Extract F
Flowing towards Competition? The Water Sector and Ofwat
In England and Wales, the water and sewerage sector is dominated by 17 regional privatised monopolies. The largest companies—such as Thames Water, Severn Trent, and United Utilities—control over 70% of the market. Unlike the business water market, which was deregulated in 2017 to allow commercial customers to choose their retailer, the domestic market remains fully monopolistic, with households locked into their regional supplier.
The Water Services Regulation Authority (Ofwat) is the economic regulator responsible for protecting consumer interests, largely through the use of price caps (specifically the PR24 price review framework which uses CPIH ± \pm\,± K inflation-linked price controls) and performance targets. However, public dissatisfaction has mounted. Between 2019 and 2024, customer bills rose by an average of 12% in real terms, while water companies faced heavy criticism for failing infrastructure, sewage discharges, and high dividend payouts to offshore holding companies.
While some campaign groups call for full renationalisation (bringing assets back into public ownership), others advocate for structural deregulation. This includes separating retail billing operations from physical network management (wholesale infrastructure) to allow retail competition, or expanding 'yardstick competition' where Ofwat benchmarks regional performance to simulate competitive pressures. Critics warn that breaking up vertical integration could disrupt critical long-term investment in reservoirs and network resilience.
'While some campaign groups call for full renationalisation... others advocate for structural deregulation' (Extract F).
Using the data and your economic knowledge, assess methods that could be used by the government and regulatory bodies (such as Ofwat) to introduce competition or simulate competitive outcomes in the domestic water and sewerage market in England and Wales.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.