10 February 2000
New regulations may mean that large users are able to pay less for their water, writes David Arminas
Water tariffs for large users, such as agriculture, mining and the drinks industry, could soon fall for two reasons. First, the Competition Act 1998, effective from 1 March, will offer major savings to utilities buyers as it rewrites the ground rules for water procurement. Second, the latest price review from regulator Ofwat, taking effect one month later, will determine water prices for the next five years. The question is whether procurement professionals can take advantage of the new market conditions.
Chris Lewis, water adviser to the Utility Buyers' Forum, a lobby group for around 100 large users, is hopeful for tariff reductions. Levels of 5-10 per cent, "more than could have been expected six months ago", are possible said Lewis, who also chairs CIPS's energy committee.
Purchasers will have to watch out for more than just better bulk-delivery agreements under the act. But what does it mean for buyers in companies designated as large users (those using 250 megalitres or more per year)?
What it doesn't mean is that buyers will automatically receive improved offers from water companies on bulk-buying and water-management services, or even a greater choice. However, it does mean that buyers can challenge water companies over their terms and conditions by referring these to Ofwat. The regulator has been given greater powers to arbitrate on anti-competitive behaviour.
The shape of future water competition remains unknown. If Ofwat is to be kept unoccupied, there are issues that need clarifying. They include common carriage, where one supplier uses another supplier's networks; a need for delivery costs and extra services, such as waste management, to be transparent and separate; and the ease of changing suppliers.
"Competition is about changing a supplier through inset appointments," Beryl Brown, Ofwat's head of competition, told a competitionin water conference held in London last week.
Ofwat, which must approve an inset - an agreement for large users to change suppliers - believes that the approval process has improved. A recent effort to streamline the system has cut the average from a year down to 16 weeks.
Insets were introduced by the Competition and Services Act 1992. Only six appointments have been approved and enacted so far, although six more have passed the first stage and three others are under consideration.
Insets can take longer than expected because of protracted negotiations by supplier and customer, explained an Ofwat spokesperson. Part of the problem is that the incumbent supplier, the water company that owns the water mains leading to a customer, must arrange access for their replacement.
The Competition Act, backed up by Ofwat's powers, is supposed to ensure that a water company cannot obstruct this access in an anti-competitive fashion, unless there is a quality question over the new supplier's water. To clarify this common carriage problem, the Drinking Water Inspectorate plans to publish Guidelines to Water Quality.
With so few insets taking place, it throws doubt on whether the system works. "It's not about the number of suppliers, it's about having the choice," says Brown. "It is not for Ofwat or other organisations to force suppliers and buyers to negotiate."
Do customers know they can change suppliers? Yes and no, according to Brown. "I say it publicly every time I speak," she said. "Mindsets take time to change and customers don't always see themselves as having powers and choices. They still see water as a service provided by an authority."
Water companies are "like rabbits caught in the headlamps of an oncoming car, not knowing which way to turn," said Jeremy Bryan, managing director of Enviro-Logic, a water management consultancy. "They know something is coming, and are not quite sure how they should respond."
Enviro-Logic's subsidiary, Albion Water, was the first independent company to be created, when it won the licence to supply Shotton Paper mill in Deeside in May 1999. It took more than three years to draw up the inset.
"Very often customers can't describe what they need because they don't understand what's possible," explained Bryan. "They are used to getting a limited service from their supplier, but customers will learn to expect more if they are offered more."
One large water user told SM: "A company has taken over our electricity and gas, and it won't be long before they take over our water."
More companies could soon be classified as large users. The Department of the Environment, Transport and the Regions has to decide on Ofwat's recommendation to lower the large-user threshold to 100 megalitres. This would raise customer numbers from 500 to 2,000.
However competition shapes up, Lewis believes procurement professionals should be proactive. "Water buyers must look for savings, stir things up and make it happen."