If the executive summary of the Water White Paper is anything to go by, we could be in for a muddled time ahead. The headings bear little resemblance to the structure that follows; issues such as abstraction and interconnection are split clumsily between chapters; it contains conflicts, such as between affordability and the need for investment; and lacks a sense of urgency, with the timetable for some reforms running to 2030.
On the upside, it addresses important issues: sustainability and over-abstraction in the face of climate change on the supply side; demographics and lifestyle on the demand side; the need for infrastructure to bring supply and demand together; pollution; and a regulatory regime that encourages efficiency and customer focus. So what, on analysis, does the Paper promise and will what it promises work?
Sustainability and abstraction
Nearly three years ago, Martin Cave made the case for reforming the abstraction regime. The White Paper sets out goals for reform. It claims they are clear and tells us what we can expect when changes are in place in the mid- to late 2020s. However, the claim that the goals are clear is questionable. It may not be possible to be fair to all abstractors and the water needs of people may not be compatible with the water needs of the environment, at an acceptable price for users. And what the changes to the regime will be is unclear, despite the Cave Review making a number of specific recommendations, some of which could have been in place this year. So we do not know what the Paper promises, which means we cannot say if it will work. What we do know is that we could have been further ahead already.Score: 4/10
Demographics and lifestyle
We knew, even before the Cave Review’s first report, that our population is increasing and that the areas where population is growing most are our driest areas. We knew that we need to be better at saving water. Do we learn any more in the White Paper? Not a lot. There are some endearing tips about not running the tap when brushing your teeth and about hippos in our cisterns. The government estate is going to do its bit too, with automatic meter reading.
The measure that would make everyone think about using less water – increasing its price – gets only an oblique mention in a section on seasonal tariffs. The measures in the Paper will help, but the failure to discuss pricing, perhaps because of its conflict with affordability, is a major omission.Score: 3/10
Infrastructure
The need for extra infrastructure is recognised. This is good, but nothing new – look at the Cave and Pitt reviews. The proposed streamlining of the planning system is to be welcomed and the government’s move to take a strategic overview of the infrastructure will do no harm. But the key question of whether funding for the required investment will be forthcoming depends on whether Ofwat creates a regulatory regime with the necessary incentives. This is not discussed, probably correctly, in the White Paper: Ofwat should be an independent regulator.Score: 6/10
Pollution
To tackle pollution, the Paper proposes a continuation of the river basin management planning currently required under the Water Framework Directive, backed by a new catchment-based approach. This is being trialled already. As past policies have resulted in higher environmental standards in our rivers and on our beaches, we can expect the proposed refining of this approach to be beneficial. However, the big questions of what this will deliver and the timescales involved have not been spelt out. On a positive note, it is encouraging to see that the Environment Agency will be finding pollution by actually getting out and walking the catchments.Score: 7/10
Customers
The new regime is discussed in the chapter ‘Developing a customer focused water industry’. This starts with a discussion of affordability, the gist of which is that customers who pay their bills on time are going to be called upon to cross-subsidise the bills of those who do not. This is bad economics and it is questionable as social policy. The merits of dealing with affordability in different ways are not discussed, which is a failing.Score: 0/10
Competition
The main thrust of the proposals on regulation is to introduce more competition, as recommended by the Cave Review, except that separate retail licences will not be introduced. None of the individual measures proposed is dramatic, but the cumulative effect of the abolition of the idiotic pricing rule and the in-area trading ban, the introduction of the sort of industry codes that have been pioneered in Scotland and licences for sewerage service provision could herald a competition step-change. And if Ofwat moves to wholesale price caps, that should help too. While none of this will directly help domestic consumers, it will do them no harm. If it increases the overall customer focus of water companies, there may even be wider benefits.
Score: 8/10
So what now? The furore around proposed NHS reform offers two pointers. Firstly, we should not be misled by the relaxed feel of the Water White Paper. The government’s recent experience of its Health White Paper shows what can happen when a radical-sounding White Paper leads to a 400-page Bill: it can quickly run into the sand and be threatened with emasculation as it is pushed through Parliament. The government may have learned that sometimes it is better to proceed with subtlety than bravado. The fact that the Water Industry (Financial Assistance) Bill ran to only three pages and was introduced with little fanfare is consistent with this. Nor should we think that the framework proposed in the Paper necessarily will be introduced in a relaxed way.
The second pointer from health reform relates to personnel. One of the driving intellects behind the structure of the current health reforms, although not their presentation, was that of Sonia Brown, former chief economist at Monitor, the independent regulator of NHS foundation trusts. Brown cut her regulatory teeth at Ofgem, introducing competition in energy markets under Eileen Marshall. She is now Ofwat’s executive director of markets and economics. Brown will want to see the competition elements of the White Paper implemented where they are practical. And no doubt she has a view on the timetable for the new abstraction regime.
William Sprigge is a consultant in the EU, competition and regulatory practice at Maclay Murray & Spens LLP. He has held positions of head of legal at Postcomm and Ofgem
This article first appeared in Utility Week’s print edition of 11 May 2012.
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