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27 June 2013
Water is scarce. It is also an essential resource in our homes, in industrial processes, across the energy sector and in the production of food. Yet water supply in many parts of the UK is under stress and the South-East of England in particular is seriously “water stressed.” A Draft Water Bill is intended to address the issue of efficient water management. It also aims to deliver a more environmentally friendly and sustainable water sector. Changes to the regulatory regime for the water sector should support the aims of the legislation.
Last week Reform held a roundtable seminar to discuss the Government’s Draft Water Bill, its aim to deliver a more resilient and innovative system for England, and the role that the regulator Ofwat will play in any reforms. We were joined by Regina Finn, Chief Executive of Ofwat, and the event was held under the Chatham House Rule.
There is consensus that change and innovation in the water industry is long overdue. While the current regulatory regime has enabled £111 billion of investment into the water sector over the past 25 years, it is perceived to have created incentives to satisfy the regulator rather than the customer. The regime has also created a bias towards capital expenditure and adding physical assets to the Regulated Asset Base (RAB) of the business. This has stifled innovation as incentives have not been in place for water companies to focus on customer needs or the long term sustainability and impact on the environment. This all means there is potential to utilise water in a better way.
Alongside tackling pollution and over-extraction of water, the Draft Water Bill proposes to reform business water supply by introducing competition for business customers and hopefully drive down the cost of supply. It also intends to improve the upstream market by allowing companies to trade water, reducing surplus capacity. In addition, changes to Ofwat’s regulation are intended to overhaul the incentives for delivery of water, remove the straitjacket on spending so that both operating and capital expenditure are considered equal (with a move to a total spend “totex” regime) and put in place measures to support companies trading water between themselves. Similar reforms in Scotland have already seen a change in behaviour by water companies, where service levels have improved and costs have fallen.
Yet there are concerns about the implementation of these reforms. The event highlighted that the current structure and regulatory framework of the water sector has historically made it attractive for investment. Despite very high levels of debt in the water sector (which usually makes companies more risky to invest in), credit ratings for water companies are high. The fact that water companies are monopoly providers and that the regulatory regime has been transparent and consistent are seen as the main reasons for this. This has led to some concern that changes could result in water becoming a less attractive asset. Some attendees also questioned why the reforms did not address sustainability issues in the downstream retail market, where there is still not enough water metering for households.
Revisions to the Draft Water Bill will be published soon and this will likely highlight that there is much more to be done in fleshing out the details of water reform. Yet if done well, these reforms could pave the way for competition across the whole water sector, including retail customers who would benefit from being able to choose their water supplier.
Blog following a Reform roundtable seminar on “Contributing to econominc growth” on 18 June, led by Regina Finn, Chief Executive of Ofwat.