Turning on the tap of reform: the UK water market and how consumers – and the environment – are losing out

March 5, 2018

Water has been in the news a lot in the past week; in its frozen form disrupting travel and bursting pipes; but also as the vehicle for Michael Gove to champion the rights of the consumer against monopolistic water companies.

Not content with waging war on plastics, the Secretary of State for DEFRA, in a speech at the Water UK City Conference, accused water companies of not acting sufficiently in the public interest. He stated, “they have shielded themselves from scrutiny, hidden behind complex financial structures, avoided paying taxes, have rewarded the already well-off, kept charges higher than they needed to be and allowed leaks, pollution and other failures to persist for far too long.”

This comes at a time of increasing public scrutiny and political pressure surrounding the role of water companies in managing environmental resources and delivering public interest outcomes. Following the recent deluge of snow, customers of Anglian Water, Severn Trent, Southern Water, United Utilities and Thames Water were affected by outages – this further illustrates the point.

Looking first at environmental resources, along with many other counties of the world, the UK faces issues of water scarcity. The ability of available water resources to meet the increased demands of water usage, whilst minimizing the impact on the environment is becoming ever harder to meet.

Population growth and climate change is expected to exacerbate UK water supply deficits, which are projected to become more widespread by the 2050s, particularly in the South and East of England due to prolonged periods of dry weather and low groundwater and reservoir levels.

Overcoming this challenge is further complicated by the highly complex nature of the UK water sector, which comprises multiple companies with different ownership structures, all governed by relationships with -many and varied- regulatory bodies. Notwithstanding the Environment Agency, no organization has overall responsibility for managing the entire system.

Managing this risk has remained the responsibility of incumbent regional water companies and geographically at least, the focus has tended to be narrow. Consequently, whilst these companies have focused on optimising networks within their own boundaries, opportunities across borders have been neglected.

Evidence from other sectors, such as electricity, suggests that some form of water system operator may overcome these problems. By paralleling the electricity system, an idealised set of practices for a water system operator can be formulated with the overarching goal of improving efficiency in the water supply industry, greater responsiveness to consumer needs, efficiency of coordination between water companies and provision of a framework within which likely regional increases in water scarcity from climate change and population movements can be managed at lowest minimum cost.

Yet despite the apparent benefits of this model, it has failed to gain traction. This can be attributed to several factors; the lack of effective coordination between water companies in England and Wales; inadequate arrangements for the access to and trading of water and the complex legislative changes needed to rectify this; disagreement over models of ownership; and the unbundling of networks that is needed to create a level and transparent playing field and reduce barriers to entry.

That said, a new set of circumstances may mean that reform is now possible. The 25 year Environment Plan, the replacement of the Common Agricultural Policy and current political pressures, all combine to provide an opportunity to reform this complex yet vital sector.

Developments within the water sector cannot be at the expense of the environment and consumers. Michael Gove was right to address the broken market and express the need for water companies to act sufficiently in the public interest; maintaining affordability of bills and changing opaque tax and capital arrangements. Customer support is key if the sector wants to continue making changes on a voluntary basis.

But changes in corporate governance alone are not sufficient. Only structural reform will be able to deliver adequate consumer and environmental outcomes, whilst responding to, and mitigating the impacts of, climate change and population growth. That is why it is time for a water system operator. Failure to act will only make political and regulatory intervention more likely.


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