By JP Floru.

Did you know that only about 39% of households in England and Wales have a water meter? Everybody else pays a fixed sum, irrespective of the amount of water used. Are we surprised that the demand for water exceeds the supply? Why bother closing the tab? It’s a free for all for the happy many.

Water companies may be privately owned, but the government is firmly in command. The water price cap is set by Ofwat, a government agency whose board members are appointed by the Secretary of State. Theoretically, price capping is the next best option to full free market competition: companies are incentivised to become more efficient as it allows them to keep a greater percentage of the receipts. In reality, efficiency is entirely overshadowed by the subjective setting of the water price cap by Ofwat. The price cap level makes or breaks.

The water price capping is determined by a raft of factors and special interest groups. The economic factors are guesswork at best. It is very difficult to predict future rainfall or future costs. There are no private market examples to compare it with. The price capping is therefore highly subjective. Water companies, environmental groups, the Environmental Agency, the European Union, and, last but not least, politicians, are all influencing the water price cap.

Why is water so cheap? Ofwat’s remit is specifically to keep water prices “fair” – whatever that may mean. Increasing the water price is certainly not attractive politically. The decision not to impose water meters upon every household reeks of political calculation, too: which politician would risk enraging 65% of households?

Instead of encouraging individual responsibility through generalised metering, state rationing is being introduced. All over the country people will hose their plants at night; fearful of the neighbour peaking over the fence. I wonder: will evidence of snooping be available under the Freedom of Information Act? Will we be able to inspect our file just like the Stasi victims? Families who pay for water per unit won’t be allowed to fill their toddlers’ paddling pool because others have been splashing out for years.

Rationing is a traditional statist devise usually exhumed when government interference has distorted the normal functioning of the market. When intervention by the state leads to unwanted side-effects, more state intervention is called upon. Unwanted side-effects are the main effect of state action. In a normally functioning market without state interference, demand exceeding supply would lead to an increase in prices. That, in turn, would reduce demand. It is the way in which the market coordinates supply of a finite resource with a rather elastic demand.

Many will argue that we cannot introduce free market competition in water because the pipe and sewage network is a natural monopoly. Digging up Albion to put down second, third, and fourth sets of pipes owned by different private companies would be prohibitively expensive and wasteful. However, one could see a situation whereby the pipe network remains in the hands of one company (with regulation) while the water production is in the hands of many different private companies (with free market price competition).

One would expect a centre right government to look into increasing competition in the water utility. One would expect a centre right government to increase rewards for responsible behaviour, by generalising water meters. Instead, we resort to the interventionist’s panacea of collective hardship through rationing.