Liberalisation of the Water Industry: What next for consumer and environmental protection?

13 April 2017

Jon Morris - Research Associate, Sheffield University Management School

From April 1st companies in the UK can choose to switch their water provider; a domestic roll-out for households seems inevitable

On April 1st the liberalisation of the English water industry for commercial consumers came into force.  This is the result of the 2014 Water Act which gives businesses, charities, and public sector customers in England the freedom to switch suppliers and is expected to create a market of about 1.1 million customers in England.

This new liberalisation is a break from the existing water industry structure that has existed largely unchanged since its privatisation in 1989.  Privatisation transferred responsibility of water supply and sewage treatment from regional authorities to private companies, essentially creating a market of large, regional, natural monopolies which are heavily regulated by the state (three regulators are responsible for ensuring affordability, environmental protection and safe drinking water standards).  Whilst privatisation is credited with enabling the investment of over £90 billion of investment in British water infrastructure and the reduction of operational costs there are concerns regarding the rise of water bills since 1989,  the implications for affordability for those on low incomes, and a trade-off in objectives from water companies between environmental standards and ensuring lower customer bills.

Despite the Coalition Government stating in 2014 that it did not intend to extend retail competition to households ‘at this stage’, stating that ‘there is no evidence to suggest it would provide enough direct benefits for householders, given the low margins involved in water prices’ the Conservative majority government is now committed to rolling out water liberalisation to domestic consumers by ‘the end of this parliament’.  This commitment by ministers poses a series of intriguing questions regarding demography, regulation and politics.

The UK’s population is projected to rise by 10 million by 2030 and by a further 10 million by 2050.  Meeting the demographic challenges this presents will require new investment in waste and waste water management; climate change adaptation; energy use and renewable energy infrastructure; and further water resource planning. Current water resource management plans are prepared for a 25 year cycle, an obligation placed on wholesalers, in consultation with customers, regulators and stakeholders. Post-liberalisation these plans will continue to be the responsibility for the wholesale company, though it is not difficult to envisage conflicts of interest between retail companies engaged in price competition becoming frustrated at having to pass on costs to consumers to cover infrastructure measures.  Questions over the ownership of water companies will also come to the fore, as there is no guarantee that revenues generated from the retail water companies will be reinvested back into the industry.  Utility consolidation and large multi-national companies entering the UK water market could see a loosening of control of investment levels in the industry.

The full implementation of the 2014 Act should allow new entrants to select their level and type of participation in the water and/or sewerage market.  The current system of water providers providing sewerage services will also come to an end, with companies able to exit the sewerage market to focus on the more profitable retail sector.  Brexit also adds to the uncertainty for management of water resources. It is unclear if the UK Government will continue to follow or enact a similar regulation to the 1991 EU Directive on Urban Wastewater treatment which requires at least two levels of treatment in urban areas, in their aim to reduce the regulatory burden on the waste water industry.  The UK may also no longer be bound by the EU Water Framework Directive which aims to improve the cleanliness of European water courses and involve public participation in decision making.  Faced with companies exiting the sewerage market the Government could be put under pressure to relax certain standards with regards to waste water.

In terms of regulation, the 2014 Water Act places new duties on the water industry regulator (Ofwat) to ‘further the resilience objective’, stressing the need for resilience of supply in the face of environmental pressures, increased population growth, and engagement in respect of long-term planning, investment and management measures to improve water sustainability and efficiency.  However, it remains to be seen how this system of fragmented private industries and government regulation can make good a pledge in the 2017 document ‘The United Kingdom’s exit from and new partnership with the European Union’, which states that the government will ‘become the first generation to leave the environment in a better state than we found it’ without substantial involvement from regulators.  Whilst UK Parliament briefings emphasise that ‘retail licensees may have greater incentive to support customers in reducing their water and sewerage consumption’, there remains concerns over the level of investment in infrastructure to realise resource efficiency benefits, and the idea of retail water companies acting against their own interests to discourage water use is an issue which has been queried in the energy sector regarding schemes such as the Energy Company Obligation.

Opinion is split on the benefits that this shift will have on wider society.  Economic theory suggests increased competition should drive down costs for the consumer and increase the level of service provided.  Multi-utility companies have the opportunity to pool resources across gas, electricity, communications, and water to invest in new, and innovative solutions to reduce water consumption and alleviate environmental pressures.  However, water is a scarce resource and essential to life, and so the priorities in the water market should be to ensure a sustainable source of supply for customers, at an affordable price.  Introducing retail competition to the water market at best adds another layer of administrative complexity, and as shown by the energy market does not necessarily lead to the emergence of trusted companies engaging in price competition.  Lessons from the energy market should be learnt, where government backed schemes such as the Green Deal failed to reduce energy consumption by any significant amount.  Managing water is also notoriously trickier than that of electricity, with local effects on the environment felt more strongly that those from energy generation, and the costs and logistical difficulties for the transportation of water means ensuring a fair geographical distribution of resources is expensive and difficult.

It remains to be seen how this move towards liberalisation of the water industry will affect consumers and it certainly seems that the United Kingdom is entering a new a brave new world.  The Government will hope for a flood of new companies and innovative solutions to the country’s water issues, but with almost no examples of managing and supplying water in this way across the globe, it may be that there is more of a drought in reality.

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