Department for Environment, Food and Rural Affairs
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Cave review of water markets publishes interim report

Cave review of water markets publishes interim report

DEPARTMENT FOR ENVIRONMENT, FOOD AND RURAL AFFAIRS News Release (367/08) issued by COI News Distribution Service. 18 November 2008

The interim report by Professor Martin Cave into competition and innovation in water markets is published today. The report sets out Professor Cave's recommended measures for increasing retail competition in the water industry which could benefit customers and the economy by up to £600 million over the next 30 years and deliver considerable environmental and service improvements.

The Cave Review recommends:

* the introduction of legislation to allow 28,000 then 162,000 large public and private sector organisations in England and Wales to choose their water and sewerage retailer for the first time.
* retail divisions of water companies should be made legally independent from their network business.
* a series of changes to incentivise new water and wastewater suppliers to enter the market.
These recommendations aim to reduce costs and increase service levels for all customers; support the more efficient use of water; and help companies to better meet the challenges facing the industry including climate change, containing costs, rising consumer expectations, and water efficiency.

Launching the interim report, Professor Martin Cave said:
"Extending competition will deliver real benefits for customers and the environment through lower prices, more choice, higher service levels and the better use of water. These changes could benefit the economy by around £600 million over the next 30 years."

The final report and further recommendations will be delivered in spring 2009.

Notes to Editors

1. For more information on the Cave review contact Alex Skinner on 0207 238 5099.

2. In February 2008, the Chancellor, Secretary of State for Environment, Food and Rural Affairs and the Welsh Minister for Environment, Sustainability and Housing commissioned Professor Martin Cave to undertake a Review of Competition and Innovation in Water Markets in England and Wales. The Review aims to recommend changes to the legislative and regulatory frameworks of the industry in order to deliver benefits to consumers and the environment.

3. The Review issued its call for evidence in June, held a workshop for stakeholders in July and has held meetings with industry officials and other interested parties.

4. The recommendations in the interim report are:
* extending competition for non-domestic customers. Currently, only customers using at least 50 megalitres a year, can choose their water supplier. Markets should be opened up to enable all organisations that consume, in the first instance, over five megalitres and then over one megalitre of water a year either individually or in aggregate, to choose water supplier. This will increase the size of the market in England and Wales from 2,200 to 28,000 and then 162,000 customers. Together, these customers use around a quarter of the public water supply. Extending competition further, to incorporate other consumers such as households, will be considered in the Review's final report next year;
* extending competition to wastewater, which accounts for around half of all water and sewerage costs;
* making the retail arm of water companies legally independent to create a champion for consumers and promote water efficiency;
* replacing the principles for determining the current wholesale price for water, which commonly give discounts of around 0.5 to 1.5 per cent off the retail price, with principles that ensure that new entrants earn a fair margin;
* Introducing default tariffs and levels of service and a code on mis-selling to ensure that customers are protected on the introduction of competition from higher prices and a poorer level of service and can take full advantage of new market opportunities; and
* introducing national market and operational codes so that new entrants can sign common agreements with all existing water companies and operate under a comprehensive set of rules.

5. The Review also sets out emerging findings on extending competition to other parts of the water industry. These include a need for the costs of abstraction and discharge to better reflect social, economic and environmental costs and notes the potential scope for greater competition in the treatment of water and wastewater while ensuring the industry can continue to attract low cost funding.

6. In addition, the Review includes emerging findings on measures to increase the level of innovation in the water industry: Government and regulators providing clear signals about desired outcomes; adopting a risk-based approach to quality standards; enhancing regulatory incentives; and supporting public good research and development.

7. The final report and recommendations on these issues will be delivered in spring 2009. The final report will also take into account the special circumstances of particular markets, including the different circumstances of Welsh Water.

8. Martin Cave is Professor and Director of the Centre for Management under Regulation at Warwick Business School.

9. Full details of the Review, including the Review's interim document, call for evidence and Terms of Reference are available at:

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