Common carriage as a way of introducing competition in the water sector

1
Common carriage as a way of introducing
competition in the water sector

• Presentation to the IADB workshop
• Second generation issues in the reform of Public
  Services
• 4 and 5 October 1999
• Energy and Utilities
• PricewaterhouseCoopers
• Sylvia Wenyon

2
Agenda

• Common carriage the policy context
• Issues to resolve
• Canary Islands common carriage
• England Wales common carriage looming
• Summary Conclusions

3
What is Common Carriage?
Common carriage is the use of distribution
networks of incumbent water companies to
transport water or sewerage by third parties
4
Common carriage and the policy context
Policy objectives in water sewerage

• Efficiency low costs/ low prices and adequate
  quality
• Security of supply
• Protect the water environment
• Health, coverage (access to urban rural
  population)

.Regulated monopoly v market forces?
5
Common carriage and the policy context
Possible role of market forces

• substituting competition for economic regulation
• overcoming in built tendencies for inertia in
  monopolies
• challenging resource self sufficiency where
  company has limited geographical coverage

6
Common carriage and the policy context

• Options for introducing market forces

• competition for the market
• concessions for whole service
• BOTs for treatment, storage (reservoirs)
• competition in the market
• supply from local source
• bulk supply
• common carriage

7
Customer Scope large users small
developments (unless common carriage available)
Options for introducing competition in the
market supply from local source
Newcomer or companies from other areas competing
via
Supply from local source
8
Options for introducing competition in the market
Non-common carriage supply from bulk supply
Newcomer or companies from other areas competing
via
Source 4
Company A
Company B
bulk supply from incumbent
Source 1
Town
Customer Scope large users small
developments(unless common carriage is
available)
Town
Source 2
Water Source
Source 3
Town
Key to map
100mm water main
500mm water main
9
Options for introducing competition in the market
Common carriage small network
section
Newcomer or companies from other areas competing
via
Source 4
small Common carriage
(abstraction licence or bulk supply)
Source 5
Customer scopelarge users developments
areas accessed via link
10
Options for introducing competition in the market
Common carriage across tow companies networks

Town
11
Options for introducing competition in the
marketCommon carriage across national/ state
links
Unlinked networks
12
Potential links
Options for introducing competition in the market
Common carriage across national/ state links
13
Options for introducing competition in the market
Common carriage across national/ state links
PotentialIntegrated networks
14
Options for introducing competition in the market
Common carriage across national/ state links
All Incumbents competing in each others areas
Plus newcomers with abstraction licences
competing via
Common carriage across national/state networks
Customer scopemost customers in country if
links feasible
Common carriage
15
Options for introducing competition in the
market Conclusion
Rationale for pursuing common carriage route over
other options

• enhances other options
• enables access by more newcomers to
• more customers
• cheapest raw water
• treatment more likely to be economical given the
  large number of customers (unlike onsite
  abstraction without cc)
• potential for savings not only in supply, but
  also in abstraction, storage and treatment
  (unlike bulk supplies)

16
Common carriage underlying economics

For cc to develop and links to be establish
competitor needs good prospects for business

• likely costs favourable
• proportion of transport costs other network
  charges relatively low in relation to all costs
• abstraction charges in other locations
• lower
• newcomer potential for further efficiency in
  treatment, storage retail high

17
Common carriage underlying economics

• Costs favourable
• Proportion of transport costs other network
  charges relatively low in relation to all costs

