An important aspect for water companies is providing customers with quality service to maintain an efficient performance assessment. Awards and penalties have been introduced to encourage companies to motivate the entities to improve the quality of service they offer to customers at reasonable prices. This paper examines the water industry in England and Wales, explores financial structure of the industry, and the monopolistic behavior of firms. The report also analyses the existing regulations that are used to ensure companies provide optimal satisfaction to their customers through continuous improvement. The last part of the report will involves an investigation of the importance of increasing infrastructure and the impact that such changes will have on the industry.
Graphical abstract
(Retrieved from Science of Total environment, 2016)
Table of Contents
Abstract 2
Graphical abstract 2
Table of Contents 3
Introduction 4
The Water Industry in Wales and England 4
The Financial Structure of the Water Industry in England and Wales 4
Monopolistic Behavior of the Industry 5
Regulations regarding the waters industry 6
Role of Increasing Infrastructure investment and the impact of such changes 7
Conclusion 8
Introduction
The water industry in the United Kingdom belongs to a few private or public companies. In 2015, there was a public outcry that ensured when thousands of residents went without water in the United Kingdom in the wake of Storm Emma. Experts in the field sought to establish the main cause of the crisis. Although some blamed on the cold weather brought about by the storm, others attributed the shortage in the water supply to lack of investment in piping infrastructure and poor planning. However, top entities such as Thames water blamed the weather for the leaking and burst of pipes that lead to water shortage in several homes. Thames Water, together with other companies such as South East Water, Affinity Water, and Southern Water called onto their customer to reduce their water usage. Experts insisted on the lack of investment in piping infrastructure as the main cause of the problem. A concerned firm raised the alarm over the fact that no one including Ofwat(Appendix A.2), the water regulator checks on the performance of the companies. The member also noted the lack of investment on the local roads as the cause of increased pressure on pipes, a factor that increases the quantity of water that leaks per year. The companies have been for leaking huge quantities of water on a yearly basis. The current report seeks to analyze the water industry in the U.K, specifically in England and Wales.
The Water Industry in Wales and England
The Water industry in England is under the regulation of Ofwat. The regulating entity must ensure the interests of customers are protected. It does this by monitoring their functions and the water prices they charge to distribute water. According to Ofwat, there are 18 in both Wales and England. Ten of these companies are given the mandate to carry out both water and sewerage services while the rest can only supply water to clients (BBC, 2015). After the industry was privatized in 1989, most of the companies are owned by individuals, the only difference being the company’s ownership structures (Renzetti, and Dupont, 2018). Dee Valley, Severn Trend water and United Utilities are examples of publicly listed entities. Thames Water is a private entity whose main investors are BT pension fund and Australian Bank Macquarie. The department of water in the UK gives customers the freedom to choose their water providers. Wales, on the other hand, has its water companies also regulated by Ofwat. The main company operating in Wales is Welsh water, a provider of both sewerage and water services. The entity has no shareholders. Welsh company is the largest water industry in Wales and sixth largest in the whole of U.K. Other small companies operating in Wales include Dee Valley.
The Financial Structure of the Water Industry in England and Wales
Consumers in England and Wales pay an extra £2.3 billion every year since the privatization of water companies. In the recent past, none of the companies has invested any significant shareholder equity. However, a report carried out by Greenwich university indicates that the companies extract their post-tax profits in the form of dividends. The cost of privatizing water companies in England and Wales costs every household approximately £100 every year. Still, the entities have been building up debt to finance their investments in the entities for the last twenty-eight years. England, in 1989, completely privatized the water sector from state ownership to monopolistic companies. Until 2016, the owners of the ten privately owned entities paid out £18.1 billion as dividends while their post-tax profits were £18.8 billion.
Retrieved from (Greenwich University report, 2017)
Monopolistic Behavior of the Industry
The monopolistic behavior of the water industry market is characterized by inset appointments and boundary appointments. Inset appointments involve the freedom given to companies to become the main water supplier to a region that was recently a territory of the 24 geographical providers (Scott, 2003 pg. 2). In the water sector, this has been the main source of natural monopoly (appendix A.1) and therefore results in limited competition. However, this form of competition is cumbersome as the opportunities provided are limited, and the process of getting an appointment takes time and is tiresome. The incoming entities, apart from taking over new appointments, have the ability to compete with one another in supplying water to consumers that are near the boundaries of their territories. However, there is no room for new entrants in the market. In the two type of competition, the entities are usually forced to set up new pipes to supply to the new customers who are already connected to the network of the existing entities. One set of the pipes is therefore left redundant. When this happens, the regulatory bodies need to come in to ensure pipes are not economically duplicated. The other type of monopolistic competition occurs when the existing entities look for services from traditional providers to perform tasks ranging from laying of pipes to meter reading. Here the competition is seen through the outsourcing of contracts to other entities. Water entities do this when seeking to achieve maximum efficiency while spending less on the tasks performed. The last type of competition entails companies supplying water to customers by the use of pipes which were laid and are operated by the incumbent companies. This form of competition requires an agreement to be signed between the incoming company and the incumbent one. Monopolistic companies do not usually give easy access to their facilities and infrastructure unless it is a must to do so. The price which the set to give their facilities has to be regulated to ensure it is not pitched too high to discourage others from competing fairly. The prices should also not be pitched too low as this will discourage competition and may have detrimental impacts in the sector in future.
