As the prospect of Scottish independence grabs the headlines, water regulators from both sides of the border are quietly working towards a common goal.
In December’s Water White Paper, Westminster gave the green light to an Anglo-Scottish competitive water retail market in which all non-domestic customers will be able to choose their supplier. Scottish nationalists might be soothed by the knowledge that England is taking its northern neighbour’s lead on this one: Scottish businesses have been able to do this since April 2008.
Nonetheless, the benefit will not be all one-way. Since the market opened in Scotland, only 2 per cent of businesses have switched from the incumbent, Business Stream. Alan Sutherland, chief executive of Scottish regulator Wics, insists customers have benefited from renegotiated contracts despite the low switching rate. However, he also says: “A lot of potential entrants to the market have told us the Scottish market is too small. If it were to become a pan-GB market, then the calculus may well be different. From a Scottish standpoint, if you want the best possible deal for customers, increasing the size of the market is good.”
The new market will not cover all of Britain. The Welsh Assembly is staying with what it knows and shows no signs of subscribing to the competition agenda, although the option remains open. Tom Kiedrowski, head of market reform at Ofwat, says: “In the fullness of time, if we can make the joint market appear to be effective, perhaps Wales will see the benefits of joining in and that would be very welcome.”
Ofwat wants to open the market in April 2015, provided the necessary legislation is passed in the next parliamentary session. Kiedrowski says the timing would be neat because it would coincide with the next price review. Prime minister David Cameron recently said a draft Water Bill would be produced “in the coming months”, but given the vagueness of the timing and that fact that the Water White Paper was repeatedly postponed, Ofwat is understandably wary of setting a
date in stone.
Sutherland is sceptical over whether Ofwat can get the market structures in place and all 21 water companies on board by April 2015, even if legislation goes to plan. He says: “The safe date would be April 2017 for market opening. You could call that fairly pedestrian, it could probably be done quicker than that, but my personal view is it is better to bring forward the date than push it back.”
Kiedrowski is confident it can be done, however.”The great thing is that we can draw on the experience of what they did in Scotland – we are not starting from ground zero,” he says. “We have done a lot of preparatory work. I think if we were starting from scratch then perhaps the timetable would be too ambitious, but I don’t think it’s too ambitious.”
Ofwat’s preferred market opening date also coincides with the run-up to the next general election, scheduled for May 2015. Pamela Taylor, chief executive of lobby group Water UK, warned in a keynote address to CIWEM last month that the issue risked becoming a “party political football”.
It is not something that hugely worries Kiedrowski. He says: “It’s worth remembering that the Cave Review was initiated under the last government, so there is a consensus on the need for reform, albeit different parties have different priorities.”
Under Treasury rules, Ofwat is limited to making “prudential preparations” until the relevant laws have been enacted, which is unlikely to be before early 2013. It cannot spend any serious money on setting up the market until it has a statutory mandate to do so.
The new competitive regime will have joint market codes and require Ofwat and Wics to recognise each other’s licences. Perhaps the most crucial area of expenditure will be the centralised IT systems needed to underpin the market and handle customer switching.
In Scotland, the Central Market Agency (CMA) administers customer movements and monitors who owes what to the wholesaler, Scottish Water. Sutherland is firmly of the view that the customer registration and settlement systems should be common. He argues that rolling out the CMA would be the cheapest and lowest risk way to proceed, but admits “some could say I’m biased”. Wics might be persuaded to adopt an alternative model. However, Sutherland adds: “We are certainly not going to change our systems without seeing that another one can work.”
Kiedrowski says there is a lot to be worked out and Ofwat “would not take lock, stock and barrel what they have in Scotland”. There would probably need to be a competitive tender process for the IT systems, he adds. “They have to be compatible, but we have to make sure they work in a bigger market.” He says a proper assessment has to be done of how effective the CMA system has been in Scotland, and whether it is scalable.
Kiedrowski also says that there are some key differences between the market structures in England and Scotland that have to be taken into account. Scotland has a single, publicly-owned wholesaler, while England is served by privately-owned regional monopolies. Wics has focused on developing retail competition, while Ofwat is encouraging market activity upstream as well. “We see this as more of an end-to-end process,” says Kiedrowski.
In Scotland, there is full legal separation between wholesaler Scottish Water and retailer Business Stream. Ofwat tried to press Westminster to provide for some degree of retail separation, but the White Paper ruled it out, fearing that such structural change would alarm investors.
Ofwat wanted separation to prevent vertically integrated incumbents from being over-dominant and discriminating unfairly against competitors. However, Kiedrowski says: “Even though we didn’t get that , I think there are a number of measures you can take to address those concerns.”
Without separation, it is not clear how the retail arm of an incumbent water company would leave the market if it performed poorly. Sutherland agrees that retail separation helps with developing a functional market, but he says it is not a deal-breaker. But although he concedes that it can be an issue if you “don’t have a way for losers to lose”, he says “you can make mountains out of molehills” and there are other ways to make sure there is a level playing field.
Overall, both regulators are pleased to see the idea of retail competition gaining acceptance. But there is a lot of work to do and decisions to make before it can become a reality.
This article first appeared in Utility Week’s print edition of 10 February 2012.
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