How a regulatory system works in practice
A Water Services Association case study

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Page 5: The external environment

Water Services Association 3 Image 5Water and sewerage are natural monopolies. The characteristics of the industry (water is heavy and costly to move about) do not assist the introduction of competition. The Director General therefore seeks to substitute comparative competition - comparing performance of companies spurred on by the incentives he gives them - for the true competition of the marketplace. Over time, with other utilities, competition may act as a spur to improvements in efficiency both in terms of better service but also in terms of a better use of capital and equipment. In his 1994 Review, the Director General stated he expected that, in the future, companies would be able to deliver ‘at least current levels of service at prices which are, in real terms, no more than those charged at present. This is what would be expected from companies in competitive markets.’

He then went on to say: Not all companies will be able to improve their efficiency above that assumed by the regulator when setting price limits. Their ability to do so, will be a test of their competitiveness and management ability. Success will enable them to compete both on dividend payment to their shareholders and on the provision of better services to their customers. They will be in the same position as companies in competitive markets. However, they will not, by and large, supply water services in competitive markets.

The principle which is being established, therefore, for the water companies is that they will be encouraged to make profits and share them with their shareholders, to invest in the long term prosperity of their industry (through capital investment) and share improvements in efficiency with customers through better quality service and lower prices. Regulating the water industry involves finding a delicate balance between the interests of a range of current and future stakeholders.

Water Services Association | How a regulatory system works in practice