Regulations regarding the waters industry
Upon privatization of the water industry, there have been a number of regulations which are supposed to monitor the functioning of the water sector. The first regulatory body is The Drinking Water Inspectorate. Its responsibility is to ensure the private companies provide drinking water that is safe for consumption. It also ensures that the entities comply with the standards set by the law regarding the safety of the water. Another regulatory body is the Environment Agency and Natural Resources Wales (Department for Environment, Food and Rural Affairs, 2013) These agencies perform functions relating to the protection and improvement of the environment. In Wales, the Natural Resources Body performs the functions. In relation to the water and sewerage services, the bodies oversee the extraction of water from the environment and the safe disposal of sewage into water sources (The economic regulator of the water sector in England and Wales, 2018). They also provide guidelines for water companies to help them in managing water resources and planning for droughts. The agencies are usually consulted when Ofwat has to offer a license to a new inset appointment. The last regulatory body is Ofwat, which is the regulatory body for water services. It is the economic regulator of all services regarding water and sewage in both England and Wales. Its responsibility is to oversee how water companies operate and to determine if they provide safe and quality water services to consumers. They ensure that customer gets value for their money. Their responsibility also entails setting price limits to ensure consumers are not overcharged and that the water companies raise enough revenue for investments. It also monitors the performance of water industries to these companies to make sure the interest of consumers is protected. The regulatory body also sets efficiency targets for private entities.
(Department for Environment, Food and Rural Affairs, 2006 pg. 78)
Role of Increasing Infrastructure investment and the impact of such changes
According to experts in the water sector, the problems facing water services in U.K were as a result of lack of investment in the piping infrastructure. The experts believe that the leakages and bursts experienced during this time were as a result of the failure of the companies to upgrade their pipes as they were supposed to do. Mr. Gilmore of Thames Blue-green economy also attributed the situation to lack of local government funding of roads. He stated that the deterioration of roads has led to pipes underneath to experience much pressure, hence the increased leakage of water. Therefore, it is evident that investing in infrastructures such as roads and pipes will reduce the leakages (Bailey, 2003 pg. 22). The companies need to upgrade their pipes from the existing old ones to ensure they minimize on the leakages. In addition, the local government needs to increase its funding of roads to ensure they undergo maintenance. Increasing investments in both piping and road networks will have a positive impact on both the companies and consumers. Investing will lead to reducing the number of fines given by the entities on a yearly basis due to leakages. For instance, Thames water was fined £8.5m for causing leakages in the year 2017. Similarly, consumers will have a continuous supply of water. The problem of water shortage that is experienced will not occur. Besides, companies that rely on water will not have to cut short their operations due to water shortages. In the case study, it is said that Jaguar and Land Rover Company had stopped its production due to lack of water.
Conclusion
In conclusion, the report has provided an overview of the water industry in England and Wales. From the paper, it is evident that the water sector in the two countries is privately run. The companies are believed to generate huge amounts of revenue or profits due to the nature of the competition they face. In 2015, the United Kingdom experienced a shortage of water supply. Experts in the field attributed this shortage to poor infrastructure while the companies blamed the bad weather. Therefore, companies need to increase their investment in order to prevent such occurrences in the future.
References
Bailey, P., 2003. The business and financial structure of the water industry in England and Wales (p. 14). Centre for the Study of Regulated Industries, University of Bath School of Management.
BBC, 2015. UK water industry: How does it work? Retrieved: https://www.bbc.com/news/uk-30886278
Department for Environment, Food and Rural Affairs, 2006. The development of the water industry in England and Wales. Retrieved: https://www.ofwat.gov.uk/wp-content/uploads/2015/11/rpt_com_devwatindust270106.pdf
Department for Environment, Food and Rural Affairs, 2013. Water Bill The structure and regulation of the water industry. Water Bill. Retrieved: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/259664/pb14058-water-bill-industry-structure-regulation.pdf
Greenwich University report, 2017.
Renzetti, S. and Dupont, D., 2018. Ownership and performance of water utilities. In The business of water and sustainable development (pp. 99-110). Routledge.
Scott, P., 2003. Competition in Water Supply. Centre for the Study of Regulated Industries.
The economic regulator of the water sector in England and Wales,2018. The Water Sector Overview. Retrieved: https://www.ofwat.gov.uk/regulated-companies/ofwat-industry-overview/
Appendix A
A.1 Natural Monopoly- A market in which the industry’s output can be efficiently produced only by a single firm.
“By natural monopoly we mean an industry whose cost function is such that no combination of several firms can produce an industry output vector as cheap as it can be provided by a single supplier.” (Baumol et al.(1977)
A1.1 Water as Natural Monopoly
Water utilities and management are monopolies because of economic advantages related to scale economies and technical considerations. Monopoly in water industry is a result of management and maintenance in infrastructure of the pipes. Competition in the industry makes it difficult for management of the infrastructure.
A.2 Ofwat- An authority responsible for water regulation services. It is responsible for economically regulating privatised water and sewerage industry in England and Wales.