Cave Review of water markets publishes final report

Wednesday, April 22, 2009

The final report by Professor Martin Cave into competition and innovation in water markets has been published. The report sets out the challenges and opportunities facing the industry.

It also recommends measures for increasing competition and innovation to benefit customers and the economy by up to £2.5 billion over 30 years and deliver considerable environmental and service improvements.

The Review recommends that: after an initial threshold of five megalitres, the Government should allow all non-household customers (1.5 million in England and 110,000 in Wales) to choose their water and wastewater retailer. The retail divisions of water companies should be made legally independent from their network business, except in the case of the smallest companies where it would not be in customers' interests to do so;

- the Government should give the Environment Agency new powers to tackle over-abstraction and to facilitate the trading of abstraction and discharge licences. Licence conditions should also be reformed to take greater account of the impacts of abstractions and discharges on the environment;

- the Government should reform the special merger regime to allow mergers where these would be in the customer's interest. Retail only mergers should be removed from the regime. For other mergers, the threshold should be raised to £70 million. In the first instance, mergers above this level should be referred to the Office of Fair Trading. To give the industry greater certainty, Ofwat should publish a transparent methodology for assessing mergers. Ofwat should also commission an independent review of the scope for using alternative data sources and statistical techniques;

- the Government and Ofwat (with a duty to support innovation), together with other stakeholders, should establish a research and development body to agree priorities and coordinate action. The body would be supported by funding from the industry and customers;

- Ofwat should give customers and their representatives a greater role in determining the services provided by their water company through 'negotiated settlements;'

- water companies should have an obligation to ensure they supply customers at best-value and Ofwat should enforce this obligation. The Government should reduce barriers to entry into the market and ensure that alternative suppliers are able to earn a return for the services they provide;

- Ofwat should encourage greater innovation by increasing the incentives for outperformance and addressing the potential bias to capital expenditure. The Government and regulators should also ensure that they give the water industry timely and consistent signals about the outcomes required; and

- Ofwat should modernise and streamline the regime of inset appointments. There should be regulated access and supply frameworks, that are binding on participants. Charges should also ensure that efficient companies are able to cover their costs. These recommendations aim to reduce costs and increase service levels for all customers; support the more efficient use of water; and help companies to better meet the challenges facing the industry including climate change, population growth, containing costs, rising consumer expectations, and water efficiency.

Launching the final report, Professor Martin Cave said:

'The industry has achieved a great deal in the last 20 years, but climate change and population growth represents real challenges to the current structure of the water sector - challenges that the industry must meet. Extending competition and supporting innovation will allow the sector to better meet these demands and deliver real benefits for customers and the environment through lower prices, more choice, higher service levels and the better use of water. These changes could benefit the economy by £2.5 billion over 30 years.'

This story was featured on The Enviromental-Expert Website.

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