Water firms oppose pipe network plan

Utilities oppose moves by regulator to give rival companies access to their regional supplies
The Observer, Sunday 30 August 2009
Water companies are blocking plans to allow water to be moved from the north to the south east of England, where climate change and a growing population is making it more scarce, as part of a shake-up of the industry.
The Environment Agency, a government body, has formed a working group with regulator Ofwat to look at forcing companies to give competitors access to their regional monopolies on water supplies.
Introducing competition in this way would cut consumers' bills, according to some executives and regulators. They accuse water companies of choosing instead to build unnecessary reservoirs and desalination plants to supply customers because spending more helps them to boost profits.
The regulator fixes how much water companies can spend on infrastructure, but allows them to keep any savings they might make. This means that companies like Thames Water can make bigger profits by spending billions of pounds building new infrastructure such as new reservoirs and desalination plants to increase supplies, than by the potentially cheaper way of importing the water from different regions.
Next month, the government will also formally respond to a review of the water markets by Professor Martin Cave, which has raised the prospect of the biggest changes to the industry since privatisation, and which will then go out to consultation.
But Severn Trent Water, one of the few industry advocates of competition, and the Environment Agency say that water companies are resisting the plans, which would see supplies transferred around the country to where they were needed most.
Customer bills have to rise to pay for companies' increased spending. Companies want to raise bills by 1.7% before inflation each year on average over the next five years, with Thames Water asking for a 3% above inflation annual rise. The regulator will fix prices in November and talks with water companies will intensify over the next few weeks.
Trevor Bishop, head of water resource policy at the Environment Agency, said it was talking to the regulator and the environment department about how to remove the disincentives for water companies to transfer water to other companies. "Companies may say they are in favour of competition, but in reality, they may also benefit from a regional monopolies structure and it could be in their interests to build desalination plants and reservoirs to supply customers," he added. "We estimate some significant future investments in reservoirs and desalination plants could be cancelled if more water is shared, which could result in lower bills or at least a lower increase in bills."
Unlike the electricity industry, only limited competition exists in the water sector. Water is much more expensive to transport over long distances than electricity or gas, which means that most water used by households and businesses comes from their area via their local company. But worsening climate change and shifting demographics are forcing the government and regulators to rethink this approach. Rainfall levels are dropping in the south-east with the resulting water shortage exacerbated by a rising population. The population of London alone is expected to rise from 7.56m to 9.11m by 2031. Most companies are predicting a supply shortage over the next 25 years with the Environment Agency forecasting that only Northumbrian Water, which owns Kielder Water reservoir, will not suffer a deficit by 2035 if no new reservoirs or pipelines are built.
The idea of a "national grid for water" to move it around the country has long been mooted but dismissed as too expensive. Severn Trent argues that building "inter-connects", or small pipelines linking different regional networks, would do the same job and cost far less. The company wants the Environment Agency to make it easier for different suppliers to obtain licences to abstract water from reservoirs. The regulator would also have to force companies to give fair access to their networks of pipelines to allow these suppliers to transfer water to their customers. Rival water companies claimed Severn Trent, which stretches from the river Severn near Bristol to the Humber in the north-east, was only advocating competition because it would benefit from charging for the use of its vast network.
Jeanne Golay, economic regulation adviser at trade body Water UK, said that competition should not be introduced for the sake of it and that companies were best placed to judge how to secure supplies for customers.
If competition of this kind was introduced, it is not known how much it would cost to build the pipelines to link all the regional networks. The Environment Agency thinks that this system would be the cheapest way to ensure that water-scarce regions, particularly the south-east, are kept supplied. It estimates that a third of the new reservoirs and desalination plants planned would not be needed as a result.
But Johan van den Arend Schmidt, partner at PricewaterhouseCoopers, said it was impossible to say which option would be the cheapest, and argued that moving water around the country would be very expensive. "It's not impossible to put in some water pipes from one area to another," he said. "But building that infrastructure and pumping the water is not cheap and the main focus at the moment is on keeping bills low. Whether customers or regulator would accept an increase of up to 10% in bills to save on one or two hosepipe bans is not clear. Another way to ensure supplies of water is to cut waste and usage."