17/02/10
A strong statutory framework is necessary if competition is to be extended in water services - developments in the energy market show why.
The story so far - developments in competition policy:
February 2008
UK government announces review of competition in England and Wales. Later appoints Professor Martin Cave to lead it (1).
April 2009
Cave Review is published (2). Lists industry challenges: climate change, population growth, containing costs, rising consumer expectations, water efficiency. Recommendations include: business customers can choose their supplier; retail divisions legally separated from existing companies; retail company mergers unregulated; higher turnover threshold for general mergers; trading of abstraction and discharge licences.
September 2009
Government consults (3). Welsh Assembly Government demurs. Proposals for England include: business customers using minimum 5 Ml a year can choose suppliers; supply licensing simplified to make it easier for new entrants; retail market to cover sewerage as well as water services; retail divisions legally separated from supply and sewerage business.
Industry view
On behalf of member companies, Water UK finds common ground with the government on two important points. First, to go on being successful, the industry model must evolve. New ways of working are needed. Extending competition is one mechanism that could contribute to this evolution. Second, there is an inherent uncertainty about how competition might develop, so a phased approach is the right way forward.
Strong framework
Individual water companies have their own views about the government’s different proposals. But they share the conviction, based on experience in other sectors, that a strong framework is needed to ensure useful outcomes for customers and society. Only a specific regime of statutory governance, determined by Parliament, can do this. Handing wide enabling powers to Ofwat will increase the risk, and cost, unnecessarily.
What specific provisions should such a framework contain? Water UK highlights:
• Statement of objectives, including that competition must be efficient (enhance, not diminish, overall benefit)
• Requirement that customers not in the market, including households, pay no more than they otherwise would
• Description of how the industry should be restructured – Parliament itself must set terms of revised company licences
• Market management structure run by companies in the market – Ofwat acts as appeal body only
• Formal protection for customers if a company in the market goes out of business.
In making the case for preserving the present level of certainty by putting in place a statutory framework for competition, it shouldn’t be necessary to mention that secure water services are critical in modern societies. But worrying developments in energy and elsewhere show that markets can be blind to the obvious.
Supplies cut off
Along with grit, salt and travel chaos, the big story of the winter freeze was gas – or, rather, shortage of gas. Four times in eight days, the cold snap forced National Grid (the distribution company) to issue 'gas-balancing alerts' to encourage increased supply and lower demand. Interruptible tariffs kicked in. Supplies were cut off to nearly a hundred large industrial users.
The immediate problem was, predictably, misunderstood by journalists keen on potential disasters. With reason, business grumbled about lost output in a depressed economy. But NG claimed, fairly, that the system had worked. Supply-demand balance was restored. Households were never threatened.
Unfortunately, however, the immediate problem is beside the point.
What we were seeing was clear justification for the anxiety (openly expressed in energy circles for some time) that current market mechanisms cannot provide a secure supply in the medium term. Whether the cause is the step-change needed in low carbon generation or growing reliance on imported gas, we may be thankful that a comprehensive review is now underway.
Big industrial customers are naturally most concerned about future security. They dismiss as "complacent" the idea that last month’s events were a one-off (4). They see "a real risk that disruptions to supply could become more frequent".
Perplexing
Business should not expect immediate reassurance from the energy regulator however.
In a consultation on energy security published in October, Ofgem repeatedly questions the ability of current competitive market arrangements to respond to Britain’s needs (5).
The regulator may reflect with grim satisfaction on its statement that "the greatest risk to security of supply appears to be maintaining gas supplies through a severe winter". In the event, this was truer than it knew.
Ofgem thought the test would come "in the next two decades" as "the outlook in the very near term is more comfortable". Given what happened in January, this is perplexing. Ofgem was relying on an NG outlook report that said we were entering winter 2009-10 with "a very high capacity margin (by historical standards) and a sound gas infrastructure".
Stark numbers
Ofgem’s concern is that market mechanisms have not produced the investment required. In the next 10-15 years, it says, as much as £200 billion will be needed to deliver energy security and meet emission targets.
These stark numbers have led others, including The Economist newspaper, to take seriously "an alternative reading of the past 15 years of energy market liberalisation: that low prices were as much a result of firms sweating their assets as of competition and ingenuity" (6).
Water UK response to Defra’s consultation
1) Future Water, a strategy for England, Defra, February 2008
2) Independent review of competition and innovation in water markets (Cave Review), Defra, April 2009
3) Consultation on the Cave Review of competition and innovation in water markets, Defra, September 2009
4) EEF and Energy Intensive Users Group, Financial Times, 13 January 2010
5) Project Discovery: Energy Market Scenarios, Ofgem, October 2009
6) The Economist, 15 October 2009
A version of this article, by Barrie Clarke, appeared in Water & Wastewater Treatment magazine, February 2010.
