Features.

Water competition is on the horizon

In 1999, Ernst & Young speculated that by 2010 there would be flourishing competitive activity in the water industry with a combination of competition for inset appointments, trading of abstraction rights and retail supply under a common carriage regime.

In practice, progress has been painfully slow. Current market arrangements allow for retail competition only for the largest customers. The arrangements are widely perceived as tilted towards protecting incumbents rather than favouring new entry, and from the outset many thought the regime doomed to fail.

Recently, there has been a sea change in attitudes. The consultation being undertaken by Ofwat presages a real extension of retail competition over the next few years. For the first time, there is a presumption in favour of competition. The proposed market opening in Scotland shows that arrangements can be developed to do it.

Looking forward, we can be more confident that by the beginning of the next price control period in 2010, the conditions for active retail competition will be in place, at least in the business market. This will drive significant benefits for customers, particularly product, pricing and service innovation. A 2006 Ernst & Young study for the then Department of Trade and Industry on the results of liberalisation of the electricity and gas markets across Europe found a strong correlation between lower prices and levels of service for business customers and the level of competition in both markets.

To move towards this, Ofwat and government should address a number of key regulatory issues over the coming months:

lthe size and scope of the market, starting with the presumption of minimising the proportion of the business value chain that is subject to monopoly