the electricity market, that combined with the forthcoming general election is likely to mean little actual change over the next year or so.

Alongside the Cave Review the Government has initiated a review of charging and metering in the water sector led by Anna Walker. The review's terms of reference included the challenging task of recommending a charging method that was both environmentally sustainable and fair to all customers. The interim report calls for full metering and volumetric charging.

An annual report is published by Ofwat summarising the financial position, the performance, and the extent of operating and capital investment made by the water companies. The objective of the report is to encourage competition and to provide information that can be used in resetting price limits as part of the periodic review process.

In brief summary, capital expenditure in 2008-2009 (the last year for which the report is available) totaled £4.6 billion. This is 14% more than assumed when the price limits were set in 2004 but its a drop of around 7% compared with 2007-08.

Full details are in OFWAT report: "Financial performance and expenditure of the water companies in England and Wales" This annual report is published by Ofwat each Autumn .

An assessment of the overall service provided to customers is made in order to:

• enable comparisons about the overall service companies provide to customers, and for this to be taken into account when OFWAT sets price limits.

• to inform customers (and other interested parties) about the overall performance of their local water and sewerage company.

There are four key areas, each with their contributing measures as follows:

• water supply (water pressure, interruptions to supply, hosepipe bans, and drinking water quality)

• sewerage service (sewer flooding incidents and flooding risk)

• customer service (written complaints, billing contacts, meter reading telephone answering, services to customers with special needs, meter options, supply pipe repairs, debt and disconnection policies, complaint handling, compensation, payment options and customer information)

• environmental impact (leakage, bathing waters, sludge disposal, sewage treatment works, combined sewer overflows, pollution incidents and sea outfalls.

The framework for competition is set out in the Water Industry Act 1991 and the scope was extended by the Competition and Services (Utilities) act 1992, the Competition Act 1998 (CA98) which took effect from March 2000 and the Water Act 2003.

With the Competition Act, competition is slowly opening up. All water companies have to publish the terms on which they allow "common carriage". Vivendi, the French Group that owns General des Eaux has already launched a new company to exploit the opportunity. However to date relatively few deals have emerged.

The current focus by OFWAT is on Water Supply Licensing(WSL). The WSL regime enables new companies to supply water once they have been granted a license by Ofwat. They can compete in two ways:

• by developing their own water source and using the supply systems of appointed water companies to supply water to customers premises; or

• by buying water 'wholesale' from appointed water companies and selling it on to customers

1. No national network of pipes exist. Typical water flows from source of supply - reservoir say - to local regional customers.

2. Only a minority of customers have meters and roughly 20% of water put into the network is lost through leakage.

3. High capital costs create a barrier to entry and could leave unsuccessful competitors with large "stranded assets".

4. Introducing a new water source into the network could compromise water quality and/or environmental performance. For example a very small change in the pH of water can dramatically affect the water chemistry and lead to visible changes in the quality of water at customers taps.

The above problems are solvable but to encourage further competition it may be necessary to split up the existing utilities according to their three main functions, pipelines, production, and retail (dealing with customers). This is proposed in the Cave Review but is unlikely to happen for sometime.

Although there will be much "noise" about competition in reality it is unlikely to make any difference to domestic consumers for some considerable time. The real opportunity is for large industrial consumers especially if they have water abstraction rights. However physical constraints still mean that in practice very few industrial companies will change supplier.

An inset application must meet one of the three criteria:

• The customer users at least 50 megalitres of water per year (250 ML in Wales)

• It is a site not currently being served by a licensed supplier (greenfield)

• The customer's premises are not household premises

The successful appointee can serve its new customer(s) either using its own resources or methods of treatment, or by requesting the use of the existing licensed supplier's assets.

To date this has been a difficult process and only eight have been approved (one of which is in administration).

The most recent licence is to Business Stream (a subsidiary of Scottish Water) to enable it to purchase a wholesale supply of water from an appointed water companies supply system and supply the premises of customers in England and Wales.