Leader: Competition is about more than margin

A marriage of necessity – that is how the joint venture between United Utilities and Severn Trent was defined when the former’s chief executive told Utility Week that the union had been driven by the low retail margin set for the soon-to-be-competitive non-­domestic water market (p24).

There’s been a good deal of mithering in the water industry about the level at which the retail margin has been set – 2.5 per cent. Many say it is too low to tempt market participants into vigorous competition on price, something Ofwat chief executive Cathryn Ross has repeatedly denied. She even recently set out her hope that competition will become lively enough to allow the withdrawal of price regulation in the non-domestic sector. The point, Ross asserts, is that competition is not about margin alone, but also about the ability to drive down the cost to serve and to think creatively about the methodology used for creating competitive advantage.

To some extent it looks as though Ross is right here. Although Sue Amies-King – the chief executive of the joint venture – cited the need for economies of scale in the face of a small margin as the “rationale” for creating Water Plus, she also directly associated the move with an ambition to innovate and become a “winner in the market”. It seems that marriages of necessity may therefore also be the mother of invention for incumbent players and it is expected that further joint ventures will come into being before the market opens – perhaps defining the early days of competition more as a time of consolidation than of proliferation in market participants. Such a rationalisation may be no bad thing as business customers begin to explore their options and develop ideas about what they could or should expect from their water retailers.

While many still hope that Ofwat will move the retail margin upwards in due course – following Scotland’s example – Ross has been clear that she expects companies to respond to competition as a driver for creative differentiation. Her eyes are now set on other challenges – such as defining “what a well-functioning market looks like” and how should it be monitored – topics she will discuss at Utility Week Live.