Ofwat calls for water industry to be opened up to competition

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Ofwat, the water regulator, has made the first tentative steps towards liberalisation of the water industry in England and Wales, publishing a menu of options that could lead to the break-up of the regional monopolies that have become infamous for market abuse and poor service.

In its 95-page review of the water and sewage sectors, the regulator set out its suggestions of how deregulation could proceed, and requested industry and consumer groups to respond. The report's findings will then be fed into a government review of water competition being led by Martin Cave, a professor at Warwick Business School.

Regina Finn, the chief exec-utive of Ofwat, said: "Competition in the water sector may be the impetus needed for the industry to finally start modernising infrastructure, plug the leaks and stop the seepage."

In the past two years, water companies, as monopolies guaranteed a certain income determined by Ofwat, have become a favourite of financial investors, with several of the biggest, including Thames Water, changing hands for generous prices.

Ofwat suggested that a "progressive" approach, starting with business customers, was the most appropriate way to deal with deregulation, the most significant potential change to the industry in two decades.

Water UK, the trade body, expressed tentative support for the move yesterday. A spokesman said that if deregulation does proceed, it "must be a means rather than an end". Jeanne Golay, economic regulation adviser at Water UK, added: "Competition needs rules. They need to be developed by a regulatory process informed by experience and collaboration of informed parties."

Among Ofwat's proposals is to reduce the threshold at which competition is allowed. Under the current regime, only organisations that use more than 50 megalitres of water per year can choose their supplier. Only 2,200 companies qualify for those terms – none has switched supplier.

Ofwat would like to reduce the threshold to 5 megalitres, which would open competition to 1.2 million customers. This would require new legislation.

The regulator also said it could force the break-up of water companies into separate businesses, such as treatment, distribution, or retail services. This could lead to an environment similar to rail competition, where one company owns the tracks – in the case of water, the pipes – while several others can run trains – water and sewage services – at varying prices.