The strange case of water
February 10th 2006

Efficient procurement is a prerequisite for running an efficient business. It is essential that all raw materials be used in the most efficient manner, whether those are energy, materials for manufacture or the mundane yet essential office supplies. Yet these items have to be purchased before they can be used in any way - efficient or not.

For the vast majority of goods used by commerce and industry there is a competitive market. This allows purchasing managers to exercise choice of quality, service and supplier and so tailor actual purchases to commercial need. That market also drives efficient behaviour by suppliers, so that their customers are able to obtain the best overall package for their needs. Water, however, is different.

Water is generally supplied to customers by large, vertically integrated monopolies. The company or companies who provide potable water and/or treatment of wastewater services to a customer depends entirely on that customer’s geographical position. The customer has neither the choice of supplier nor, in most cases, the quality of water that is supplied.

Since 1989 Ofwat has regulated the water industry. That organisation has pursued a policy of comparative competition in an attempt to ensure that the industry operates in the most efficient manner. This has had some success, but many believe that true market competition would drive more efficient behaviour by the water industry.

Ofwat also has a duty to ensure that efficient water companies have sufficient finance to remain in business.

The net result of these policies has been, with the singular exception of industry wide price reductions in 1999 and a very few other examples of small reductions, an inexorable succession of annual price rises above the rate of inflation.

Not all of commerce and industry is fully dependant on the regulated water industry for supplies or wastewater treatment service. Many have private boreholes from which water is abstracted, or abstract water from a canal or river alongside their premises. These abstractions are of a lower quality than public water supplies but often suitable for industrial processes, with or without further treatment.

Many larger enterprises treat their own wastewater. This treatment may be sufficient to allow discharge to a river or other watercourse or, more usually, to make savings in the overall cost of treatment by presenting the monopoly service provider with weaker wastewater. Since 1989 it has been possible for the largest water users to change supplier by means of an Inset Appointment. However, few customers or suppliers have been interested in pursuing this route. A current case before the Competition Appeals Tribunal may affect this situation.

The 2003 Water Act paved the way for further limited competition in the supply of water. On December 1st 2005 it became possible for new entrants and water companies to hold licenses to supply water (outside their own areas in the case of companies). At the time of writing three such licenses have been granted by Ofwat: Aquavitae, Watercall and Severn Trent Direct.

Further licensees are expected and will be announced on Ofwat’s web site. Customers who buy 50 000m3 or more of water now may obtain their supply from a licensee rather than the monopoly supplier. However, it will take up to 5 months from the customer’s decision to change to Ofwat’s approval. There will be two ways in which a customer may be supplied: i) by the licensee acting as a retailer of the monopoly’s supply, ii) by the licensee putting his own water into the monopoly’s network to supply the customer. The latter arrangement is likely to produce the greatest financial benefit to customers, since the Water Act set stringent rules for pricing transport and wholesale prices to licensees. The greatest benefit to customers of the new licensees may well be their improved service offerings, such as billing, water leakage and efficiency measures and so on.

So there are now several possibilities for water customers to save on overall water costs; it is essential to ensure that water efficient measures are in place, using free help such as The Big Splash, run by Envirowise. They may look for alternative sources and check whether they have unused abstraction licenses which can be revived. They can investigate the potential benefit of effluent pre-treatment.

Large users can now choose an alternative supplier.

Customer representatives are lobbying for this new power to cascade down to smaller users. Defra has committed to a review within three years but meuc and others believe that the benefits should be enjoyed by the greatest number of customers as soon as possible.

The meuc has helped over 500 leading UK private and public sector organisations achieve lower electricity, gas, water and telecoms prices and enabled them to secure superior trading terms.

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