ERC Research Papers
Published August 2009
by Nigel Hawkins
AQUA BRITANNIA! How UK Water plc can maintain high investment levels - within acceptable pricing limits - and raise its profile overseas.
The UK's Water Industry Regulator OFWAT, set out a preliminary ruling on the next 5 years of investment on the 23rd July. AQUA BRITANNIA ! the first think tank response to this.
But more than that, given widespread concern about the sustainability of world water resources due in part to the projections of large population growth over the next decades - the Economic Research Council (ERC) has felt it appropriate to analyse the challenges facing the water and sewerage industry in the UK.
• COMPETITION - Trying to produce competition between water companies has been a 20 year failure, which seems destined never to produce tangible benefits. It is time for OFWAT to give up on this and focus on bearing down on excessive investment by the water industry.
• WATER SUPPLY SOLUTIONS - A sharp rise in water metering - a financial gain to the consumer - would weaken the case for costly new reservoir investment. Water leakage from the UK's 325,000 km of mains remains costly to fix and can only achieve a limited increase in supply. Desalination plants are very expensive. A National Water Grid is financially nonsensical. Building a pipeline to transport a cubic metre of oil which costs £200 makes sense, water only costs less than £1 per cubic metre.
• OFWAT - For the 5 years between 2005/06 and 2009/10 was too generous in its investment allocation to the Water Industry (the WACC - weighted average cost of capital), which resulted in higher than necessary prices for consumers. Unlike OFGEM, who saw sense in not proposing a draft WACC when debt markets are so volatile for the next 5 years, OFWAT is taking a risk with consumers money by believing it can set the correct rate. Instead it should set the WACC for a three-year period with a provisional figure for the two years thereafter.
• PRIVATISATION - A future government should make plans to privatise Scottish Water, Glas Cymru, Northern Ireland Water and British Waterways.
• GOVERNMENT SHOULD - repeal the water-specific mergers legislation and take initiatives to encourage UK Water plc to expand its franchise internationally where huge opportunities await.
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