Industry NewsIn the wake of the Cave Review, business consumers may begin to see the development of an effective form of choice and competition in the water market in the foreseeable future. Paul Anderson - Energy Market Analyst at EIC evaluates the situation.
Readers may be excused for feeling a sense of déjà vu at that statement given the promises made over the last five years. However, recent developments – specifically resulting from the Cave Review – have provided some of the strongest signals yet that progress can be made. Still the question however remains: how many of us will be in a position to capitalise on the benefits when or if they materialise?
The interim report from the independent analysis of competition in the water industry, authored by Government advisor Professor Martin Cave, has suggested major changes in the nature of water competition – if not the structure of the water industry itself – and the Government has already pledged to push forward with some of the suggestions in the near-term. The current move to improve competition and choice is being promoted under the banner of increasing the effectiveness and efficiency of the water industry and its use of resources.
The growing pressure on the UK's supply-demand balance has necessitated many stakeholders to examine prospects previously considered taboo. However, many consumers are resistant to change – as evidenced by the recent furore around modifications in the way some suppliers are charging for surface water drainage – and the social impacts of the Cave Review are likely to lead to a heated debate.
The proposals are multi-faceted, but indicate a move towards emulating the Scottish market structure which has been successful in promoting competition and choice. The debate has been opened into Cave's initial findings, with a final report expected later in 2009 and any required changes in legislation to follow in due course.
Cave has proposed opening the market to more consumers, allowing for choice in both water and sewerage supplier, altering the controversial pricing model for wholesale water and requiring water companies to divide their retail functions into separate entities in a bid to level the playing field for new suppliers. Industry regulator, Ofwat, would also have a stronger role to play in defining prices in the new market, rather than just being the arbiter on the application of a pricing model defined by legislation.
The anticipated changes are likely to appeal to consumers who have become increasingly frustrated with the application of the current competitive regime – Water Supply Licensing (WSL) – which went live in December 2005 and is yet to see any consumers switch supplier. However, the timescales being indicated by Cave suggest that no significant improvements will materialise before 2012.Those changes which could be potentially fast-tracked – such as increasing market size – are likely to have minimal benefits without the longer term fundamental changes in market structure and legislation.
There are questions over whether consumer interest in choice can be maintained for this length of time, particularly given the number of false starts seen to date. There are also concerns over how these proposed changes may impact on the operations of those new entrants using the WSL. If the current regime is being modified or – more likely – replaced in some manner, can the new entrants survive until a fairer market comes along? If they can, would they willing to take part having already been burnt by the promise of the WSL? Given that the current desire for change is based on increased efficiency and effectiveness, this raises the prospect that an interim 'market' may be in the provision of advice and services for consumers wishing to use their resources more wisely.
The proposals echo many of those being tabled by Ofwat which had also undertaken its own review into the state of competition in the water sector. Indeed, the regulator is already taking action to smooth the way for some of Cave's proposals. For example, it is pushing forward its scheme for accounting separation, requiring regulated suppliers to provide a more detailed account of their expenditures based on the different aspects within the value chain. The aim is to improve understanding of the true costs of service delivery in the water industry with the aim of highlighting where further efficiency gains may be made. Such a step would also be a clear precursor to physical separation of the vertically integrated suppliers.