Examination of Witnesses (Questions 129-139)
PROFESSOR MARTIN
CAVE AND
MR ALEX
SKINNER
3 JUNE 2009
Q129 CHAIRMAN:
Could I formally welcome Professor Martin Cave, who is obviously
the man in charge of the Cave Review on competition and
innovation in the water market, supported by Alex Skinner, the
Head of the Secretariat of the Cave Review. You are both
very welcome. I feel I know you already, Professor Cave. I woke
up this morning listening to your dulcet tones on the Today
programme. I always think that is the most difficult bit because
they have very little time and they try to pack an awful lot in,
so you have to give very succinct answers. I was very interested
in what you had to say. You made an interesting point about Ofwat
and you said, "The basic problem is that Ofwat, like any
regulator of monopolies, has to rely a great deal on what the
companies tell it. Then that means there is a risk that they will
slightly exaggerate their costs and we will end up with price
controls that are too lax." That is a very interesting observation.
Did that comment arise from a bit of ex post analysis of
what happened at the last Price Review?
PROFESSOR
CAVE: It was
not inconsistent with that, but it is something which applies
to regulators of monopolies everywhere. It is a generic problem
rather than one peculiar to Ofwat.
Q130 CHAIRMAN:
I suppose it would be too difficult a question to ask, but if
it is a bit lax from the consumers' point of view how much is
it up or down of what is the optimum result?
PROFESSOR
CAVE: I was
trying to move on to make the point that at the moment we rely
on the regulator to protect consumers but in an ideal world you
would rely much more on competition to protect consumers so that
you give people a choice and the regulator would not have to take
all the strain, as he does at the moment.
Q131 CHAIRMAN:
That, I suppose, takes us really into the work and your understanding.
The reason we asked you to come and talk to us is that we spoke
to Anna Walker and you, if you like, are the other half of a potentially
missing chunk from the bill. We are trying to wrap our minds around
the fact that obviously if the Government was to try in the remaining
time in this Parliament to get the bill through it might be quite
difficult to do everything. Obviously the work that Anna Walker
is to do, and your work, is still at a formative stage and it
is not translated into a legislative form. Would you think, just
as a general approach, that given the complexity of the task which
you have tried to articulate it might be better to move at a slightly
slower pace, given the constraints on parliamentary timing, and
get competition right rather than rush all the fences?
PROFESSOR
CAVE: I think
there are some things which are fairly straightforward which I
believe could be drafted fairly simply and could be implemented
with a very high degree of competence and would benefit consumers.
So I would be very enthusiastic for those bits to be included
in the bill rather than wait until the next Parliament.
Q132 PADDY
TIPPING: Such as what?
PROFESSOR
CAVE: I think
the most obvious thing would be the introduction of retail competition
in England and Wales. That would be essentially following on the
lines pioneered by Scotland in April of last year.
Q133 PADDY
TIPPING: Retail competition?
PROFESSOR
CAVE: Yes, that
would be one example. There are various things relating to abstraction
which I think are important, namely changing the price of abstraction
so that we have abstraction prices reflecting different degrees
of scarcity of water.
Q134 CHAIRMAN:
Just before we all plunge into asking lots of questions, I would
be less than honest if I did not say I struggled a bit to really
understand how competition in water operates. I listened to you
with considerable interest this morning hoping that I might get
a ray or two of enlightenment. I suppose it was when you said
that it is very difficult, because water is sort of heavy stuff,
to move it around, as opposed to electricity, a nice homogenous
commodity, you can connect up a wire, move the stuff around, you
can have separate billing arrangements, cross-charging, everything.
It is wonderful and simple compared with water. So just give us,
please, now we have got you in front of us, a few moments of overview
as to how does competition actually work. What do we mean by competition
in water, both from the domestic and business customer standpoint?
PROFESSOR
CAVE: If you
think of the water value chain, there is the retail end, the business
of getting and billing customers, and it is easy to see how that
could be made competitive because you would do what they have
done in Scotland, which is allow people to come in and buy wholesale
water from the incumbent and then just sell it together with other
services perhaps, to customers. Initially it will be business
customers, but who knows, in the future it might also be household
customers. Then we move up the value chain the next bit might
very well be the pipes and there is very little prospect of competition
in pipes, except possibly in particular areas associated with
inset appointments.
Q135 CHAIRMAN:
Sorry, what are inset appointments?
PROFESSOR
CAVE: At the
moment they are basically new housing estates which do not already
have pipes provided to them. Then the question might arise as
to whether those pipes should actually be installed by the incumbent
or by the developer, or some other third party. Then finally,
moving up, there is the treatment works. Now, if you had hypothetically
within a particular locality a number of different owners of treatment
works then they could put their water, treated water, or obviously
mutatis mutandis dealing with waste water, they could put
that into the pipes, get themselves a bunch of consumers and then
they would in a sense be directly supplying their consumers. Therefore,
that would mean that somebody who built an efficient treatment
works might be able to get a cost advantage over another potential
competitor and therefore there would be competition in those circumstances
for the customers.
Q136 CHAIRMAN:
Just let me try to understand from the domestic water consumption
side what that meant. I live in the north west of England. I have
my water services delivered to me by United Utilities. You just
enunciated that somebody could come along and buy water wholesale.
The message I am getting out of that is that if there was the
Fylde Coast Water Company, they could go along to United Utilities
and try and do a deal with them and say, "We'd like to buy
X million cubic litres of water from you," and if United
Utilities had got a bit to sell it would then be up to the Fylde
Water Company to come along and say, "Mr Jack, we've got
this cracking offer here. We can do you water for X," and
X might be X minus from United Utilities. Is that basically what
you are saying?
PROFESSOR
CAVE: It would
not work quite like that because in essence what the Fylde Water
Company would do would be to go along to you and say, "We're
going to make you a better offer than they the competitor, United
Utilities are making". If you agreed, then you would be registered
thenceforward as being a customer of Fylde Water Company rather
than United Utilities. You get a bill from them and then Fylde
Water would pay United Utilities for the water which you use at
a wholesale price. Now, obviously for there to be a business in
there for Fylde Water Company there has to be a big enough margin
between the retail price which United Utilities is offering and
the wholesale price at which it acquires the water from United
Utilities. The problem with the 2003 Act was that the margin that
was created was too small to sustain any kind of competitive business,
but the other point I would have to make is that you probably
have a water and sewerage bill of around £300-£400,
of which the retail component might be, say £30 or £40,
and in fact the kinds of saving that Fylde could offer you as
a domestic consumer probably would not be enough to attract your
notice unless you had a particular down on United Utilities, which
I am sure you do not. As a consequence, it would not really be
worthwhile doing that. The costs of setting up the system for
domestic customers at the moment seem to exceed the benefits which
they get, so that is why in the report the recommendation which
is made is that it is only business customers who would be eligible
for this form of retail competition in the first instance.
Q137 MISS
MCINTOSH:
A very quick question. You say competition works in Scotland?
PROFESSOR
CAVE: Yes.
Q138 MISS
MCINTOSH:
My understanding is that the only company providing competition
has gone bust. Where is the competition? There is no competition
at all.
PROFESSOR
CAVE: I think
there are three or four companies providing services.
Q139 MISS
MCINTOSH:
Could you tell us who they are?
MR
SKINNER: Osprey
is another company. Scottish Water Business Stream is the one
which is associated with the incumbent. There is Osprey and then
AquaVitae, which I think is the one you referred to, did get into
difficulty.
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