To ask the Secretary of State for the Environment, if he will make a statement on the progress of the Government's Review of competition in the water industry in England and Wales.
Mr Michael Meacher
Following further work on the options for extending competition in the water industry in England and Wales, the Government has decided to boost the opportunities for competition. Our proposals will bring customers the prospect of more choice, keener prices and better services. We propose to license new entrants into the market for production and retail activities, while the incumbent water companies will remain vertically integrated statutory undertakers, retaining their important strategic water resource and environmental duties. Companies will be given clearer rights to enter the water market, providing the opportunity for innovation and efficiency gains to give customers better deals. We will continue to ensure that public health, the natural environment, and the high quality of drinking water is safeguarded, and that water services remain affordable for customers. We will publish a consultation paper on the proposed legislative and regulatory framework in the summer.Water Competition Information Pack
Water Competition Key Points
- The Government has decided to boost competition in the water industry, in order to bring further benefits to customers. Competition is expected to promote innovation and efficiency, bringing choice, and with it price and service advantages to customers. The introduction of competition in the gas and electricity industries has been successful and the Government believes that water customers should also benefit from competition.
- This announcement follows the Consultation Paper "Competition in the Water Industry in England and Wales" published by DETR and the National Assembly for Wales in April 2000. Ministers have considered the responses to that consultation paper, and have done further work to consider the options for increasing competition in the water industry.
- The implementation of these proposals will draw on the experience of the gas and electricity sectors. A new legal and regulatory regime, amplifying the provisions in the Competition Act 1998, will provide a framework for competitors to enter the market in production (water abstraction and treatment) and retail activities alongside the incumbent regional monopolies. The framework will allow competitors to share the current networks operated by each water company.
- The existing statutory undertakers (water companies) will continue in their present vertically integrated structures, responsible for all elements in the supply chain from abstraction to retail, and will remain monopoly network operators, managing the water pipe distribution network. They will continue to be responsible for strategic water resource planning (such as for new reservoirs, and planning for and operating in drought and other emergencies) while competition develops. They will also retain their role as "supplier of last resort" which means they have to supply any customer who requests a supply of water for domestic purposes if their existing supply or supplier has failed, and provide alternative supplies in the event of a major disruption in the permanent supply.
- New entrants to the market will apply to the DGWS (Director General of Water Services), for licences for production and/or retail activities. Only licensees will be able to make "common carriage" agreements with incumbent network operators to put water into their pipes and facilities, or provide retail services to customers. Licence conditions will set out their responsibilities and duties. This, and the proposed new powers for the Drinking Water Inspectorate, will ensure that appropriate controls are maintained on those who put water into the public supply system and those who offer services to customers. The new Consumer Council for Water, proposed in the Water Bill, will also help safeguard the interests of consumers.
- The new regime will ensure that the current high level of safeguards protecting public health and the environment are maintained. The Government will work with the industry's regulators (Ofwat, the Drinking Water Inspectorate, and Environment Agency), the water companies, consumer and other groups, to establish the regulatory regime and systems needed to encourage competition whilst safeguarding public health and the environment, and taking into account the Government's wider social objectives. Ofwat will also consider other changes to their regulatory regime to promote competition, in line with the Director General's new duty proposed in the draft Water Bill.
- A consultation paper will be published in the early summer following those discussions, inviting interested groups to give their views on more detailed proposals for increasing competition in the industry. Clauses creating a new legal framework will be incorporated into the draft Water Bill.
Background Notes
The water industry
1. Regional Water Authorities were privatised in 1989, producing a number of regional monopolies. At present, the water and sewerage industry in England and Wales consists of 24 companies. Each operates within a particular geographic region. Ten companies provide both water and sewerage services, but in addition there are 14 companies that supply only water. Their customers receive sewerage services from water and sewerage companies.
2. The 24 companies are statutory undertakers, with duties and rights set out in primary legislation. They are vertically integrated companies, operating all functions in the water supply chain, from abstracting water from the ground or rivers, storing and treating water, distributing it through their underground pipe network, and supplying it to customers' taps.
3. Most customers have no choice about who supplies them with water. There are a few exceptions to this, particularly for industrial customers or those who are supplied from a private water source, but in general domestic customers and most small commercial customers have to buy water from their regional water company. The Competition Act 1998 has provided opportunities for new entrants, and water companies have drawn up access codes describing the terms on which they will provide competitors with access to their pipes and facilities. However, the Competition Act does not provide a clear, water specific framework for competition.
