Licence, price control reforms

Apologies for the recent quiet. I have been busy developing and delivering some material on creativity and innovation for a water company. That will be done within a few days and ‘normal service’ – i.e. sporadic, sometimes relevant posting on water matters – will resume shortly…

For the time being, I’d like to highlight briefly some interesting UK happenings on Ofwat’s proposed licence and price control changes. There’s a good summary story here and Ofwat’s recently closed (23 Nov) consultation on the licence modifications can be accessed here.

As I understand it, Ofwat wants to be able to modify water utility licences to be able to set different price controls for segments of the value chain, to drive:

  • ‘retail choice for business’;
  • ‘better allocation of treated water resources’; and
  • ‘different approaches to sludge treatment’.

The current value chain breakdown they show in this recent document. First there’s the clean water value chain:

Source: Ofwat

Secondly there’s the wastewater/sludge side, with less potential contestability:

Source: Ofwat

What immediately jumps out is how little value is potentially up for grabs via the introduction of business retail competition from the Draft Water Bill / Water White Paper; it’s around 2%. For wastewater, if such competition came to pass, the figure would be even less – 0.1% (and 0.2% for household retail). For me, these numbers put into perspective the current hype about introduced competition – something, after all, that was an implicit promise of privatisation in 1989 but has proved extremely elusive since.

In the absence of a policy framework enabling more actually to be up for grabs, it seems Ofwat is trying to mimic some competition effects by at least considering different aspects of the value chain separately. Nevertheless the water utilities have pushed back – e.g. United Utilities has said Ofwat’s overall reform proposals were ‘not in the best interests of customers, investors and stakeholders’ and Water UK has noted ‘widespread concern within the industry about their [the reforms] potential impact on investor confidence‘.

Exciting times may be ahead then as Ofwat choses whether to refer matters to the Competition Commission for a resolution. Whatever the outcome, it’s interesting at least to see this kind of process underway. For meaningful competition to ever reach the UK water sector, in my view, these are exactly the kinds of fundamentals that need to be explored more and more.

Duncan Thomas

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