Competition in water and wastewater in England and Wales - - PowerPoint PPT Presentation

Protecting consumers, promoting value and safeguarding the future

Competition in water and wastewater in England and Wales Presentation to ninth ACCC conference 25 July 2008 PHILLIP DIXON Head of Competition www.Ofwat.gov.uk

– Protecting consumers, promoting value and safeguarding the future

Summary

• Regulation so far
• Challenges ahead
• Why promote competition?
• Competition so far
• Ofwat’s review of competition
• What steps Ofwat is recommending
• Possible road map
• Conclusions

– Protecting consumers, promoting value and safeguarding the future

Industry snapshot

• 22 vertically integrated
• monopolies. (39 at

privatisation)

• 23 million connected

properties

• Average annual capital

investment £3-3.5 billion

• Total turnover ~£8.7 billion
• Deliver 12,653 Ml per day
• Leakage 3576 Ml per day

Average bills 2007-08: Industry average: £325 unmetered £285 metered South West (highest): £650 unmetered £378 metered

Regulators Ofwat – Economic regulator CCWater – consumer champion Environment Agency – licences

water abstraction and effluent discharges

Drinking Water Inspectorate –

regulates drinking water quality.

– Protecting consumers, promoting value and safeguarding the future

Regulatory framework

• £80bn capital investment up to

2010

• Essential services safeguarded
• Improved reliability and quality of

service

• Improved water quality - safe,

reliable drinking water

• Reduced leakage
• Reduced risk of sewer flooding
• Average customer bill in 2010 will

be £100 lower than it would have been

– Protecting consumers, promoting value and safeguarding the future

Challenges ahead

• Water Industry affected by long term drivers:

– Climate change – adaptation and mitigation – Weather volatility – floods and droughts – Population growth and location – water stress – Demand for water and how we value water

• And short term failures:

– R&D spending low – few new connections and little water moved, despite differences in water costs between regions – few service choices beyond ‘plain vanilla’

– Protecting consumers, promoting value and safeguarding the future

Why promote market competition?

Comparative competition

• uses real information to drive performance
• allows companies to manage their own business
• lets company performance speak for itself
• but is an imperfect proxy for effective competition
• data collection is onerous and expensive
• information asymmetry - companies have advantage over

regulator

• companies tempted to ‘game’
• diminishing returns
• works better with static industry structure

– Protecting consumers, promoting value and safeguarding the future

Why promote market competition?

Competition should lead to greater knowledge about:

• Water companies’ costs
• Customers’ preferences
• Economic values of water

Incentivising:

• Greater innovation
• More efficient development of

the supply system

• More efficient allocation of

resources Benefits should include:

• Downward pressure on prices
• Greater responsiveness to

customers’ needs

• Environmental benefits
• Reduced need for regulation
• Where competition is feasible, regulation is second best
• Encourages market entry
• Stimulates investment and dynamic behaviour
• Improves efficient allocation of resources
• Competition has delivered benefits in a range of other

network utilities

• Many customers want choice

– Protecting consumers, promoting value and safeguarding the future

Competition, the story so far

Limited competition so far

• 1992 – business allowed to switch (‘inset appointments’)
• 1997 – first business switches, only 14 to date
• 2000 – Competition Act 1998
• 2003 – Water Act creates bespoke competition regime

– Only water, not sewerage – Around 2,200 business customers – Restrictive access price method

• 2005 – Water Supply Licensing comes into effect
• 2008 – so far, no customers switched, only 1 active entrant

– Protecting consumers, promoting value and safeguarding the future

Ofwat review of competition Part I

Conclusions

• Existing regime ineffective
• Need to remove the access pricing rule from primary

legislation – Replace with principles

• Reduce the threshold for non-household customer

competition from 50Ml to 5Ml and then to zero

• Enable retail competition for sewerage, explore feasibility
• f competition in other parts of sewerage business
• Improve customer confidence

– Protecting consumers, promoting value and safeguarding the future

The Value Chain

Collection Abstraction (Water Resources) Treatment Distribution Supply (Retail) Collection (Supp) Treatment (Sewage and Sludge) Disposal Retail

Water

Collection Abstraction (Water Resources) Treatment Distribution Supply (Retail) Supply (Retail) Collection (Sewerage) Treatment (Sewage and Sludge) Disposal

Water ‘value chain’ Sewerage ‘value chain’

12-13% 24% 55% 8-9% 12% 27% 49-50% 11-12% % of value chain by cost

– Protecting consumers, promoting value and safeguarding the future

Ofwat review of competition Part II

Conclusions

• Ultimately, competition should include households (with

appropriate safeguards)

• Aim to separate contestable from non-contestable markets
• Develop accounting separation, followed by price control

separation

• Rapid progress to legal separation of retail businesses
• Upstream separation over time
• More effective abstraction rights market
• Withdraw from regulation where competition can protect

consumers

– Protecting consumers, promoting value and safeguarding the future

Costs

• Current framework is costly – we want to reduce these costs
• But change may result in:

– Loss of economies of scale / scope – Initial set-up costs and new transactions costs – Financial uncertainty, higher cost of capital? – Unwinding cross-subsidies, affecting vulnerable consumers

• However:

– Short payback period in Scotland – Separation can unlock value for investors – Communication minimises uncertainty – Mechanisms can be built to protect consumers

• And we will introduce competition progressively

– Protecting consumers, promoting value and safeguarding the future

Possible road map

• Most reforms need legislation and wide support
• Timing of legislation and Government decisions are uncertain
• 2009 – Cave Review reports to Government, draft legislation

prepared

• 2010 – Separate cost reporting, market opened to >5Ml
• 2011 – Progress on formal price control separation and

abstraction rights trading

• 2012 – Earliest likely date for full business market (0 Ml)

– Protecting consumers, promoting value and safeguarding the future

Conclusions

• Regulation has worked, but we

need competition to tackle the challenges of the future

• A progressive approach to vertical

separation of monopoly and contestable markets

• Cost transparency is key
• Eventually, all customers to be

able to choose supplier

• Withdraw from regulation where

possible

• Maintain high standards of quality

and security

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