A Competitive Water Market

Mira Shenker
Water Canada
July 5, 2010

 

Scotland creates a best practice for water pricing that some countries are looking to emulate.

 

With just about every good or service, including some essential services, people decide how much of it they want based on its cost. When gas prices go up, car drivers decide whether or not they want to absorb that cost. But when the cost of clean water goes up, it’s mostly absorbed by the service provider: the government.

Not so in a competitive water market, where the cost of using water for production is given by its market price (purchase price for the buyer and opportunity cost for the seller).

In an excerpt from Liquid Assets (2002), executive director of Environment Probe, Elizabeth Brubaker, wrote the following.

In the best of all possible worlds, consumers would choose their water from a number of suppliers offering different qualities, services, and prices. Industrial consumers could reduce their costs by choosing interruptible supplies or less treated water. Residential consumers could choose untreated water for their gardens and, for their personal use, could satisfy their preferences regarding taste and health concerns. The choice between fluoridated and unfluoridated water, or between chlorinated water and that disinfected by other means, would be made by individual households—or, at least, neighbourhoods—rather than city officials.

Like those drivers choosing to switch from premium to regular, or to leave the car in the driveway and take transit, water consumers could, in theory, choose their quality and quantity.

Brubaker says that scenario had been deemed unrealistic by water planners and economists who argue that water is a natural monopoly that leaves little room for competition or consumer choice—until recently. Economists are now beginning to argue that although a true monopoly lies in transmission and distribution networks, water itself can be supplied competitively.

The United Nations’ Intergovernmental Panel on Climate Change says that "improving the functioning of water markets could help create the kind of flexibility needed to respond to uncertain changes in future water availability."

A competitive market has certainly been healthy for access to a less essential asset, telecommunications connections.

Telecom consultant, Mark Goldman, who was gearing up for this June’s Canadian Telecom Summit in Toronto when we spoke, says competition drives investment and innovation in the sector. When Canada’s government-regulated monopoly for phone service ended in 1992, quality of service started to increase, says Goldman. "Nobody thinks about the cost of a phone call anymore. Competition has delivered better prices, better quality of service, and far more innovation." Canada’s telecom market allows for multiple wireless providers, with new competitors like Windmobile cropping up all the time.

If it works in telecom, will it work for water?

The Water Industry Commission for Scotland (WICS) believes its two-year-old system has proven that it can.

Scottish Water was the only supplier of water until WICS introduced a competitive water market for business, becoming the first country in the world to open up water supply to competition for all non-household customers.

According to WICS, public sector organizations across the country are benefitting from the change. Organisations now can tender their water contracts, the act of which, theoretically, leads to a better end price for the user. Chief executive of WICS, Alan Sutherland, says, "No longer following the one-size-fits-all approach, customers have been able to find the best solution for their needs, negotiating pricing and service levels as well as addressing environmental concerns."

The competitive tender process allowed Business Stream, one of the competitive market retailers, to secure a £45-million, three-year contract with Scotland’s education sector, which will see 56 central government agencies and 62 colleges and universities being supplied more cheaply than would otherwise have been possible without competition.

"We estimate that 40 per cent of businesses are now getting a better deal than the default tariff and some retailers are reporting that 12 per cent of their revenue is earned through competitive tenders. This shows that customers and retailers alike are engaging seriously which is tremendous news for all," says Sutherland.

But water is arguably our most essential asset, and national water campaigner with the Council of Canadians, Meera Karunananthan, worries the basic right to water won’t be protected if Canada moves away from centralized political management of water resources toward market-based institutions.

"We’re not talking about a monopoly here," says Karunananthan. "It’s not about one company having the monopoly over others; we’re talking about the government distributing water resources on a not-for-profit basis." She says that’s the only way to ensure access to clean water for everyone—not just the wealthy. "Water is a public resource and a human right. When you leave it to the markets, only higher-income people get served."

Just like broadband access for less wealthy, rural communities is subsidized by government, couldn’t access to water be guaranteed even in a competitive market?

Sutherland says, "Water is not subsidized. The amount that is charged is the price you pay to have it delivered."

Besides which, Karunananthan says that even if government does step in, a competitive market that has them up against industry power players like big oil creates major problems. She says water markets like the Province is proposing for southern Alberta would just end with government paying "much more than it needs to" for water. The market, reported in June 2009 in Fast Forward Weekly, would be the first of its kind in Canada.

In November 2009, the Edmonton Journal reported that Maude Barlow, chairwoman of the Council of Canadians, said, "It’s a big concern because the public loses control of something essential for life and it becomes a market commodity."

Others argue that allowing retailers to, in effect, buy water wholesale for resale, is the only powerful incentive not to waste it and to encourage customers to use it as efficiently as possible.

At a recent talk at the Ontario Centres of Excellence’s Discovery 2010, Ontario’s Environment Minister John Gerretsen said the current low cost of water in Canada has been a disincentive for conservation.

Sutherland says, "If people or businesses are offered water at half the price they do not then go on to use twice as much. The competitive market has delivered greater savings for customers but this doesn’t mean that they are using more water as a result."

Given the backlash just in southern Alberta, could this model ever work in Canada?

Sutherland says, "It is hard for me to make direct comments about systems in other countries but generally as long as customer service and billing are carried out by the same people who manage the assets then something similar can be done in terms of launching a competitive market by then separating those two operations out."

WICS has been talking with the UK government both before the recent general election and since. Sutherland says, "We have given comment and ideas on how the competitive market could work in England and Wales and we regularly liaise with Ofwat, our counterpart regulator for those areas. The omens are good for the introduction of a competitive market elsewhere and ultimately it would be a good thing for Scottish customers as it would encourage more retailers into the market."

 

Mira Shenker is Water Canada’s associate editor. She’s also the editor of ReNew Canada magazine.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s