Water, energy and the waiting game

Drinking-water does not fall free from the skies. But if gas and electricity companies have their way, consumers could soon be paying less for tap water. The Government is due to issue a consultation paper in May which will look at opening the supply of tap water to a wider market, beyond the local monopolies operated by the existing 24 water companies, and paving the way for consumers to switch end suppliers.

Confident that the Government will give the green light to greater competition in the water market, gas and electricity companies are already planning to supply their own branded tap water by late 2003.

Centrica-owned British Gas, which has 60 per cent of the combined gas and electricity markets, has set up a water division to identify opportunities in the market (MW last week).

There have also been reports that BG has entered discussions with South West Water to cross-sell gas and electricity to the water company’s customers. Any such talks would, presumably, be part of a move to create closer links with water companies in preparation for the deregulation of the market.

One City analyst says that BG is keen to enter the water market to shore up its eroding customer base, which is being threatened by aggressive marketing from rival energy companies.

The precise terms of further deregulation of the water market have yet to be revealed, but one thing is for sure: the energy companies are simply interested in the combined billing opportunities that it would afford. They have no desire to get involved with the practicality of water management.

The water industry, however, is not so enthusiastic about the prospect of full-blown competition.

Water UK, the trade body for water companies, claims there are major differences between the management and supply of energy and water. It has not yet set an industry position on – or possible proposals for – further deregulation of the water market, preferring to wait until the Government reveals its plans. The spokesman for Water UK says: “There is no resistance to further competition but the issues related to water are very complex. Issues of public health and safety and issues of environment revolve around water, and at the moment we are waiting for an industry-specific framework which will address all these issues.”

A spokesman for Severn Trent Water says the company, which has 3 million customers in the UK, would welcome more competition. He adds that it would continue to operate as an integrated company, not only supplying and maintaining water, but also looking after the needs of its customers.

But BG, which has never made a secret of becoming a “total household essentials provider”, has already drawn up its own proposals for retail competition in the water market which, if pursued, would provide for a radical shake-up of the industry. It suggests that existing water suppliers should separate their retail operations from the water management side of their business to ensure a level playing field for any new retail entrants. BG envisages handling billing, customer services and the selling of water and leaving the management of the water to the existing companies.

However, Electricité-de-France-owned London Electricity (LE), which also owns the Virgin Energy brand, is not in favour of separating the retail and the operational side of the water business. A spokesman for the company says: “As a supplier we would always like to participate in the actual mechanism of the process to ensure that the product is good. Water is not a priority for us at the moment, but who knows what will happen in the future?”

The Water Act 1989 partially opened the water industry by transferring the assets of regional water authorities to private companies. These new businesses were awarded licences to operate in the market for at least 25 years from September 1989. Pricing models operated by the 24 water companies are regulated by the Office of Water Services (Ofwat) and are based on the performance levels across a range of criteria, including the maintenance of environmental standards.

But increased competition is widely expected to reduce the cost of water to the consumer, whether payment is extracted by a flat rate or metered according to the amount actually used.

Ofwat director-general Philip Fletcher, who is lobbying for further competition, says: “We need fresh legislation if we are to move competition forward faster and I look forward to the Government’s announcement of its proposals.”

But some water companies are sceptical about the consumer benefits that deregulation will bring. A spokesman for one warns: “Increased competition could risk water quality or even the environment, because it will only be the price issue that everyone will focus on. The limited savings for the customers do not justify the costs and disruption of changing the current structure.”

BG is not the only energy company keen to enter the water market. A spokesman for Innogy, which owns npower, says: “We are hoping that the new government proposals will open the market further. The company has always been interested in offering bundled home services to its customers, including water.”

Powergen is also said to be interested in the water market, but refuses to discuss any marketing plans. The company is in the process of being acquired by German company Eon, which last September bought American Water, a publicly owned US water company.

These companies see “great opportunities” in becoming multi-utility providers and delivering a single bill to consumers for home essential services.

A research manager at Datamonitor, Iain Bosbery, sees water as “one big” opportunity for utility companies. He says: “Water is more politically sensitive than gas and electricity, because even consumers have some sort of emotional affinity with water. Also, the majority of the water companies are still focused on engineering issues and are not led by consumer-interest issues. At the moment, these companies are paying lip-service to deregulation issues.”

But Thames Water, the leading player in the market with 13 million customers, claims that it is well placed to cope with the increased competition that deregulation promises. A spokesman for the company says: “If the Government chooses to promote retail competition in the water industry, Thames Water will be an active player. Our high standards of service and competitive billing put us in a good position.”

It is only a matter of time before the energy and water companies find out to what extent the water market is to be deregulated. If the government sanctions increased competition, the energy companies are ready to use all the marketing tools available to them to get consumers to switch water suppliers.