Transport unit costs are high in proportion to
total unit costs in low densely populated
countries
Less consumers to share costs
Large Link High construction and Transport costs
(water is heavy)
15
Typical Americas
Typical Europe
18
Common carriage underlying economics
Proportion of transport costs low
33 network
7
Generation 52
4
Distribution 29
Transmission
Other 9
Electricity
Transport costs are important in water in the UK,
In less densely populated areas such as the
Americas they are likely to be even more
important. Therefore Competition has less scope
than in other utilities to reduce costs/prices
30 network
Storage Transmission
Production Exploration 43
7
Distribution 23
Other 14
Supply 13
Gas
37 network including pumping
bulk transmission
Abstraction, Treatment storage 40
7?
Distribution 30
Supply 17
5
Clean Water
Pure natural monopoly
21 network
More potential for savings in wastewater This
depends on the extent of economies of scale in
treatment (i.e., whether treatment is part of the
pure monopoly element)
Sewage Sludge Treatment 55
Sewerage 21
Supply 18
5
Waste Water
Source Ofwat, Offer, Ofgas
19
Common carriage underlying economics

• Costs favourable
• Abstraction charges important in relation to
  total costs
• raw water rights available (new, traded or
  leased)

20
Common carriage in the policy context
Policy objectives

• Bring down prices to consumers/ adequate quality
  ?
• Ensure security of supply
  ?
• Protect the water environment
  ?
• Health, coverage (access to urban rural
  population) ?

• Requirements for common carriage to meet the
  policy objectives
• adequate abstraction pricing or management
• mechanisms to release raw water or water rights
• policies to address loss of incumbent cross
  subsidies that were supporting universal service
  obligation

21
Issues to resolve

• Network issues
• Industry structure
• Externalities, universal service stranded
  assets

22
Issues to resolve (network issues)

• Requirements of CC in any sector
• 1 rules for network operation and interface with
  water traders (notice, information requirements,
  rights of network operator to refuse access when
  risk to network)
• 2 settlement regime to account for differences
  in inputs and outputs
• 3 charging regime for use of the network

23
Issues to resolve (network issues)
Requirements of CC in any sector (continues)

• common carriage to be made statutory
• information to be made available on
• position of network
• characteristics
• position of available sources

24
Issues to resolve (network issues)

• problems of introducing different waters, even
  when water complies with national standards
  effect of mixing effect on pipes (quality,
  hardness, colour, taste)
• new water negative effect in the network and thus
  in network maintenance
• how do we establish who is responsible for the
  changes in quality, the negative effects on the
  network and on the service

• Water quality and hydraulics
• Liability allocation for poor quality supply
  for network damage

25
Issues to resolve (network issues)

• Liability for other levels of service
• Allowances for leakage

• pressure and interruptions to supply are likely
  to be affected
• leakage can be affected due to the changes in
  pressure and the increase in the number of
  connections
• newcomers will have to accept certain levels of
  leakage and input more water (how much leakage
  should they accept?)

26
Issues to resolve (choice of industry
structure)
Water
Bulk imports
Impounding Reservoir
SURFACE WATER
Supply Pipes
Treatment works
Bulk exports
(diurnal) storage
GROUND WATER
bore holes
Distribution network
WHOLESALE NETWORK
aquifer
Licensed abstractions
Transmission
?
? Treatment
Storage
Storage Raw Water Reservoirs
Distribution
Supply
Waste Water
NETWORK
Supply to large users
Trade effluent treatment Disposal
Sludgetreatment disposal
Sewerage/drainage
Sewagetreatment
27
Issues to resolve
(externalities, cross subsidies stranded assets)

• benefits questionable if
• abstraction prices do not reflect environmental
  externalities, though quantitative controls are
  an option and
• if there is no mechanism to release abstraction
  rights

• abstractions and externalities

• competition will highlight undermine current
  cross subsidies. Incumbents would need to be
  protected in order to be able to deliver service
  to to high cost of supply users

• cross subsidies and universal service obligation

• stranded assets

• should the incumbent be protected for stranded
  assets?

