Utility Week

When the great experiment that was UK utility privatisation and deregulation got underway in the early 1990s, the golden rule was “competition wherever possible, regulation as a last resort”.

Great faith was placed in markets to deliver improved service, better value, lower prices and higher investment – and, in energy supply, it has by and large worked. While customers have been hit by spikes in energy prices in recent years, there is widespread belief that competition has delivered the promised benefits.

So why hasn’t competition done the same in water? Almost 20 years after privatisation of the industry in England and Wales, the passing of two Acts of Parliament and countless Ofwat reviews, all we have to show is a handful of inset appointments.

Some argue water is “different” from energy; the density of the product; the narrow retail margin; the lack of a national grid and the importance of product purity all make competition somehow harder than in energy.

But there is light on the horizon. Just six years after the formation of Scottish Water as the national water and sewerage company, all 130,000 businesses in Scotland are about to be given a choice of water supplier. The arrival of water competition in Scotland was once described by Alan Sutherland, chief executive of Scottish regulator WICS, as a turbocharger that will propel the efficiency of the Scottish Water tortoise ahead of the England and Wales hares.

Not for Scotland the over-complex and some would argue deliberatively obstructive water supply licensing regime created in Westminster. The far simpler WICS model of retail-only competition, with Scottish Water remaining the monopoly wholesaler and distributor, has allowed the competitive market to begin to operate in record time. Under the principle of facilitating competition where possible and only regulating where necessary, it makes sense to open the market first in retail, leaving the more difficult issues of treatment, distribution and supply under regulation – for the time being at least.

Splitting Scottish Water into separate retail and wholesale divisions has already revealed unforeseen benefits, simply by clearly identifying cost structures and encouraging the retail arm, Business Stream, to focus on the needs of its customers.

As competition develops, the full scope for innovation and new ways of working will become even clearer, and if the current experiment works it could be extended to domestic customers or further back into the supply chain.

Simply getting customers used to the idea that they have a choice of supplier will undoubtedly drive new ways of working, allowing the market to lead the regulator rather than the other way round. The experience in energy suggests that the once unthinkable quickly becomes the norm when the powerful forces of competition are let loose. Few people in British Gas could have imagined the division of the company into retail, transmission, distribution and production operations that followed deregulation. But now the idea of vertically integrated energy businesses that monopolise entire supply chains is a total anachronism, and is being challenged even in Europe where monolithic, state-owned utilities are still the norm.

Maybe the turbocharged tortoise that is the Scottish water industry will soon make the idea of regional vertically integrated water monopolies seem equally outdated.

Steve Hobson
Editor
Utility Week