Chief executive’s view: Let’s not miss a trick

Sensible regulation by Ofwat is the key to ensuring a successful competitive water market in England, one in which customers enjoy the benefits that customers in Scotland have had for years.

Having worked in multiple industries before I joined Business Stream I’ve been on the inside of some of the biggest industry transformations of recent years. As a result I have a good idea of both the threats and opportunities that are likely to arise when embarking on a competitive water market in England.
Over the years, I’ve worked with and within newly privatised companies faced with switching from being a cost-focused monopoly to a customer-focused retailer, and I’ve found that, in general, the process is akin to trying to teach an old dog new tricks – in that the attitude and health of the animal will make all the difference.
It is my view that success will depend on the attitude and health of England’s existing water market. There appears to be the political will for change, and customers have been telling us for years they’d value the kind of choice created by deregulation in Scotland. The English water market has benefited from infrastructure investment to the tune of some £108 billion since privatisation, so the foundations for change appear stable.
The critical factor in the success of any newly-competitive market is the willingness of incumbent suppliers to engage with its core principle so customers get a better deal.
Clearly the wheels of market reform are starting to turn, although a lot of the detail is yet to be decided. The Water Bill is expected to receive its second reading in Parliament before the end of the year and this should give us a better idea of how the legislation will ultimately be implemented.
In my view, the number one issue that must be addressed if the English water market is to be fit for purpose come 2017 is the question of a fair and open marketplace.
The benefits of competition in Scotland are clear to see – since market opening, customers have saved more than £35 million through efficiency alone, and have reduced water consumption by more than 16 billion litres. I firmly believe a competitive water market in England presents opportunities for providers across the UK. The Water Bill must create a sound policy framework that will create a fair and equitable non-domestic retail marketplace. The proof will ultimately be in the implementation, which will require leadership and clear guidance from Ofwat.
We now have the PR14 price review under way, which we hope will make it easier to achieve transparency around the true cost structure of wholesale and retail businesses, which hasn’t previously been possible. There are real concerns that the wholesale charging regime will be too opaque and too complex to enable retailers to provide accurate price structures to customers, who would then have no confidence in the marketplace.
Without transparency of wholesale pricing, we also run the risk that, in some areas, the wholesale and retail parts of an incumbent business could work together to eclipse their competitors. This would leave retailers to disentangle complex pricing structures, possibly across multiple sites and regions, and having to negotiate on cost directly with the incumbent. Negotiating access to the market with more than 20 incumbents would be enough to make most would-be retailers run for the hills. Imagine a race where the previous champion is given a head start and can take a shorter route than his or her challengers. Not many bookies would take that bet.
In Scotland, the regulator requires that Business Stream, as the incumbent, has no advantage as a result of its unique position in the market. Access to the market is regulated, not negotiated, so all participants can compete from a common foundation. This means we have had to work hard to keep our customers because entrants to the market have the same wholesale pricing and access to market data that we do.
My experience as chief executive of Business Stream over the past five years has proven the merits of this model to me, and I’m strongly of the view that Ofwat should regulate the English market to ensure complete transparency and a level playing field for all providers entering the market.
If we don’t look after our customers, someone else will. A failure to structure the market in a way that forces the focus onto customers risks entrenching existing monopolies and lumping customers with an inherently dysfunctional menu of providers.
Simply put, if opening the non-domestic retail market is going to be successful, it must put customer interests at the centre. It is still not clear why exit provisions have not been included in the Bill, and I hope this is not a closed discussion because retail is an economies of scale business and not every water company has the desire or resource to be a retailer. Allowing companies to exit would create a more evenly-balanced market without creating the potential for customers to find themselves on day one with a sub-par or ­uninterested retail provider.
We were disappointed in Defra’s decision not to require separation of retail and wholesale interests, but that puts real pressure on the regulator to ensure that in the absence of legal separation, no retailer can benefit from its position with the wholesaler. That’s a condition of our licence in Scotland and makes sure that customers are insulated against protectionist behaviour from incumbents, while creating sanctions for breaches. Without the right policing of incumbents, we run the risk of creating 21 different markets for each regional incumbent.
But we can’t rush it. A properly functioning market takes time to get right and we have three and a half years to do it. If we structure the market correctly, incumbents will have plenty of time to get ready for day one.
After all, when customers have a choice in a competent market, they invite the innovation and high levels of customer service that are essential to helping grow and drive a healthy business. We must not repeat the sins of the past and design a market doomed to fail. Customers have a real appetite for change and will not be so forgiving this time.