Examination of Witnesses (Questions 260
- 265)
WEDNESDAY 17 JUNE 2009
HUW IRRANCA-DAVIES
MP AND MR
MARTIN HURST
Q260 Mr Drew: They have commissioned
a report, so they have some focus on it.
Mr Hurst: Just to give a little
bit of history, first of all on competition, we were first consulted
on that about six years ago, if I remember correctly, and a regime
was put in place, partly because of the cost of water, with the
threshold of 50 megalitres of supply for customers and with a
fairly strict cost principle to make sure that the system was
not abused. The evidence from that is that that system is too
restricting and in fact extremely bureaucratic. The Government
has made it clear that it does not see at the moment the case
for extending competition to household customers but that, for
example, if Tesco across the country would like to have one bill
for all its water supplies rather than having a bill in the fashion
that each of its current suppliers wishes to give it that bill,
then there is no burning reason why Tesco should not be allowed
to have that. If it does help business customers at the margin,
then it something we want to look at. Martin Cave's approach is
very much a suck-it-and-see approach. You start by lowering the
threshold and doing some things to enable business retail competition;
then you do some things at the other end to see if there is anything
around the abstraction regime you can do, which also incidentally
would help with giving companies an incentive on water efficiency.
The large majority of the water business is in Martin Cave's report
untouched, and that is important for two reasons. One is because
the infrastructure actually is not readily able to be unbundled,
but also because we are absolutely clear that we cannot take this
forward, and Martin Cave says this explicitly, in a way that jeopardises
water company financability. If you take this forward in a way
that would drive up water company financing costs, then every
customer would end up paying the burden. I think I would describe
it as an incremental approach from the edges.
Huw Irranca-Davies: It is worth
adding a couple of unusual bits of some of the evidence that Martin
Cave has cited, which are not to do with the normally cited benefits
of competition. One of them is that if you had this ability for
companies to choose, if we dealt with the megalitre issue, when
surveyed, 60% of business companies said that they would switch
to a company that actually provided a water efficiency audit;
in other words, competition can have those benefits for water
efficiencies because companies want to know where they are being
wasteful and so on and so forth. The other point I flag up is
in terms of productivity. If we increase productivity within the
water companies and efficiency, then that will drive down costs
in the long term to the consumers. Ofwat's calculation is that
you would increase total productivity somewhere between 0.5% per
year to 2% each year by opening up this limited element of competition.
I do agree with what you are saying. You cannot have competition
for competition's sake. It has to deliver something, and that
is where we are.
Q261 Mr Drew: Your water company
is against this?
Huw Irranca-Davies: I have one
and there are two. The curious thing with Wales is that we have
Dwr Cymru but it does not quite follow Offah's Dyke; we also have
Severn Trent which comes in and so on.
Q262 Mr Drew: Get rid of them
Huw Irranca-Davies: You are right
in saying Dwr Cymru is a very different model. It is unique in
the way that it is set up. It is a mutual model. It is a very
interesting innovative model and it is generally well liked. That
is not to say it is perfect but it is generally well liked. Their
concern is not anti-Cave; their concern is whether they can survive
and thrive under Cave. I have had some interesting discussions,
and I do not know whether you raised this with Martin Cave when
he was here with you, with Martin Cave about whether the model
he is proposing drives out the Dwr Cymru's of this world; does
it allow for different models of operation; does it allow for
future Dwr Cymru's should the opportunities arise. He is quite
adamant that it does because he does not want to have a system
which sets up one model of commercial entity; he wants to see
a system where genuine innovation in the water sector has to allow
for different models to come forward. If Dwr Cymru is good, and
it is good in many areas, the last thing that people are going
to want to do is switch away from Dwr Cymru. I know Dwr Cymru
do not want this but you might get people asking for Dwr Cymru
to extend their services to them, but I do not think Dwr Cymru
are interested in that.
Q263 Mr Drew: Your other problem
is that Ofwat want to go much further. They want a competitive
model and I suspect from the line of questioning we had last week
that they would be quite happy to look at competition when it
is the residential consumer. Are you going to stop the regulator
getting its own agenda up and running, which is: further, faster,
more competition?
Huw Irranca-Davies: Let us do
the proper, full consultation on all of Cave. Martin Cave has
been quite clear in saying that what he sees is a phased approach,
what Martin Hurst here described as a suck-it-and-see approach.
If we were to take it forward, then we would do it in a way that
looked for the evidence that it actually delivered results and
was effective. He sees no case at the moment, no evidence, to
say that we would see the benefits from extending it to residential
users. The type of competition that he is advocating is limited.
If we did deal with the megalitre issue, one of the benefits for
this, albeit as Martin says it is at the margins, would be that
you take a current potential customer base that could choose between
providers of what is a round 2,200 at the moment, it just does
not work, up to around 28,000. It is a little piece and we could
see whether it works or not. Again, I am not pre-empting decisions
that we might come to. It does come down to the first principles,
as you say: it is not competition for competition's sake. It is:
will it deliver benefits either to the consumer in terms of bills
or alternatively in terms of water efficiency and productivity
of these companies?
Q264 Lynne Jones: I do not quite
understand how the unbundling works for the limited area of competition.
Is it that the businesses are so large that a new company can
take over what infrastructure delivers to them, or does there
have to be new infrastructure? What are the barriers to providing
the kind of water efficiency audit that you have mentioned? Surely
we need to make sure that the system can provide that to everybody,
not just big companies?
Mr Hurst: Water is very different
to most of the other big utilities. We do not have a national
grid, which means you cannot put water in one end of the system
and get it out the other end of the system like you can in energy.
Q265 Lynne Jones: There are issues
of quality as well.
Mr Hurst: Yes, absolutely, and,
even compared to many of the other utilities, the amount of capital
that is invested in the infrastructure relative to the front-end,
so to speak, is relatively big, so the amount of money you can
make on retail competition is relatively limited. That said, if
you look at the Scottish experience, they have found not that
many people wanting directly to switch. The possibility of customers
switching retail services has led the existing companies to lower
their rates for retail services, so it has had some benefit at
the margin, as we said. I do not think anybody at the moment is
talking about fundamentally breaking up the infrastructure. For
new infrastructure, there is the possibility of inset appointments
that already exists. Martin has suggested we look at that further.
Take for example the Olympic site which will need new infrastructure
to deliver water; rather than simply saying to Thames Water, "This
is in your area; you have the automatic right to supply this infrastructure
and charge for it", you can actually open it up. In cases
like that, you may well secure a lower price for the customer.
What you have to be careful of is that that does not just mean
that the profits are expropriated and there is no benefit to the
customer. A point that Dwr Cymru have made and also Anglia Water
have made is that it is important that you ensure that there is
a genuine customer benefit from that kind of thing rather than
simply saying, "We will take your profits and keep them for
ourselves". On water efficiency services, you are right,
and Ofwat have given targets to water companies to do water efficiency
but, with the best will in the world, a profit maximising company
is going to concentrate on where its profits are and the big profits
for water companies are inevitably to do with the financing and
big capital programmes because that is where the big money is.
The idea that Martin has I think is that if you have companies
that do not have that tail attached to them and their profits
are based on supplying, billing and the retail services, then
there will be much more incentive to think about where they can
make the extra profits potentially through water efficiency services.
I think only time will tell whether that is happening, but if
it did happen, it would be a big prize.
Chairman: We will move on and talk about
the Bill.
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