Scottish Water Should Go With The Utility Flow

14 May 2005

A version of this article by Tom Miers appeared in The Scotsman on 14th April 2005

The Scottish Water Industry should be liberalised and opened up to competition, according to a new report by Professor Colin Robinson, an energy and utility markets expert.

Reviving The Scottish Water Industry, published by the Policy Institute, says that Scottish businesses and consumers could both benefit if they had the right to choose their water supplier.

In any market, competition between producers is vital to drive up standards and lower costs, to the benefit of consumers.

But for years ‘network’ utilities such as the phones, gas and electricity seemed immune to the benign effects of competition. Short of installing rival networks of pipes and wires, how could businesses and householders be offered a choice between one phone or power company and another?

In fact, of course, recent reforms in the UK have shown that competition is possible to a surprising degree in these markets. The trick is to separate the ‘network’ – the pipes or wires which carry the gas or electricity - from the plants which produce it at one end and the retailers who sell it to industrial and private consumers at the other.

This makes these industries very similar in structure to other more familiar markets in food, clothing and so on. The only difference is that the transport element must remain a monopoly, and the stuff transported must all be the same. But this still leaves huge scope for innovation and competition in production, storage, billing, metering, and package deals combining the product with other goods or services.

Such reforms have introduced huge efficiencies into the UK gas, electricity and telecoms markets in recent years, and Professor Robinson says that the same principles could be applied to water in Scotland.

Currently, the industry here is dominated by Scottish Water, a state owned company which has a near monopoly throughout the supply chain, from storage in reservoirs to charging customers (though the billing is still performed rather uncomfortably by local councils). Scottish Water has been the subject of widespread criticism in recent years, not least by its regulator, the Water Industry Commissioner for Scotland. Business customers in particular feel that services is poor and costs too high. But they have no-one else to choose from – we are all in effect captive customers.

Meanwhile, though the company is ‘publicly owned’, in practice the public has little control over the company. It certainly cannot sell its stake and invest elsewhere if unhappy with the management!

Robinson recommends that Scottish Water should be confined to running the pipes – a monopoly activity that would therefore require price controls by the regulator – and that new companies should be created or encouraged to take over collection, storage, retail and so forth.

For example, an existing gas company might enter the water market and offer its customers discounts for buying both water and gas together. It would find economies of scale in billing and customer service which it would pass on to customers in the form of lower prices. Thus it would hope to win new business. It would buy water wholesale from a number of competing reservoir owners. The stuff itself would still be piped by Scottish Water for a carriage fee. But this fee would be capped by the regulator, and Scottish Water would not be allowed to compete at the production or retail ends to prevent it from abusing its monopoly position as the pipe owner.

Professor Robinson also recommends that the various companies in the industry should be privately owned, including Scottish Water. Exposure to the capital markets would place additional shareholder pressure on managers to perform. Private ownership would also make political interference harder.

But, as the experience of the water industry in England and Wales shows, privatisation is in itself not enough. It has undoubtedly delivered some efficiency improvements, as is tacitly admitted by the regulator in Scotland, who uses them as a benchmark for Scottish Water. But competition cannot be effective just by comparison. The water companies are too different for that. Customers must be allowed choice to spur innovation in service and costs by the industry.

A new Water Act passed by the Scottish Parliament promises some improvement, but does not go nearly far enough. While it offers some competition for large industrial customers, Scottish Water will be still be allowed to bid for this business, and domestic consumers are specifically excluded from the market.

Instead, says Robinson, the regulator should be given a specific duty to encourage new market entrants and competition at all levels, while Scottish Water itself should be confined to running the pipes.

Utility market reform has made the UK’s gas, electricity and telecoms industries among the most efficient in the world. This has provided a major boost to industry, domestic consumers and the economy generally. It is time to extend this revolution to the water industry in Scotland. We could steal a march on our English neighbours and have the world’s finest water industry, as befits our bounteous position in nature.

‘Reviving The Scottish Water Industry’ is avaiable in full on this website under Research 7 Publications