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Water, water everywhere, an expensive drop to drink

The saying goes that ‘all ships rise on a high tide’ – a truism, if ever there was one. It now seems like all UK water bills are also set to rise over the coming year, due mainly to the ‘high tide’ of infrastructure costs compounded by inflation and interest rate rises. This of course is set against the backdrop of water companies with reported financial difficulties, major sewage discharging and CEOs who forgo their bonus only to resign shortly afterwards.

So where has this all gone wrong?

Privatisation in the 1980’s and 1990’s bought competition and choice to the consumer for electricity and gas, the theory being that choice would help to keep prices down with the regulator Ofgen, monitoring events from a distance. This however is not the case with water, we can’t choose one supplier over another. What this means is that the regulator acts as a proxy for the missing competition - having to negotiate directly with the water companies.

So, we are (and have for some time been), reliant upon a regulator who should have the ‘teeth’ to ensure a good deal for the consumer. However, when it’s alleged that it’s cheaper for a water company to pay a fine for sewage discharge rather than fix the infrastructure problem, then something seems inherently wrong.

After The Times reported that water bills could rise by as much as 40%, George Eustace, former Environment sectary was quoted on the BBC’s Today programme as saying, "That figure [40%] is something that the industry has put out and it is probably because they are about to commence their negotiations with Ofwat and I think that the figure will be far lower than that when it comes to it."

Now in most other competitive markets, parties are generally fearful of pitching proposals too high at the start of a negotiation. The reason being, that after one strike, they may be out, because a much cheaper alternative is available. This is not the case here, so the supplier can afford to pitch high and try and anchor an end position, ultimately not far away from the original pitch position, in the absence of any alternative. There also doesn’t appear to be any clear time pressure to apply in order push them to move more quickly either.

Competition provides a major threat (or a sanction) that the water company would surely wish to avoid. In the absence of other supplier options, there needs to be other credible threats or sanctions available to the regulator to maintain some sort of balance between the power held between the two sides. The threat of a special administration regime (SAR), which would see the water company temporarily taken over by the government, seems a very hollow one. The time, effort, and embarrassment for the government in doing this seems to render it a toothless option. An upcoming general election also definitely adds to the pressure on the regulator and ultimately the government. Other things for the regulator to consider could be as follows:

  • Find an alternative credible and realistic threat that the water companies wish to avoid

  • Be clear on your objectives and goals (consumer pricing, costs, timing etc.)

  • Consider pitching your proposal first to the water companies – seize the initiative!

  • Make the proposal realistic and credible

(Ofwat, if you need any coaching or training on the above (or any other aspects of commercial conflict), please give Savage Macbeth a call 😉). The outcome really doesn’t have to be just water more water under the bridge!

Sam Macbeth, 29th June 2023

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