Competition? What competition?
December 1st 2006

UK water prices, tips for cost savings and predictions for the near future are discussed by Claire Holmes, senior water consultant at EnergyQuote

With UK's water supply being the third most expensive in the world and cost to UK businesses growing by nearly 8% in the last year (forecast to increase a further 4% over the coming year), everyone is interested in available opportunities through the new legislation introduced for large water users (50Ml per annum) in December last year.

The progress remains limited however, with process, supply prices and genuine choice hampered by the complicated pricing structure attached to the Water Supply Licensing (WSL).This is compounded by the fact that there have only been five new water operator licensees issued, so healthy competition is proving slow to emerge.

The lack of uptake and entrants into the market appears to have been caused by commercial reserve,waiting on the success of the competition and therefore delaying others taking action. Water monopolies have set up satellite companies to protect their revenue and possibly increase their financial opportunities, giving them a slight edge on the new individual entrants who are reliant upon the incumbents' relationship to actively develop competition.

A handful of customers chose to switch suppliers, in advance of the market, before the official legislation was passed and have been happy with the results, yet they still remain the minority and they perhaps simply benefited from reduced costs from new entrants whose main driver was a feasibility study rather than a commercial exercise.Given the expediency and resulting opportunities derived through deregulation of the electricity, gas and telecommunications markets, customers were naturally expecting the same opportunities and results from water. With almost a year having passed, is it unreasonable to have expected greater developments and cost saving opportunities from the opening of the water market? The barriers to success: There is a shared disappointment within the industry at the lack of competitive price development, yet also an acceptance that this was anticipated. However, it would surely have been possible to adapt a successful tried and tested model relevant to the water markets? The existing network structure and lack of 'National Grid' forum has proved the greatest hurdle to the task of providing regulated pricing.

Ofwat has tried to provide a fair mechanism through their access codes and pricing regime for all of the existing suppliers; in fact deliberations and advisory meetings were held for years prior to this formula being devised and agreed.

Yet, despite all of the preparation and methodology this complicated pricing structure still means that each site has to be individually negotiated with the water monopolies, so comparative pricing and true cost reduction is difficult to accurately assess.

The cards still seem to remain in the hands of the monopolies.With the incumbent suppliers holding all of the relevant data for tendering, and the lengthy process of arranging confidentiality protection in line with data protection legislation, is further exacerbating reluctance to release this information. Lack of data can prevent a smooth transfer, as this information is critical to the success of the entire process and given the restrictions many consumers feel, the benefits do not warrant the time investment need to seek a more competitive supplier.

Solutions: Without the regulated pricing regime generating a wholesale margin for the new licensees, there is little benefit or cost reduction to share with the customers. So how can this be improved? It would appear that incumbent suppliers are seeking to retain as much money in their pot as possible, as one would expect, given that they are commercial entities, and are still not fully considering improving levels of customer service. The obvious key for new entrants to the market is an introduction of improved customer service, personal contacts, accurate data, billing in line with individual requirements, monitoring and targeting.

However, with new entrants disputing the accuracy of wholesale pricing – which is prohibiting them from offering a like-for-like service at a reduced price – how will competition ever flourish? At this stage it appears unlikely that the costing method used and pricing mechanism will be reduced substantially in the near future so is there really a choice at all? Or are we faced with the reality that water prices look set to rise and there is little that consumers can do to alter this pattern.

There is no doubt prices will rise, as the price determinations set by Ofwat for 2005-10 indicate but there are still opportunities for consumers to reduce their current annual expenditure and in many cases achieve considerable retrospective rebates. Substantial savings can be achieved by addressing key areas and with government funding opportunities available this can be with little or no capital outlay.

Given the lack of development, the best option available to large consumers of water is to ensure that they are currently paying the bare minimum for their water through their existing supplier and are availing themselves of all the cost reduction opportunities available to them through varying methods.

Expert advice should be taken to ensure all aspects of fixed charges, supply and wastewater are addressed so consumers can be assured that when the competition develops more fully, they can accurately confirm the consumption data and enter into a new supply contract. With the introduction of new Schemes of Charges on 1st April 2007 and associated price increases, now is the time to address matters and ensure that you are prepared for all the available opportunities – when they arise.

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