21 June 2012

Breaking vertical monopolies

The gains from division of labor are limited
by the size of the market -- Adam Smith (a Scot)
Read this and consider that it means:
Scotland is the first country in the world to give business and public sector customers a real chance to choose their supplier. As a result, many customers are now paying less for their water and sewerage services.

The introduction of water competition in Scotland has led to many beneficial changes for customers. It means that suppliers can attract customers by:
  • Offering tailored services.
  • Improving efficiency.
  • Giving advice on how to reduce water usage.
  • Controlling costs, meaning you could benefit from cheaper water.
  • Providing a higher standard of service.
What's going on here? Any NON-residential water customer in Scotland can contract for retail water service from any of four (and perhaps increasing) retail providers, all of whom contract for wholesale water from Scottish Water, which is charged with acquisition, treatment and delivery of water in the network.

England and Wales are planning to expand their limited version of this idea to more and more customers, turning them into consumers with choices. Such an expansion will add scale to the UK market, making it easier for new retailers to enter the Scotland-England-Wales market.

Bottom Line: The water business is full of monopolies that are NOT natural monopolies in every dimension. Regulators should look for ways to introduce competition into different dimensions of the water business, and Scottish Water has been experimenting with a novel approach for 130,000 customers since 2008.

2 comments:

  1. David, this "competition" seems very severely limited:
    "The market affects only the retail part of the service (that is, the customer-facing activities such as billing and water efficiency advice). It is therefore quick and easy to choose water supplier, as your supplier will handle everything." "Scottish Water still acts as a monopoly wholesaler and distributor, as well as supplying domestic customers with water and sewerage services. It is responsible for operating and maintaining the network of water and sewerage pipes, as well as selling wholesale water services to the current Scottish water companies."
    This seems like a complete national monopoly but with private parties allowed to operate some billing operations and customer advice for businesses. Seems fairly trivial and not really about breaking the water supply monopoly. What am I missing?

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  2. @Tom -- you're right, but it turns out that customers *do* like choices on customer services... perhaps b/c Scot Water -- like a typical water utility -- is better at pipes than people :)

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