Regulation
4. The water industry has an economic regulator, the Director General of Water Services (DGWS), who sets limits on what the water and sewerage companies can charge, protects the standards of service to customers, and compares the performance of companies. This has resulted in price reductions to customers of an average of 12% on their annual water bills in 2000-2001. The DGWS also applies and enforces the operation of the Competition Act 1998 in the water and sewerage sector, concurrently with the Director General of Fair Trading.
5. Drinking water quality is regulated by the Drinking Water Inspectorate (DWI), which ensures that companies are following all the regulatory requirements and good practice relating to the supply of water fit to drink.
6. The Environment Agency regulates the impact on the environment of the water industry, principally through its operation of the licensing system for water abstraction and impounding, and its systems for controlling the quality of sewage effluent and other discharges through the discharge consent process. The Agency also requires each water company to maintain a 25-year plan showing how it proposes to maintain an adequate balance between water supply and demand, and a separate plan for dealing with drought.
The benefits of competition
7. Bringing more competition into the water industry is expected to produce a number of benefits to customers. New competitors may be able to offer cheaper prices, and, as has been seen with gas and electricity, they should also be able to offer customers a number of new services – particularly at the retail end of the market. Gas and electricity customers have been offered a range of services, such as combined gas and electricity bills, additional financial services and different types of tariff structures. However, domestic customers will not be offered a choice of "different types of water" by different competitors, but they should not find any deterioration in the water they receive from their taps.
8. Competition brings innovation and efficiency gains as companies look for the best ways to win and keep their customers, through reducing their costs, finding better ways of doing things and producing a better service for customers. Competition in the water industry is expected to have a positive effect on the efficiency and performance of all the companies in the market.
9. Industrial customers should also find that they are offered different services as new entrants and incumbent companies compete for their business. This is already happening to some degree, and we would expect to see the scope for this increasing. In the case of large industrial sites, it might be possible for companies to offer different "qualities" of water if drinking quality water is not required for their processes. Companies might also offer not only water supplies but whole site water management, helping industrial customers to be more efficient in their water usage.
Price regulation
10. The Government is considering options for the future price regulatory regime, and will consult on these as part of the wider consultation exercise in the summer.
Environmental improvements
11. The Government will ensure that the new framework for competition is consistent with its environmental objectives. The programme of environmental schemes approved as part of the recent Periodic Review will be unaffected.
How competition will work
Incumbent water companies
12. Much of the work of the water industry is related to its network, which moves water from sources to customers. It would generally not be economic or practical for competitors to replicate this network. The incumbent water companies will therefore remain monopoly "network operators". They will continue to be vertically integrated companies, undertaking all functions from water abstraction through to supply at the taps within one company.
13. Incumbents will retain strategic control over the water that enters their network and is supplied to customers. They are also in the best position to retain their existing strategic planning responsibilities, both in dealing with planning and operation during drought and other emergency circumstances, and for wider water resources and investment planning. Statutory undertakers act at present as "suppliers of last resort" which means they have a duty to supply water for domestic purposes to anyone who asks for it (usually in cases where another supply or supplier has failed), and to provide alternative sources of supply when mains supplies fail for any reason. This duty will continue. The costs to the incumbents of undertaking these strategic activities will be taken into account in their charges to new entrants for using their pipes and facilities.
14. Ofwat will continue to regulate the statutory undertakers, and will develop a regulatory regime in relation to new entrants. Ofwat will also be reviewing its regulatory regime to consider what changes, such as further transparency in incumbents' costing information, will be needed to promote competition, by building a more level playing field for new entrants. The Government will also consider whether there is a need for additional measures to promote competition in sewerage services.
New entrants
15. New entrants into the market will be able to compete with the incumbents in two areas: production and retail. In order to do this they will apply for licences from Ofwat. They may choose to have a licence for production, or for retail, or licences for both activities. In order to obtain a licence they will need to prove that they are able to undertake the activities to the standards required by the regulators. All three main regulators of the industry will maintain the necessary controls on new entrants to safeguard consumer interests, public health and the environment. There is also the existing opportunity for a new entrant to become a statutory undertaker through the current inset appointment process.
Competition for production activities
16. New entrants may wish to apply for production licences. These will entitle them to apply to the relevant network operator to put water into their network. Production licences may include both abstraction and treatment activities.
17. New entrants who have production licences might acquire a source of water in a number of ways. They might apply to the Environment Agency for a new water abstraction licence, where there are spare water resources in a water catchment. They might buy an abstraction licence from an existing abstractor; the Government has consulted on plans to make trading abstraction licences easier, in its consultation paper "Economic Instruments in Relation to Water Abstraction" April 2000. An announcement of the Government's intentions in the light of this consultation will be published later this Spring. New entrants might also make contractual arrangements with an existing abstractor to buy already abstracted (and/or treated) water. The Government is considering additional measures needed to promote competition.
