Ofwat ‘failing to match other regulators in encouraging competition’
Posted: Monday 19th November 2007
The House of Lords Committee on Regulators recentlyy criticised Ofwat for failing to match the success of other economic regulators in introducing competition to their market. The Committee’s report UK Economic Regulators concludes that UK economic regulators perform well in promoting competition and competitiveness and argues that there is no need to re-write the legislation that established them, but stresses that Ofwat (the economic regulator for the water and sewerage industry in England and Wales) needs to do more to facilitate competition in the water market.
The consumer water market in England and Wales is identified by the Committee as one that has failed to deliver the same level of consumer choice of supplier as other regulated industries such as energy and telecoms. While in many of the regulated industries it is relatively easy for customers to change their supplier, of, for example gas or telecom services, it is still impossible for an individual or company to change water supplier. The Committee argue that there is nothing specific about the nature of water that prevents increased competition and criticise Ofwat for failing to be more proactive in developing a genuinely competitive market place.
One explanation for the failure of the water market to provide adequate consumer choice is Ofwat’s interpretation of a provision of the Water Act 2003 which requires water undertakers to develop access codes to set out terms and indicate prices for allowing licensees access to their water supplies. The Committee do not accept Ofwat’s position that the legislation itself must be amended and argue that the regulator must do more to ensure enhanced competition in the water market. The Committee support the Competition Appeal Tribunal’s judgement that a change in Ofwat’s interpretation of the legislation is necessary.
The Committee recommend that a key role for all regulators should be to improve the competitiveness of British industry in the world economy. This has not previously been a major focus for regulators and the Committee calls on regulators to fully consider the impact of their decision on UK firms’ competitiveness. In some cases this will require a lighter regulatory regime, as over regulation pushes up both the direct costs to the UK economy of funding the regulator and also indirect costs of complying with what may be over regulation. The Committee express some concern that regulators may, in some instances, become self serving and look for new tasks as a regulated industry becomes increasingly competitive and consequently self regulating. They recommend that the Competition Commission undertake periodic reviews on whether effective competition exists in regulated markets with the aim of scaling back regulation where possible.
The Committee asked the National Audit Office to complete a review of Economic Regulators use of Impact Assessments (IAs). This is published in the report and calls on regulators to strengthen the cost/benefit analysis included in IAs and conduct post-implementation evaluation as a matter of course. The Committee call on regulators to ensure IAs are not used a tool to justify policy but rather as a basis for deciding policy. They argue that in most cases regulators themselves can conduct the IA but that an independent body such as a Parliamentary Committee or the NAO should monitor the quality and objectivity of the assessments.
Other recommendations in the report include:
· A Joint Parliamentary Select Committee on Regulators should be established to provide Parliamentary oversight of regulators. This is needed as current House of Commons departmental Select Committees cannot by their very nature provide a cross departmental overarching review of regulators’ performance.· The Joint Regulators Group should be formalised and should produce an annual report to ensure regulators share best practice in a meaningful way.
Commenting Lord McIntosh of Haringey, Chairman of the Committee, said:
“Many of the UK’s economic regulators have done an excellent job in ensuring their markets are competitive and provide good value for the customer. Unfortunately in the water industry this has not been the case.
“Ofwat must do more to encourage competition amongst water suppliers. They have to start by looking again at how they interpret the legislation around access charges. We see no reason why the water industry cannot become just as competitive as energy or telecoms is now.
“Overall there needs to be more Parliamentary oversight of the role of regulators to ensure they don’t pursue over regulation or become self serving. That is why we are recommending a new Joint Committee is established to regulate the regulators.”
Ed Humpherson, Assistant Auditor General at the National Audit Office, who contributed a review of regulators use of Impact Assessments to the report, said:
“We were pleased to support the Committee in its work, and that the Committee felt able to endorse the recommendations we made. We will consider carefully the Committee's recommendations concerning the NAO's future work programme.”
In response, Ofwat says it will consider carefully the conclusions and recommendations of the House of Lords Committee on regulators, but it rejects the suggestion that the failure of competition to develop in the water sector has arisen because of Ofwat's interpretation of legislation.
Regina Finn, Ofwat Chief Executive said "Ofwat has been working within a very restricted regime to try and promote the development of vigorous competition in the water sector. That regime only creates the potential for fewer than one water customer in ten thousand to choose their supplier. With such a restriction it is impossible for the water sector to be as competitive as energy or telecommunications."
Laws governing water competition mean that only around of 2,200 customers to be eligible to switch to a new supplier. This means that over 23 million customers cannot by law choose their supplier.
In addition, legislation designed to enable competition in the water sector came into effect in December 2005 – less than two years ago. Similar legislation enabling competition in energy came in over 17 years ago. A framework for introducing competition in telecoms came in 23 years ago.
Ofwat is carrying out a wide-ranging consultation on how to open up the water market to competition. It will be publishing its recommendations on how to improve the current regime in December.
Regina Finn said "We are pleased that the Chancellor, in the pre-budget speech, announced the Government's intention to review competition in water and we know that Defra Ministers are open to considering our suggestions on ways to best develop competition in customers interests, including the interpretation of rules on access prices."
The regulator's response follows criticism from the House of Lords Committee on Regulators that it needed to do more to promote successful competition within the water industry.
