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

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 Average bills 2007-08: Industry average: £325 unmetered monopolies. (39 at £285 metered privatisation) South West (highest): £650 unmetered • 23 million connected £378 metered properties Regulators • Average annual capital Ofwat – Economic regulator investment £3-3.5 billion CCWater – consumer champion Environment Agency – licences • Total turnover ~£8.7 billion water abstraction and effluent • Deliver 12,653 Ml per day discharges Drinking Water Inspectorate – • Leakage 3576 Ml per day 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? • 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 Competition should lead to Incentivising: Benefits should include: greater knowledge about: - Greater innovation - Downward pressure on prices - Water companies’ costs - More efficient development of - Greater responsiveness to - Customers’ preferences the supply system customers’ needs - Economic values of water - More efficient allocation of - Environmental benefits resources - Reduced need for regulation – 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 of competition in other parts of sewerage business • Improve customer confidence – Protecting consumers, promoting value and safeguarding the future

The Value Chain Water Water ‘value chain’ Collection Collection Supply Supply Abstraction Abstraction Treatment Treatment Distribution Distribution (Retail) (Retail) (Water Resources) (Water Resources) 12% 27% 49-50% 11-12% Sewerage ‘value chain’ Treatment Treatment Collection (Supp) Supply Collection (Sewage and Disposal Retail Disposal (Sewage and (Retail) (Sewerage) Sludge) Sludge) 24% 12-13% 55% 8-9% % 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 A journey of discovery able to choose supplier • Withdraw from regulation where possible • Maintain high standards of quality and security – Protecting consumers, promoting value and safeguarding the future