Q&A: Ofwat’s Cathryn Ross

Lois Vallely talks to Cathryn Ross, chief executive, water regulator Ofwat, about the Treasury's plans to introduce competition into the domestic water market.

Q: When did Ofwat find out that the Treasury want to introduce competition into the domestic water market?

“There are lots of things that are discussed before the Autumn Statement comes out, there are lots of ideas that government talks about, and it talks about some of those ideas with people like us. We had had conversations with government about what they were asking us to do. We had told them that we were ok to do that, we could do that, we could deliver. So in that sense, no – it wasn’t a surprise, but you’re never entirely sure what’s going to make it through into the final version of the Autumn Statement.”

Q: Does the announcement put additional pressure on the timetable for business market opening?

“No. No it really doesn’t, and I think one of the things that is really important here is that none of us – Ofwat, government, companies – have any intention of letting any work on household competition affect the timescale for non-household retail market opening. There’s no reason why it should.

“We have been asked to do a review of costs and benefits. We can do that, [and] we will do that by the summer, as the government has asked us to do. One of the advantages of being asked to do this now is that, should the government decide that it wants to have competition, we would then be in a good place to take the people who would be delivering non-household competition in April 2017 and deploy them on household market opening .

“There is actually logic to looking at those costs and benefits in a way that will inform government’s decision in the fairly near future, but there is absolutely no way we will let that derail the non-household retail market opening timetable.”

Q: Is the outcome of the cost benefit analysis a foregone conclusion?

“I don’t think so. From the language [in the Treasury document] I think what you can infer is that government is keen on the idea, but they wouldn’t have asked us to do a review of costs and benefits if the thing was already a forgone conclusion. And we’re certainly not treating it as that.”

Q: Is Ofwat bringing in outside help for the analysis?

“We certainly will. We are scoping that out at the moment, we’re thinking through what resources we will need to deliver it, how we’ll organise the work. There’s absolutely no doubt that that review will be led by us, we have people who will be steering that within Ofwat. But will we need some bodies on the ground who will help us go through the evidence-base and do the analysis? Yes, I’m sure we will.”

Q: Who’s going to pay and how much?

“We’re scoping it out at the moment. We are intending to put out a terms of reference early in the New Year, and to invite comments on that. And we will know more about the work that we will have to do and how much that will cost at that point. If we can’t fund that within our existing licence fee settlement, then government has recognised that we may need to go back and ask for more money to do it. But of course if we can fund it from our licence fee settlement, that’s exactly what we will do. But we don’t know yet.”

Q: Ofwat has done a lot of work setting out its business plan. Would this need to change?

“The wonderful thing about the way we work now is that we put all of our work through programmes and projects. One of the advantages of that is it makes us much more agile, much more flexible and much more responsive to changes in circumstances. So one of the things we’re doing as we scope out the household competition review is looking at where we might be able to trim back other areas of work to make people available to do this. What I would say, and this is really important, is there is no way that the household competition review will derail the timetable for Water 2020. We’ve made some firm public commitments on timing there, and we will stick to them. But do we have scope to move some resources elsewhere in our work? Yes we do and we’re going through that thought process at the moment.”

Q: Does domestic competition fit with Ofwat’s ‘trust and confidence’ agenda?

“I think it does. I think there is scope for competition and greater use of markets in the household sector that deliver benefits. For example, in terms of water efficiency and greater resilience. But of course it depends on the choice of retail model and that’s something we’re going to be looking at. One of the questions that we will be asking as we go through the review is exactly that – what are the different models of retail competition that might be introduced? What are the pros and cons of those different models in a narrow cost beneficial sense, but also in a broader cost beneficial sense?”

Q: What lessons can water companies take from energy when opening the market?

“I think there are really important lessons, and I think it is really, really, really important that we learn those lessons. One of them is that it’s important to keep an eye on how markets are working and actually what they are delivering for customers. I think if you keep an eye on that in a much more dynamic, real-time way, it gives you the ability to intervene – not necessarily using your hard powers, maybe using some of your softer powers – to make sure that the market continues to deliver for customers and therefore maintains its legitimacy. I’m not sure that really happens in energy, I think the market got too out of line with the expectations of customers and society before this was realised. I think that could be the biggest lesson for water.”