18. Once the new entrant has a source of water which they want to put into the network, either to use to supply their own customers, or to sell to other retailers, they will need to make a "common carriage" agreement with the network operator.
Common carriage
19. Common carriage is the term used to describe the situation where a producer puts their water into someone else's network, in order to supply their own customer. It is very unlikely that "their water" is actually used at their customer's tap, but they are adding enough water to the general supply to balance the amount taken out by their customer. There is considerable natural variation in the quality of water taken from different sources and network operators usually need to balance very carefully the types, quantities and flow of water in their pipes in order to ensure that drinking water quality standards are met at consumers' taps. At present the incumbent water companies do this within their own distribution systems by managing all the inputs from their own sources and treatment plants. Allowing new producers to add water to the statutory undertaker's pipe network will be carefully managed to ensure the maintenance of the very high quality of drinking water at customers' taps.
20. The basis for this management will be the common carriage agreement. This will set out all the technical conditions that the producer must abide by in order for the network operator to accept their water into its system. Water companies have drawn up access codes, which define the terms on which competitors may have access to their facilities. Ofwat will be issuing further guidance on the codes in the near future. The agreements will also set out the charges that the network operator will charge the producer for carrying their water. A water company could be infringing the Competition Act 1998 if it unreasonably refuses access to its network and facilities. The Director General has powers under the Competition Act 1998 to decide whether a company is unreasonably refusing access or offering unreasonable terms such as anti-competitive prices.
21. The consultation paper accompanying the draft Water Bill, "Water Bill – Consultation on draft legislation", November 2000, proposed to widen the Drinking Water Inspectorate's powers so that it could prosecute anyone who supplies or causes to supply drinking water unfit for human consumption. This will mean that licensed producers, as well as network operators, may be prosecuted if they have contributed to supplying unfit water, for example by breaking the terms of a common carriage agreement, or contravening quality regulations. This only applies to the public supply network, not private supplies.
22. It is important to understand that, because of the character of water and the pipe networks, water that is put into a pipe network at a particular point, is generally only physically moved within a particular geographical area. Unlike gas or electricity, water is a heavy, non-compressible commodity that generally needs considerable energy consumption for pumping it from source to consumer. And its quality after treatment can be adversely affected if it remains too long within the distribution system without further treatment. Water companies' networks often do not link up even within their own region due to geographic and hydraulic circumstances, or historical development. So water that is abstracted in one area is generally used (and discharged into sewers and drains) in that area. Only 3.5% of water is currently transferred between neighbouring companies.
23. Common carriage may offer the prospect of increasing the flexibility of use of water resources, by enabling different or additional sources to feed into the existing local or regional "water grids". The Environment Agency will wish to see that common carriage arrangements do not harm the environment, particularly if they significantly alter the route by which the water returns to the environment.
Competition for retail activities
24. New entrants may also wish to apply for retail licences. This will open billing and customer services retail activities to competition. A retail licence holder will have no physical contact or operational involvement with the pipe network or the quality and supply of the water itself, which will be supplied to its customers' taps by the network operator. The retail company will buy the water that it needs to serve its customers. It might buy the water from an abstractor (which could be the vertically integrated statutory incumbent who also owns the pipes, or from a separate abstractor who puts water into the network operator's pipes), or it might itself hold a production licence that will enable it to put water into the network operator's pipes.
25. However, it is unlikely that the water that the retailer buys is actually the water that comes out of its customers' taps. The same applies to gas and electricity, and, just as in those sectors, this need not matter for the domestic customer. They will be buying their water from the retailer, who will send them their bills, offer them services, and answer any queries that they have. They will also be able to obtain advice and assistance from the new Consumer Council for Water, proposed in the draft Water Bill.
Further work
26. The Government will be undertaking further work on the details of the new competitive environment for water supply. This work will be undertaken in co-operation between the Department of the Environment, Transport and the Regions, the National Assembly for Wales, Ofwat, Drinking Water Inspectorate and the Environment Agency. Discussions will continue with representatives from the incumbent water companies, potential new entrants, industry and commerce, and consumer and environmental groups.
27. The Government expects to issue a more detailed consultation paper in the early summer, setting out a framework for increasing competition in the water industry. Clauses creating the necessary legal framework for competition will be incorporated into the Water Bill before it is introduced to Parliament. The development of competition in the industry will continue to be kept under review.
Published 17 April 2001
Environmental Protection Index
Defra Home Page