Leading accountancy firm Deloitte has today launched a new report which questions the economic and financial benefits of introducing retail competition in the water sector.

‘Lessons for the Water and Sewerage Industry from Retail Competition in the Utility Sector’ shows how retail competition in other industries such as energy and telecoms has played a key role in delivering cost benefits to customers.

The report goes on to point out that the market mechanisms for delivering such benefits in the water sector have not yet been developed. This means that the overall cost-benefit analysis should be re-appraised. The report has been prepared with the sponsorship of Water UK, the body which represents all the UK water and wastewater companies at both national and international level, and represents the results of independent work by Deloitte.

Robin Cohen, head of Deloitte’s economic consulting practice and author of the report said:

“The water industry is at a crossroads with the UK government planning to produce a White Paper this summer on future reform. Our report calls into question whether retail competition, which was proposed in the Cave review, is the best first step along a reform path.”

Doug King, Deloitte Vice Chairman and Senior Utility Partner said:

“This report shows that the costs of retail competition are high compared with the benefits for non-household consumers. This leads to such a long pay-back period that the reform’s present assumptions fail the cost-benefit test. The benefits case can only be substantiated by linking retail competition with assumed benefits from upstream competition but this raises many issues that have yet to be debated. It is likely that there are other ‘first steps’ that would provide much greater benefits to customers, such as facilitating bulk water trading.

“Furthermore, in this context a critical issue is ensuring that debt and equity investors do not lose confidence in the water industry as the industry cannot afford a rise in financing costs. Securing low cost finance is crucial for the water industry to raise the £100 billion funding it requires to invest in its vital infrastructure.”

Key findings from the report include:

• Retail competition will be costly; prices will need to rise by £60 per non-household customer in the short term and take some 11 years before prices fall below the level where  they would otherwise have been.
• There will need to be a substantial consolidation of retailing businesses to achieve the potential savings, for example 21 businesses concentrating into around six.
• The current proposals for retail competition in water are fundamentally different to the market liberalisation of telecoms, gas and electricity industries.

Deloittes say that the proposals are not focused on well identified and significant cost inefficiencies and are limited in scope to non-household consumers. In addition, it has not yet been clearly identified how retail competition will link with any possible upstream market liberalisation. In the light of these limitations Deloittes conclude that it is necessary to re-appraise the overall cost-benefit case for the introduction of retail competition.

The report also makes the point that one of the key objectives for any reform initiative in the water sector is “to enhance or secure the financeability of some £100bn capital investment required over the next 20 years.” However, the proposal for retail competition in the water sector has not been conceived either as asloution to any well-identified inefficiency or any other major challenge - for example, the financability of a substantial investment programme or sustainability in the face of climate change and water scarcity.