Cave review of UK water markets publishes final report

The final report by Professor Martin Cave into competition and innovation in UK water markets has been published...

LONDON, UK, Apr. 22, 2009 -- The final report by Professor Martin Cave into competition and innovation in water markets is published today. 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 megaliters, 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 licenses. License 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 modernize 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."

Background Information
In February 2008, the Chancellor, Secretary of State for Environment, Food and Rural Affairs and the Welsh Minister for Environment, Sustainability and Housing commissioned Professor Martin Cave to undertake a Review of Competition and Innovation in Water Markets in England and Wales. The Review issued an interim report in November 2008 and a call for evidence in June 2008. The Review has also held meetings with the industry and other interested parties.

The Review aims to recommend changes to the legislative and regulatory frameworks of the industry in order to deliver benefits to consumers and the environment. As a result of the lack of international experience of potential reform, the cumulative nature of such reform and the need for the necessary contributory factors to be in place, the Review has adopted a step-by-step approach, starting where the risk-reward ratio is most favorable. Recognizing the range of circumstances prevalent across England and Wales, including the varying nature of water and wastewater markets and company structures, the Review has also avoided a one-size-fits-all approach and proposed that the Review's recommendations should be applied flexibly.

>> View the report, including an executive summary

The main findings of the interim report were:
- the introduction of legislation to allow 28,000 then 162,000 large public and private sector organizations in England and Wales to choose their water and sewerage retailer for the first time;

- retail divisions of water companies should be made legally independent from their network business; and

- a series of changes to encourage new water and wastewater suppliers to enter the market.

Martin Cave is Professor and Director of the Centre for Management under Regulation at Warwick Business School. As well as his academic work he has also undertaken studies for regulators in the UK and throughout Europe. He is responsible for two independent reviews of spectrum management and for an independent review of the regulation of social housing.

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