Utility Week

Utility Week 16th June 2017

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UTILITY WEEK | 16TH - 22ND JUNE 2017 | 13 Policy & Regulation Analysis Is domestic water competition dead in the water? F or at least two years, a cloud of ambiguity has hov- ered over domestic reform in the water retail sec- tor, and the shock result of the general election has done nothing to dispel this uncertainty. In a tighter run race than most had expected, the water sector has narrowly escaped renationalisation under Labour – for now. However, Tory plans for domestic retail competition are still yet to be confirmed or disregarded. Behind the scenes before the election, many market participants had come to think of domestic competition as inevitable. But with no clear government line on the proposal, a definitive timeline for opening the market was lacking and prompted Ofwat chief executive Cathryn Ross to push government for a "swi decision". In the wake of the election results, Lord Redesdale, chief executive of new entrant The Water Retail Com- pany, said domestic competition is "dead in the water". It's a strong statement, but so far there has been little to gainsay it. The domestic reform idea was first floated in 2015 by then chancellor George Osborne. Since then, lit- tle information has come from the Department for the Environment, Food and Rural Affairs, aside from a few murmurings in March from water minister Therese Coffey that it is "still on the agenda". It is understandable that water competition is not cur- rently at the top of the government's agenda. It is faced with the rather more pressing matter of beginning Brexit negotiations as a minority government. And is competition in the domestic water market even a good idea? Calculations of consumer savings have so far shown meagre potential and the closest market com- parator – energy – has failed to inspire political or public confidence in its competitive structure. A price cap and other interventions loom. Additionally, Redesdale outlined two major problems with it. One: the non-household market has, to date, shown that small margins make competitive water retail business cases difficult to build. And two: there's not going to be the legislative will or time to deliver it. Striking a more pro-market pose, however, Bristol Water's chief executive Mel Karam told Utility Week Live delegates last month that the benefits the energy sector has had from retail competition are a good lesson for water and that he would personally welcome domestic competi- tion, if combined with a liberal water trading market. And despite the modest consumer savings forecast by Ofwat in its cost-benefit review, Southern Water has pre- dicted that bundling could magnify the consumer ben- efits of a fully open water market. Analysis conducted by Economic Insight suggested savings could be as high as £150 per year per household, if water were to be par- celled with energy and broadband services So, is domestic competition dead? Despite a seeming crisis of confidence in competition in its traditional Conservative heartland, maybe not yet. "Whatever happens next, it is clear the fate of the next government will – at least to some extent – rest on its ability to get energy retail policy right." James Harvey, director, Economic Insight installation of wind turbines in remote Scot- tish islands seem likely to go ahead. But the quest to deliver meaningful quan- tities of shale gas may stall again given the political heat it generates. On the water front, very little change is anticipated, with the next periodic review – due to impact in spring 2020 – being paramount. However, the Conservative manifesto did pledge to "update the rules that govern mergers and takeovers"; this plan could reduce some of the frothy bid speculation in the share price ratings of both Severn Trent and Pennon. In summary – and unlike the 1992 knife- edge result – stock market interest in this general election had been muted. But its surprising outcome provides considerable uncertainty – and presages a further general election within 18 months. Nigel Hawkins, director, Nigel Hawkins Associates GBP TO EURO, SEVEN DAY June 6 7 8 9 10 11 12 1.165 1.155 1.145 1.135 1.125 June 7 8 9 12 June 7 8 9 12 June 7 8 9 12 June 7 8 9 12 SSE share price, five day (p) Centrica share price, five day (p) National Grid share price, five day (p) Pennon Grid share price, five day (p) 1,540 1,520 1,500 1,480 1,460 210 205 200 195 1,035 1,030 1,025 1,020 1,015 1,010 920 915 910 905 900 "Industry desperately needs clarity and the new government, whatever form it takes, must resolve the critical and complicated Euratom issue… the clock is ticking towards March 2019." Tom Greatrex, chief executive, the Nuclear Industry Association

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