28
Issues to resolve significance in different
cases
Network issues more difficult to resolve in case
1
2. Sources owned by different parties far away
form demand
1. Sources are dispersed and demand centres
intermeshed
Wet area
Dry area
England Wales several links points of entry
and exit
Canary Islands (Tenerife) cc over trunk transport
Demand areas
Sources
29
Issues to resolve
Would the transaction costs of setting contracts
and going into litigation around liabilities
outweigh the benefits of competition?
30
Canary Islands Common Carriage already exists

• Common carriage in Tenerife for many years
• abstraction rights were individually owned and
  tradeable since the 16th century
• market signals provided an incentive to transport
  water from places where it was relatively
  abundant (the north) to places where it was
  scarce (the south).

• common carriage exercised through
• pipes owned by individuals who charge a network
  toll (pase) for access
• maintenance responsibility an issue some water
  rights owners have built a parallel network to
  ensure better maintenance

31
England and Wales Main Developments in
Competition

• Supply competition has relied only on on site
  abstractions or bulk supplies (no common
  carriage)
• 1989 Act
• only new customers
• more than 30 meters to the existing distribution
  main or sewer
• greenfield sites and those
• under private supplies
• in 1992 Act
• large users and
• 30 m rule abolished
• powers to regulator to determine bulk supplies
  sewer connection charges
• cross border domestic if incumbent agreed
• customers request it and were prepared to pay
  for the pipelines needed

32
England and Wales Main Developments Competition

• Results
• since 1989, only 5 insets granted (only 2 large
  users)
• however large user tariffs have declined
• Main problems
• limited scope for entrants without cc
• Inset has to agree with incumbent on bulk supply
  or sewer connection charges (difficult to agree
  incumbent has greater bargaining power).
• inset companies and newcomers say there are no
  rules,

33
England and Wales Common Carriage looming

• New legislation
• The 1998 Competition Act with effect on April
  2000
• it could be an abuse of dominant position to deny
  access to a facility, when this is essential

34
England and Wales water resources 2002
indication of sources of savings on costs of raw
water
Provided transport costs, hydraulics and
population densities allow and water is priced
appropriately, cheaper water will be transported
via common carriage from places where it is
abundant (Wales and the north) to places where it
is less abundant (East)
Key Tight Marginal Adequate
35
England Wales benefits of common
carriage price differentials? Need to explore
reasons
Key Below 51 p/m3 51 -60 p/m3
61-70 p/m3 71-80 p/m3
Above 80 p/m3
4
3
17
10
27
14

• But are the differentials due to factors that can
  be addressed with competition
• differences in efficiency or
• availability/prices of raw water?
• Not always prices are higher in some regions
  because of
• areas being hilly or
• of low population density

5
23
1
2
15
13
26
25
8
15
12
8
20
19
24
8
8
16
9
18
6
11
22
21
price of retail water in England and Wales 1997-98
36
Summary conclusions

• Compared to other alternatives, common carriage
  enhances the scope for introducing effective
  competition
• In relation to the objectives of water policy
  common carriage is able to deliver
• lower consumer prices,
• with introduction of other mechanisms
• lower environmental damage
• greater security of supply
• Scope for benefits greatest in countries with
• high population densities
• differences in raw water availability between
  companies areas reflected in raw water prices
• great differences in efficiency

37
Summary conclusions

• Issues to resolve
• rules for network operation charges
• water quality and hydraulics
• liability allocation for poor quality, levels of
  service and network effects
• abstraction allocation and pricing to reflect
  externalities
• cross subsidies and universal service obligation

38
Summary conclusions

• Benefits and issues to resolve are more
  significant in specific circumstances
• In cases like the Canary Islands, where raw water
  is priced through the market sources are owned
  by different parties far away from demand, issues
  likely to be solvable cc carriage competition
  likely to be beneficial
• in cases where supply and demand are more
  intermeshed, the economics may be favourable but
  network issues may be more difficult to solve
• Allowing it to happen will let the market
  identify favourable cases expose significance
  of issues to resolve

39
Summary conclusions

• Whether benefits outweigh costs remains to be
  seen Jury is out in England and Wales it is
  about to be tested
• However early introduction of competition may
  conflict with PSP interest in traditional
  concessions