A framework for valuing water in England and Wales

Abstract

The paper has as its main objective the design of a framework for valuing water in England and Wales in the medium-term i.e. 2015–2020/25. However, the paper addresses this in the context of what would be the most appropriate long-run market and trading framework for the efficient abstraction and use of water in the long-run, i.e. post 2025. We set out objectives and constraints both for the medium-term and the long-term. The main objectives are to provide effective signals (a) for the right level and type of investment in both new resources and network infrastructure; and (b) for efficient water resource use. Given the length of life of new water industry investment, we attach greater priority to investment incentives. For the medium-term, we also attach considerable importance to the objectives of a flexible framework and evolutionary potential. We conclude that for the medium-term, the best alternative is a “BST” (bulk supply tariff) model. Under a BST model, the incumbent water company is required to offer water at a ‘default’ regulated wholesale price, but wholesale and retail parties eligible to trade can do so bilaterally outside this mechanism.