ARCHIVE: Cave Review: Supporting research and innovation
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- Innovation in the Water Industry in England and Wales (PDF 649 KB)
- Cross subsidies, price structures and competition in the England and Wales water industry (PDF 1.35 MB)
Innovation in the water industry in England and Wales
The Review commissioned research from London Economics to benchmark the level of innovation in the sector, including international comparisons, and to assess barriers to innovation and how these might be addressed.
With regard to levels of innovation, the research found that:
- All companies are aware of the importance of innovation and have a special focus on it; and
- There seems to be a positive environment towards innovation within the industry.
- The UK has experienced a more significant decline in R&D expenditure in the utility sector compared to other countries in the G7 and Australia; and
- From the patent data for the G7 countries, Australia Great Britain appears to have had a larger decline in the number of patents filed in water and waste water treatment as compared to the other countries.
Barriers to innovation include:
- Regulatory co-ordination leading to a common agency problem: The common agency problem is one where multiple regulators (called principals in the literature) with different objectives (economic, environmental and safety) might counter each others’ incentive scheme; and
- Inflexible incentives which lead to historical solutions by the companies.
- Improving co-ordination across regulators, such as contingent monitoring and reward where companies are only rewarded for outperformance in the economic objectives if they have also met their standards for environmental impacts and drinking water quality. Likewise, companies are not penalized for failing to meet their economic performance if they have over performed in their environmental targets;
- Dampening of incentives due to the 5 year economic profit period should be investigated; and
- consider investigating more flexible approaches to environmental and natural resource regulation. Looking to examples particularly in Australia could help develop such incentives in England and Wales;
- should consider the role of co-operative research. In many cases the innovation public good is at the industry level (not cross-industry level), and at society’s level, and therefore co-operative research should be funded by the water sector and government (carbon emissions is one exception as it is cross-industry and society.
Cross subsidies, price structures and competition in the England and Wales water industry
The Review together with the Walker Review jointly commissioned research from Reckon LLP to carry out a study on cross subsidies in the water and sewerage industry in England and Wales,
- Looked at certain pricing structures in the water industry;
- considered how theoretical new forms of competition may affect current price structures
- identified what might then be done to preserve features of current price structures, if desired; and
- how the establishment of new forms of competition may affect the opportunity to introduce certain new types of tariffs which may enable water and sewerage charges to achieve policy purposes better.
The report identifies relevant features of current charging arrangements for water and sewerage services, and considers how these relate to public policy objectives. The report draws particular attention to the following:
- Charges based on the rateable values of customers’ properties;
- Water companies setting the same charges across the whole region they supply, regardless of any cost differences between locations;
- The WaterSure scheme, which provides capped water bills for qualifying households who have water meters; and
- The costs of late payment and bad debt being spread across all customers.
The analysis highlights that retail competition can be introduced whilst maintaining tariffs differentiated by rateable value and geographic averaging. With a monopoly wholesale supplier or an Independent Procurement Entity these features can be maintained by setting an appropriate wholesale price structure. The WaterSure aims could be met through wholesale pricing arrangements or through the establishment of a special regulatory scheme to fund rebates to qualifying customers. Mechanisms can also be introduced to prevent the introduction of tariffs differentiated by payment mechanism or creditworthiness, although such mechanisms could bring their own problems.
Page published: 15 April 2009