Shake-up of water industry proves damp squib

So much for the promised radical shakeup of our water industry. What was heralded in the weekend press as the biggest upheaval for the industry since privatisation has in practice turned out to be something of a damp squib.

Even judged against the water industry's somewhat soporific Richter scale of events, this one would be hard pressed to register much more than one. If the cause of the weekend's sensation was John Gummer's propaganda machine, then he must have intended it as an April Fool's joke. The Environment Secretary's proposals for "increased customer choice" add up to little more than a hill of beans.

What the Government wants, and what it is going to get, are two very different things. Its starting point is that prices are too high and that the best way of redressing this is through competition. With modern technology and operating systems, Mr Gummer believes, it should be perfectly possible to develop "common carriage", allowing competitors to supply water within the franchise of an existing operator. Great. So we can look forward to the type of competition that already exists in telecommunications and is fast being developed for gas and electricity, can we? Well, not quite. Common carriage is to be confined initially to customers using 250 megalitres of water a year or more - that's only about 600 nationwide. And in practice using alternative water suppliers is only likely to be economic for those located close to the borders of the present water regions, reducing the number of potential beneficiaries still further.

With all the other monopoly utilities, competition has begun with big industrial users and only slowly progressed to domestic customers. But if Mr Gummer really believes this experience can be repeated with water, he's living in cloud-cuckoo land. For competition to work in any meaningful way would require the development of a national grid similar to the one that exists for gas, electricity and telecommunications. The Government has already examined the feasibility of such a project and found it to be uneconomic, both in terms of construction and running costs.

Furthermore, the ecological effect of digging up the land and diverting water on the scale required make it extremely unlikely except in the case of persistent drought conditions that such a thing could ever be sanctioned. For most industries, dynamic competition will always be the best safeguard against abuse. But for water, tough and effective regulation remains the only realistic option.

Triumphalism at Lille backfires

By any standards, Britain's performance at the G7 jobs summit in Lille yesterday, was a lamentable one. Ministers were hoping the event would provide further international acclaim for Britain's model of a deregulated labour market. With even the Germans and French coming round to the view that deregulation creates jobs, it was not an unreasonable thing to expect.

But as so often occurs at events of this sort these days, ministers managed to undermine support for their position with an uncompromising and ridiculously triumphant approach to the problem.

The clash that emerged was not so much over the rights and wrongs of a deregulated labour market as about degree. To the Europeans, unfettered deregulation ignores the need to remedy the social exclusion resulting from unemployment. It also raises the risk of an unacceptable beggar my neighbour to lower living standards between countries.

To complete the rift, Britain's European partners have the single currency on their minds. They suspect Britain will use its social chapter and single currency opt out to take advantage of low standards, low wages and a low exchange rate, giving it an unfair edge within Europe.

The Government's dismissive reaction to these fears is a product of its strategy for dealing with the issue of job insecurity so successfully tapped by the Labour Party. This is a bad tactic.

It is bad enough that the British were unable to resist a spot of triumphalism in Lille. Officials were handing out a Department for Employment and Education propaganda document which stretched credibility about the Government's record on jobs through its selective presentation of the facts. The Japanese and Americans, with considerably lower unemployment, managed more subtle diplomacy.

More than that, the British refusal to accept that its partners might have a point, and engage in discussion about it, undermines the value of the most important economic policy forum. It will eventually marginalise our influence. Although all those present in Lille have an eye on their domestic audience, most did not feel compelled to sacrifice genuine discussion at the altar of party politics.

Greed could still short-circuit electricity

The only thing that now looks like short-circuiting a further round of consolidation in the electricity industry is an outbreak of excessive greed at Midlands Electricity and Southern Electric or pusillanimity on the part of PowerGen and National Power. These being privatised utilties, neither eventuality can be ruled out entirely. But if the script goes to plan then the Trade Secretary, Ian Lang, should clear the bids by the generators for the two regional electricity companies.

The Monopolies and Mergers Commission delivered its verdict last Friday and the betting in the market is for clearance subject to certain conditions. Ministers may, understandably, be wary about endorsing anything that smacks of concentration of power in the sector, having broken the link between generation and supply when the industry was privatised.

But they conceded the principle of vertical integration when they allowed Scottish Power to buy Manweb.

And they further weakened their case when they agreed to let Hanson first buy Eastern Electricity and then start acquiring power stations from the two big generators.

The case against permitting the two latest mergers is that National Power and PowerGen would be able to rig the electricity pool, the wholesale market for England and Wales, and exert undue influence on the market for contracts between generators and suppliers. Both these objections can be met by legally binding undertakings.

The bigger issue for ministers to address is what shape they want the industry in as it heads towards full competition in 1998. The consumer is more likely to be better protected by four or five large integrated players slugging it out for their business than by a larger number of independent RECs with a vested interest in sitting on their local monopolies.

Midlands and Southern could spoil it all by demanding that their suitors come back with unacceptable prices. But if that were to happen they would be as much the losers as the two generators.

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