Ofwat price review 2009 - Environment, Food and Rural Affairs Committee Contents


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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