Leader: It’s the end of the world as we know it

It could have been worse. Rumour has it the Treasury initially wanted to announce this week that the water market would open to competition for domestic customers in 2017, at the same time as business customers. Water companies were saved that, at least, with Monday’s shock announcement being that domestic competition is likely by the end of this Parliament in 2020.

It was the inevitable next step – the government’s enthusiasm for opening the non-household market has always signalled more fundamental change to come. But companies were confidently expecting to be allowed to implement non-household competition first. They thought another Parliament, and another price review, would pass before domestic competition led the agenda.

Chancellor George Osborne has blown that confidence out of the water. The motivation for swift change isn’t clear – there isn’t the same pressure for reform from domestic customers as there was from business customers. But it seems the newly-elected single party government is keen to implement its free market ideology, and water has been tacked on with a number of other industries.

Ofwat has been handed the task of carrying out a cost-benefit analysis, to be completed by next summer. While the industry insists this is a genuine exercise, the wording from the Treasury makes it seem a foregone conclusion. Certainly, the regulator’s enthusiasm for competition is well documented, and it would take a brave body to defy Number 11 – not to mention Number 10, which also had a hand in this week’s announcement.

So what does domestic competition mean for the 18 water companies that make up today’s market? Nothing less than the end of life as they know it. While the energy industry isn’t a direct analogy, it’s likely that water wholesale businesses will become something akin to energy networks: they have and will keep a natural monopoly. Maintaining investor confidence over the next few years and beyond will be top of their list of concerns.

Following vertical disaggregation, it’s uncertain how many of today’s water companies will be a force in the retail market. There are huge questions over how to develop a thriving market with viable margins while protecting all customers, including those who are hard to serve, which must now be answered quickly.

What the announcement means for customers isn’t yet clear. Certainly, consumers’ lacklustre response to the option of switching energy supplier suggests that the opportunity to change water company isn’t likely to be earth shattering. No doubt multi-utility bundling and white labelling will emerge, which may attract some customers. There will be initial costs to market opening, with savings likely only further down the line. Proponents of competition argue that innovation and improved customer service will result – and perhaps they will, if water can learn from the mistakes of the energy industry.

And what of the water companies? For some, this week’s announcement is terrible news. For others, it’s an opportunity, albeit one at risk of being rushed. The companies are unlikely to insist on a party line this time round, as they did to the industry’s detriment with business retail. This seems an implicit acknowledgement that the old days of the one-size-fits-all vertically integrated water company are over forever. Welcome to the Brave New World of water.

Ellen Bennett, Editor