Water competition – what competition?
February 15th 2007 The government, through Defra, took a very cautious approach to the introduction of water supply competition. Their approach was so cautious that some of us, who have been lobbying for many years for the introduction of competition in this industry, expressed the view that, if a government wished to demonstrate that it was in favour of competition, but did not actually want it to happen, this is the type of regime that it would introduce!
The Water Act 2003 requires that new entrants should be licensed by Ofwat.New entrants may be completely new to the water industry, in which case they can seek business anywhere in England and Wales, or subsidiaries of existing incumbent suppliers, in which case they are precluded from offering services within their owner’s area.Licences are issued for retail only or combined retail and supply. This latter case involves the use of incumbents’ supply networks (subject to conditions) to transport the new licensee’s treated water and is known as Common Carriage.The quality of the licensee’s water will be regulated by the Drinking Water Inspectorate. These requirements are reasonable to ensure the protection the customers of the new licensees as well as those who remain, by choice or otherwise, with the incumbent supplier.However, since licensees must have retail customers before they can use common carriage to put water into networks, retail supply has to come first.This is where the delay has been seen.
It is the opinion of the writer that there are three major barriers to competition: 1) the conditions that control the wholesale price to new water retailers and 2) the small size of the market and 3) the lack of a requirement for a supplier of last resort in the legislation. Although final prices to licensees will be struck on a site specific basis, indicative wholesale prices giving a maximum of 2.5% / 0.4% (demands of 50,000m3 / 500,000m3) and a minimum of 0% discount on the existing delivered price offer little incentive for business customers to switch supplier. Section 66E of the water Act 2003, which introduced competition, requires the financial indifference of water companies when losing a customer to a competitor.Thus, ineligible customers are protected from potential price rises,but any incentive for innovation by the incumbents (a government declared reason for introducing competition) has been lost. A recent Competition Appeals Tribunal case has thrown doubt on the method used by Ofwat to calculate these prices.
The size of the potential market is limited by the requirement (with minor exceptions) that customers are eligible only if the consume more than 50,000m3 per annum on a single site. Amalgamation of sites is not permitted, either within or outside company boundaries.
The possible lack of a supplier of last resort means that Customers contemplating a change of supplier would be well advised to ensure that this is covered in any contract with a new licensee.
One of Ofwat’s duties is to ‘promote competition in the interests of all customers’ The writer believes that this can best be achieved by allowing licensees a workable margin and encouraging innovation to improve the efficiency of incumbents. It is clear that Ofwat needs to take a fresh look at their interpretation of the legislation and if it finds that there is no other interpretation that will provide new licensees with a reasonable margin, Defra will need to decide whether it wants competition in water supply to succeed. If so, a change of legislation will be required. More articles from MEUC Limited: | 
