The next steps for the UK’s water sector – the draft Water Bill and beyond

Reflections on the Westminster Energy, Environment & Transport Forum seminar, 4 December 2012[/intro]

By Gareth Walker, Oxford University

After a summer of unusually high rainfall [1], it is hard to believe that last March the Environment Agency (E.A.) classified most of England as under drought conditions [2]. There were restrictions on both domestic and agricultural use. A government minister was compelled to hold a ‘Water Summit’ to address intensifying competition between agriculture and utilities over water resources in East Anglia [3]. Even the possibility of water transfers from Wales [4] and Scotland [5] to England was discussed at a political level. It was said the drought could continue past Christmas [6].

Then the rain arrived, and didn’t stop, prompting extensive economic damage and disruption across the country. Thames Water, the supplier for much of London, placed advertisements on the London Underground imploring customers to continue to curb consumption despite the floods, unsure if the rainfall would abate before aquifers and reservoirs sufficiently recharged [7]. These are the events which come to mind when assessing the draft Water Bill.

England is home to the world’s most comprehensively privatised water sector. Our water security relies heavily upon private investment. Since 1989 the sector has attracted £90 billion in investment, allowing it to meet ever-increasing European environmental and drinking water quality directives. Yet now there is doubt over its ability to continue to simultaneously deliver environmental integrity, social equity, and healthy dividends. The E.A. is demanding a more integrated approach flood risk management and reform in water abstraction licences, particularly in catchments in the south of England which are now classified as some of the most water stressed in Europe [8].

The economic regulator, Ofwat, is clear that allowable increases in domestic bills above inflation will no longer be the certainty they once were. The introduction of the Competition Act of 2000 led to a House of Lords report singling Ofwat out as having failed in its duty to promote competition, noting that while other utilities had been liberalised, water remained a regional monopoly [9]. The Scottish response was to introduce competition for commercial water customers in 2008, ‘proving’ it was possible. The irony of the Scottish state-owned water sector achieving competition before the fully privatised English undertaking was not lost to policy makers. As Jacob Tompkins put it at the Forum, there was a sense of “Scotland have done it first, so oh my goodness, we need to have a bill”.

So it’s not surprising that the subject of liberalisation and markets has loomed large in recent years. Borne out of both a political mandate for increased competition and an economic philosophy of managing water as a scarce private good, the 2011 White Paper on Water promised to resurrect a vision of market-environmentalism which consecutive governments had quietly retreated from since privatisation. Scarcity would be signalled through increased trade in abstraction rights and bulk water supplies, customers incentivised to reduced waste through price signalling, and companies exposed to direct competition within markets.

However, the institutional reform necessary to introduce markets to a heavily regulated monopoly which presides over a complex and integrated resource system such as water is no simple task. In such instances, markets do not materialise through laissez-fairism and invisible hand prophesies, but through a concerted and state-sponsored effort to govern institutional reform. Institutions are about security in knowing just what the ‘rules of the game’ are. Changing the rules comes at a cost in a sector which places a premium on stability.

Scotland’s success depended upon political will and an ability to ensure a clear and simple institutional framework. Competition was largely a political act, designed by its left-leaning government to protect Scotland’s corporatised public water infrastructure from private ownership while adhering to demands for increased competition in retail. Government-mandated conditions on responsibility for suppliers of last resort, procedures for establishing new contracts, and the bulk sale of water through a single state-owned raw water supplier, all contributed to a transparent and predictable operating environment.

England and Wales arguably contain a greater diversity of interests, both within and beyond government. The Treasury’s mantra of “recovery through stability” does not bode well for White Paper reform aspirations, especially given that investors and lenders are visibly spooked by the prospect of increased competition and have threatened an increase in the cost of capital [10]. There are tensions between utilities and agriculture concerning the impact of markets on the long-term security of abstraction rights. Within the water sector, there are twenty-five water companies and eight commercial suppliers, all with varying ownership structures, overlapping resource systems, and differing local operating conditions. Each with a position on reform.

Where agreement on reform between agents is left to the lowest common denominator, the result is ultimately little or no change. While the aspirations of White Paper were clear, the path to them is not. The draft Water Bill makes only cautious progress towards White Paper ambitions. Universal metering has once again been abandoned, the vertical separation of companies is off the table, and abstraction reform will only be completed by the mid-2020s at the earliest. Environmental groups and opposition government representatives have declared the bill “disappointing” [11]. The lesson learned?  Governance is ubiquitous, even when it comes to market-oriented aspirations.

Gareth Walker is a DPhil student at the School of Geography and the Environment. His research focuses on water scarcity in relation to resource planning and institutional reform in the English and Welsh private water sector.