Ofwat doing poor job of encouraging competition, says Lords Committee on Regulators
The House of Lords Committee on Regulators criticised Ofwat for failing to match the success of other economic regulators in introducing competition to their market. Its report "UK Economic Regulators" concludes that UK economic regulators do well in promoting competition and competitiveness, but stresses that Ofwat (the economic regulator for the water and sewerage industry in England and Wales) needs to do more to facilitate competition in the water market...
LONDON, Nov. 12, 2007 -- The House of Lords Committee on Regulators today criticised Ofwat for failing to match the success of other economic regulators in introducing competition to their market. The Committee's report "UK Economic Regulators" concludes that UK economic regulators perform well in promoting competition and competitiveness and argues that there is no need to re-write the legislation that established them, but stresses that Ofwat (the economic regulator for the water and sewerage industry in England and Wales) needs to do more to facilitate competition in the water market.
The consumer water market in England and Wales is identified by the Committee as one that has failed to deliver the same level of consumer choice of supplier as other regulated industries such as energy and telecoms. While in many of the regulated industries it is relatively easy for customers to change their supplier, of, for example gas or telecom services, it is still impossible for an individual or company to change water supplier. The Committee argue that there is nothing specific about the nature of water that prevents increased competition and criticise Ofwat for failing to be more proactive in developing a genuinely competitive market place.
One explanation for the failure of the water market to provide adequate consumer choice is Ofwat's interpretation of a provision of the Water Act 2003 which requires water undertakers to develop access codes to set out terms and indicate prices for allowing licensees access to their water supplies. The Committee do not accept Ofwat's position that the legislation itself must be amended and argue that the regulator must do more to ensure enhanced competition in the water market. The Committee support the Competition Appeal Tribunal's judgement that a change in Ofwat's interpretation of the legislation is necessary.
The Committee recommend that a key role for all regulators should be to improve the competitiveness of British industry in the world economy. This has not previously been a major focus for regulators and the Committee calls on regulators to fully consider the impact of their decision on UK firms' competitiveness. In some cases this will require a lighter regulatory regime, as over regulation pushes up both the direct costs to the UK economy of funding the regulator and also indirect costs of complying with what may be over regulation. The Committee express some concern that regulators may, in some instances, become self serving and look for new tasks as a regulated industry becomes increasingly competitive and consequently self regulating. They recommend that the Competition Commission undertake periodic reviews on whether effective competition exists in regulated markets with the aim of scaling back regulation where possible.
The Committee asked the National Audit Office to complete a review of Economic Regulators use of Impact Assessments (IAs). This is published in the report and calls on regulators to strengthen the cost/benefit analysis included in IAs and conduct post-implementation evaluation as a matter of course. The Committee call on regulators to ensure IAs are not used a tool to justify policy but rather as a basis for deciding policy. They argue that in most cases regulators themselves can conduct the IA but that an independent body such as a Parliamentary Committee or the NAO should monitor the quality and objectivity of the assessments.
Other recommendations in the report include:
• A Joint Parliamentary Select Committee on Regulators should be established to provide Parliamentary oversight of regulators. This is needed as current House of Commons departmental Select Committees cannot by their very nature provide a cross departmental overarching review of regulators' performance.
• The Joint Regulators Group should be formalised and should produce an annual report to ensure regulators share best practice in a meaningful way.
Commenting Lord McIntosh of Haringey, Chairman of the Committee, said: "Many of the UK's economic regulators have done an excellent job in ensuring their markets are competitive and provide good value for the customer. Unfortunately in the water industry this has not been the case.
"Ofwat must do more to encourage competition amongst water suppliers. They have to start by looking again at how they interpret the legislation around access charges. We see no reason why the water industry cannot become just as competitive as energy or telecoms is now.
"Overall there needs to be more Parliamentary oversight of the role of regulators to ensure they don't pursue over regulation or become self serving. That is why we are recommending a new Joint Committee is established to regulate the regulators."
Ed Humpherson, Assistant Auditor General at the National Audit Office, who contributed a review of regulators use of Impact Assessments to the report, said: "We were pleased to support the Committee in its work, and that the Committee felt able to endorse the recommendations we made. We will consider carefully the Committee's recommendations concerning the NAO's future work programme."
1. The report UK Economic Regulators is published by The Stationery Office, House of Lords Select Committee on Regulators, 1st Report of 2006/07, HL Paper 189.
2. The Costs Principle element of the 2003 Water Act requires water undertakers to develop access codes to set out terms and indicate access prices for allowing licensees access to their water supplies. There is almost universal agreement that these network access charges have worked to discourage new companies from entering the water market, they produce margins too low to encourage new entrants. They also prevent competition between water licensees to supply water to potential new entrants to the market.
3. The report will be available online shortly after publication at: http://www.parliament.uk/parliamentary_committees/lordsregulators.cfm