Water: Supply, Prices, Scarcity and Regulation

New IEA paper argued that reforms are needed to encourage more choice and more trading in Britain’s water market.

Tackling water shortages and ensuring water costs are kept low for consumers requires changes in how water is regulated. A new report, Water: Supply, Prices, Scarcity and Regulation, by former water regulator, Sir Ian Byatt (who set up Ofwat) argues that the focus on environmental enhancement, rather than limiting prices, has driven up costs for the consumer and limited supply.

The publication suggests reforms are needed to encourage more choice and more trading in Britain’s water market. It explains how a combination of quality standards and greater freedom for companies will help to ensure that Britain does not face significant water shortages in the future.

Key recommendations in the report include:

Reducing prices

·         Prices for water have risen too high with continual increases in bills causing social problems for consumers, especially in the south-west of England.

·         The regulator should set an indicative price cap so that water prices increase by no more than the rate of inflation (and preferably by less). Within that stable price cap water companies would be able to plan long-term investment on a proper economic basis so that there would be less regulatory control of investment and less destabilising short-term decision-making around regulatory reviews.

·         Regulators should explore the possibility of negotiated settlements between water companies and customers to determine any price increases.

·         More retail water competition in England should be encouraged.

·         The drive to attain ever-increasing water and environmental quality at ever-increasing cost must come to an end.

Tackling water shortages

·         Special summer tariffs or special tariffs for hosepipe use would be preferable to blanket bans on certain types of water use. Tariffs designed to regulate demand through the price mechanism during times of likely shortage should be extended.

·         Mechanisms such as water trading and abstraction-right trading, together with incentives to take a long-term view when making investment decisions, can help to alleviate water shortages and encourage companies to ensure that water finds its way to parts of the country where it is most scarce.

·         There should be greater trading of water, including of abstraction rights, encouraged by the regulatory framework.

·         Though a water grid to transfer water from areas of surplus to areas of shortage might be appropriate, it should arise by evolution encouraged by an appropriate regulatory framework. Such a grid should not be centrally planned.

2012, Current Controversies No. 37

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