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water competition rules must change

Competition for water supplies to customers in England and Wales using more than 50 megalitres (Ml) has been possible since December 2005. In all that time, we're not aware of a single customer that's changed supplier.

Ofwat say this failure is mainly due to a combination of the Costs Principle set out in legislation and the high 50Ml threshold. In response to the recent Ofwat consultation, UCC strongly endorses Ofwat’s analysis and attributes most of the difficulty to the Costs Principle.

There is a fear that domestic water consumers could be disadvantaged by competition for business customers but UCC points out that this wasn’t the case with domestic electricity and gas consumers in the 1990s. Long before they were able to buy competitively themselves, domestics had gained from the improvements achieved through
business competition. Huge cost reductions had been made through greater efficiency, and suppliers had recognised the advantages of providing good service standards. With this in mind, there shouldn’t be a narrow-minded view of avoided costs in looking to replace the existing retail–minus approach in water. UCC believes that for retail competition, the approach should employ average accounting costs, which would be a much closer fit with existing Ofwat regulation than the current regime.

UCC argues that avoided costs are much more relevant in the area of common carriage where a new supplier is seeking to provide an alternative water source. This would mean that the deferment or cancellation of a major new investment (say a new reservoir) by the water undertaker would be fully recognised in access prices. Under current ‘rules’ let’s suppose that such a deferment/cancellation did not occur until 15 customers had switched. In this case, it would not be the first customer who got the advantage of innovation but rather the 15th! This situation is clearly unsustainable and changes must be made – although a reduction in the 50Ml threshold might help to alleviate the problem.

Ultimately, all 1.25m businesses should have choice but as a practical way forward and to alleviate fears and
uncertainty, an interim threshold of 5Ml should be employed, enabling 27,500 large businesses to buy competitively.

Legal advice appears to confirm that the threshold could be reduced fairly simply but a change to the Costs Principle requires primary legislation. Even if DEFRA can be persuaded to take this forward, will the Government as a whole allow Parliamentary time? The UCC very much hopes so.