Government plans may hinder business water market development

23/12/2011

Development of an effective retail market for water in the UK could be hindered by government proposals, according to industry experts.

Business water competitiveness may be prevented by the failure of the government to demand the separation of water companies' retail businesses, Ofwat is warning.

The proposals adopted from the Department for Environment Food and Rural Affairs’ (Defra) white paper have been deemed as "overly cautious" and do not allow for a company's retail arm to exit the market and merge with each other, Utility Week reported.

Defra's white paper set out changes on how to deal with the legacy of over-abstraction of UK rivers and water demand.

While the government claims to have considered proposals to separate retail businesses as a means to bring down costs, it states that they decided against the measure to avoid unsettling investors.

However, Ofwat claims that only through separating water companies' retail businesses can an effective market be developed, by capitalising on economies of sale through consolidation.

Regina Finn, chief executive of Ofwat, told the newsportal: "We believe ... the sector should have the flexibility to evolve over time.

"One concern we do have about the White Paper is that the proposals actually restrict the flexibility of the companies to do just that.

"We believe that what is in the White Paper would prevent companies actually engaging in retail mergers and delivering the economies of scale they might deliver to customers now."

Responding to the call for evidence on the principles for economic regulation in the water market, Ofwat had also previously called on the government to set out its overarching strategy for economic regulation, in the hope of creating further stability.

According to the watchdog, this may include a clear statement that effective markets deliver the best results for consumers and the environment and so economic regulation should seek to achieve this. 

Moreover, when effective markets are not possible, economic regulation should serve to mimic the effects of an efficient market to create competition.

Posted by Emma Noble