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Deloitte cautions a careful look at water reform

9 February 2011

Deloitte, the business advisory firm, today launches a new report on retail competition in the water sector. Launched at Water UK’s City Conference, the report, ‘Lessons for the Water and Sewerage Industry from Retail Competition in the Utility Sector’, raises questions over the economic and financial benefits of introducing competition in water retail.

The Deloitte report 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.

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; and 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.
  • This is because:
    • It is not focused on well identified and significant cost inefficiencies
    • It is limited in scope to non-household consumers
    • It is not yet clearly identified how retail competition will link with any possible upstream market liberalisation
  • These limitations mean that it is necessary to re-appraise the overall cost-benefit case for the introduction of retail competition.

Notes to editors:

The UK Government is expected to publish a White Paper this summer which will conclude on some possible reforms to the water sector. This includes consideration of the introduction of retail competition which has already been proposed both by Ofwat and by an independent review of competition.* (Independent review of competition and innovation in water markets by Professor Cave).

About Deloitte

In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. 

Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

Member of Deloitte Touche Tohmatsu Limited.

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