Accounting giant Deloitte has today launched a report questioning the economic benefits of retail competition in the water sector.
Lessons for the Water and Sewerage Industry from Retail Competition in the Utility Sector shows how retail competition in other industries such as energy and telecoms has played a key role in delivering cost benefits to customers. The report goes on to point out that the market mechanisms for delivering such benefits in the water sector have not yet been developed. This means that the overall cost-benefit analysis should be re-appraised.
Deloitte head of economic consulting practice and author of the report Robin Cohen said: “The water industry is at a crossroads with the UK government planning to produce a White Paper this summer on future reform. Our report calls into question whether retail competition, which was proposed in the Cave review, is the best first step along a reform path.”
Deloitte vice chairman and senior utility partner Doug King said: “This report shows that the costs of retail competition are high compared with the benefits for non-household consumers. This leads to such a long pay-back period that the reform’s present assumptions fail the cost-benefit test.
“The benefits case can only be substantiated by linking retail competition with assumed benefits from upstream competition but this raises many issues that have yet to be debated. It is likely that there are other ‘first steps’ that would provide much greater benefits to customers, such as facilitating bulk water trading.
“Furthermore, in this context a critical issue is ensuring that debt and equity investors do not lose confidence in the water industry as the industry cannot afford a rise in financing costs. Securing low cost finance is crucial for the water industry to raise the £100 billion funding it requires to invest in its vital infrastructure.”
Key findings from the report include:
Retail competition will be costly; prices will need to rise by £60 per non-household customer; and there will need to be a substantial consolidation of retailing businesses to achieve the potential savings, for example 21 businesses concentrating into around six.
The current proposals for retail competition in water are fundamentally different to the market liberalisation of telecoms, gas and electricity industries because: It is not focused on well identified and significant cost inefficiencies; It is limited in scope to non-household consumers; and it is not yet clearly identified how retail competition will link with any possible upstream market liberalisation.