Why is our water industry set up as it is?

TMFTP

I’d like to ask if anyone's aware of plans to properly privatise the water supply and remove the existing regional monopolies. The purpose would be, IMO, to provide open, fair competition and pricing across the industry.

I am NOT a “customer” of these companies – as a customer I can choose what to buy and from where to buy it. Neither of these conditions apply to my water supply.

Neither is it a “water tax” – if I disagree with a tax I can elect a new governing body which will review it. I have no say in who provides my water supply as far as I can see.

So we have water “dictatorships” - who tell us exactly what will be supplied, how much of it, and how much I MUST pay. In a democratic country?! Thames Water have failed to control leakage – with no meaningful censure – for years. They are a shareholder-run company. What possible incentive is there for a shareholder to divert their profits away from their pockets and into repairs or controls when there is zero possibility of their consumers going anywhere else?

Until we provide the shareholders with the incentive – in the form of impacting their profits – then the companies will continue to skimp on efficiency and maximise consumer revenue. In every other similarly privatised industry we have choice – phones, gas, electric. Why not water?

Before I go making a bottom of myself, I'd appreciate views or some historical perspective on this, as the current situation seems bizarre to me.

bunking_off

I'm no supporter of the water industry, but...

The privatised companies aren't at liberty to charge what they like - there's a regulator that is supposed to act as a proxy for a competitive market...as such if there's a beef with the system, it's that the regulator doesn't exert their power with sufficient vigour.

It is theoretically possible to have a competitive market, but probably not practicable. Let's take a look at the privatised gas/electricity and telephone markets to illustrate the issue.

In the gas & electricity markets, there's basically a monopoly backbone network and, with some exceptions, access network. This network is fed by multiple competing generators. When you elect to buy your gas/electricity from a given supply company, they have to match your consumption by purchasing equivalent from the generators. As such, you won't get the same gas molecules/charged electrons that your supplier has purchased, but you use 10KWH in a day, your supplier has to purchase that. Competition arises from the supply companies purchasing their energy from the generators (or, in certain cases through vertical integration, they'll produce their own).

Moving onto telephony, this works similarly. With the exception of ntl/Telewest, there's a monopoly access network, but with multiple competing backbones. If you buy your phone service from e.g. Post Office, they'll buy the conveyance of your calls from a third party network provider (C&W), who in turn has to buy access services from BT. In some cases, the company you get your phone service might be vertically integrated hence own their own backbone network. Competition kicks in because Post Office can move their contract away from C&W, C&W operates its backbone in competition with other providers, and backbones make investment decisions about how best to exploit the BT/Openreach access network.

Now, let's return to water. You could have competition, by having competing backbone pipelines supplying the monopoly pipes to your house. More realistically, you could have multiple reservoirs owned by competing companies feeding the single backbone. The fundamental problem, however, is that there isn't a "national grid" for water. Your house is fed by one or two reservoirs, and you can't readily switch water from reservoirs at the far end of the country to feed you, in the same way as can be done for other utilities. As such, there isn't scope for competition in that way.

I guess there could be scope for competition a la rail industry, ie companies are awarded franchises to run a region for a period of time. But that's hardly been a model of success...

TMFTP

I disagree with the perceived effectiveness of the regulator. The regulator agreed a price hike for Thames Water on the basis that it was exepecting, of all things, a regulatory fine.

The price hike was intended (IIRC) to cover the cost of the fine (which then never happened) to prevent a share price crash which would in turn impact a number of large pension funds.

This seems less "regulation" and more "collaboration" - at least in the sense of the other industries mentioned, where the regulator seems to have taken a much tougher line.

The "national network" piece makes sense, and I now understand why that would need an arrangement other than any currently in existence. I can't believe other countries don't have working models we could learn from. I'll have a look.

It's just a bizarre setup, wide open to (and seemingly already being used for) abuse, and it just appears there must be a better way.

No idea what it is yet, mind...

Cardew

Great post by bunking_off.

However there is one factor that hasn't been mentioned and sets water apart from the other utilities - namely Sewers

Many towns and cities in Britain have a crumbling infrastructure of Victorian sewers and the cost to maintain these varies tremendously by area.

Skiduck

Cardew wrote:

Great post by bunking_off.

However there is one factor that hasn't been mentioned and sets water apart from the other utilities - namely Sewers

Many towns and cities in Britain have a crumbling infrastructure of Victorian sewers and the cost to maintain these varies tremendously by area.

it will always happen, it's the reverse of "not in my own backyard"

Starb

Currently The Water Act 2003 states that there is to be no competition in the residential water market.

Only premises with an annual consumption of more than 50 megalitres can change suppliers - households are expressly excluded.

However, you can then go into inset appointments. Theoretically you can replace your incumbent water supplier by a competitor for a designated site, when this site is going to use more than 50 megalitres per year and where the site concerned has not previously been supplied, i.e. "greenfield" site.

For example, a new housing development can be supplied by an inset appointee, but all of this housing development will then be "stuck" with this inset appointee and cannot switch back to the main water company for that area, which in effect. takes away competition.

There is an excellent article on this in Utility Weekly this week entitled "out with the insets".

bunking_off

Interesting. Water isn't my business (more comfortable speaking about Erlangs as measurement of telephone traffic), but I'm guessing that 50 megalitres equates to approx 500 homes? Or have I got a zero wrong either way.

On that basis, in the way that housebuilders are greedy about securing the lowest possible costs, I'm surprised that more aren't exploiting this...get the pipework installed free of charge from their perspective (or even a kickback from the water provider) in exchange for the provider being able to fleece the homeowners thereafter.

Certainly there's evidence of that happening in other markets...I have the dubious pleasure of having a private gas line at my place. For a good while all the competitive offers weren't available to me, and even now I get surcharged...

Starb

The inset appointees scenario is currently being tested, I can't remember which region though. They have to get the licence from Ofwat before they can do this which can be a long and drawn out process, and a lot of developers aren't willing to wait.

I for one wouldn't want to be lumbered with a small, new water supplier that I would be stuck with until I moved home or they went bankrupt.