Monday, 8 August 2016

You can switch energy suppliers - why not water suppliers?

Currently we can choose and switch between energy suppliers but not water companies. Until now water companies have been allowed to enjoy a natural monopoly in each area, with regulation from OFWAT to ensure that prices are fair and services are good. However, as from April next year business customers will be able to switch supplier and OFWAT has produced an evaluation of costs and benefits from extending this to residential customers. They report a number of potential benefits [1]. But given our experience of energy suppliers, do we really expect competition between water companies to realise those benefits?

We can't trade water between regions - competition will be restricted to retail supply.
It makes sense to have competition in the energy market because the electricity grid and the gas grid are truly national - you can transmit power generated on the Sussex coast to meet demand in Edinburgh if you want because it all connects up. The same is not true for water - some water districts have pipes between them but this connectivity is at a low level. Besides which, electricity transmission at high voltage is efficient (losses are only 1%-2%) and gas flows very easily but pumping water from one part of the country to another takes a lot of energy. It doesn't make sense for people in Cambridge to buy water from Manchester! This being the case, competition for the actual supply of water is always going to be very restricted. The bit of the market that is to be opened up is only the retail bit - the part that handles your customer account, billing and complaints.

The most optimistic scenario predicts potential savings of £6/year
For the average household water consumer, this amounts to about 10% of the costs, or about £38. So, improved efficiencies due to competition in this market are unlikely to make much difference to your bill. OFWAT has modelled four scenarios and even in the best one the financial savings are only £6/year [1].

The consumer council for water surveyed a sample of customers to see what level of savings would encourage them to switch supplier. For a saving of £1-£10, only 6% of customers said they would consider switching [2]. Given that people seem to be reluctant to switch between energy suppliers even when they could save £100s [3], it seems extraordinary to expect anyone to switch water company for £6.

Comparing the energy companies with water companies, it seems to me that water companies are already doing a great job.

In the water industry, retail costs are lower. The retail part of a typical water bill is about 10% or £38 [1], compared to 20%, or £200 for energy [3]. Competition has extra costs, because of the cost of persuading customers to switch.

The water industry gets fewer complaints. In 2014/2015 the average number of complaints per 10,000 water customers was 34 [4]. In the energy industry, the supplier with the lowest number of complaints was British Gas with 820 per 10,000 customers [5]. This is 24 times as many complaints as the average water company and they were mostly to do with billing, payment handling and customer service[6]. Competition in the energy industry has not brought good service.

Energy customers in debt do not benefit from competition. The recent market review [3] found that less well off customers were least likely to switch, partly because this is very difficult to do if you are in debt. If you owe more than £500 your chosen supplier can refuse to take you on even if you have a prepayment meter [7].

You could have a single bill for gas, electricity and water but is that a good thing? OFWAT predicts that energy companies would join in the water market so that consumers could get a single bill for electricity, gas and water. This could be convenient - but given the lack of trust between consumers and energy suppliers, I am not convinced it is a good thing? In fact it is quite possible that your water company would exit the market completely and specialise only in wholesale water supply. In that case you could be automatically switched to another supplier that you had not even chosen,.

Do we need competition to stimulate innovation? OFWAT thinks that competition would encourage retailers to introduce innovative services such as smart meters to improve water efficiency? But why do we need competition for this? Thames Water is already introducing smart meters [8].

Non-household customers in Scotland have a choice of supplier already but only 5% have switched. There has been retail competition in the non-household water market for some time, albeit limited. In England, customers consuming more than 5 million litres per year (about 7 times the average household) are allowed to switch their retail supplier but only four have done so. In Scotland, all non-household customers can switch and have been able to do so since 2008 - but only 5% have done so [7].

I don't want choice of which company bills me for my water - I just want a good, value for money service, which I am getting already, thanks to OFGEM, CCWater and similar organisations. If I was being offered a choice in where my water came from, how it was treated and how well the leaks were being managed, that would be more interesting, but that is not on offer.

[1] The costs and benefits of introducing competition to residential customers in England – summary of emerging finding (OFWAT) July 2016
[2] Floating the idea: Household customer
views on water market reform in England
(CCWATER) May 2016
[3]Energy market investigation: Summary of final report (CMA) June 2016
[4] Complaints to Water Companies, England and Wales, April 2014 – March 2015 (CCWater) Sep 2015
[5] Comparing suppliers (OFGEM)
[6] How we're doing with our complaints (British Gas)
[7] Switching energy supplier if you're in debt (Citizens Advice Bureau)
[8] Smart metering (Thames Water)
[9] Water Bill Reform of the water industry: retail competition (DEFRA) November 2013

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