Many challenges face those working on the design and governance of the new water market, ahead of the expected passage of the Water Bill through Parliament later this year (see: http://bit.ly/YZrjGW). The Bill is expected to fully open the English business water and sewerage market in both resources and retailing.
Fortunately, this work can be informed by experience from other utilities, because water is the last major market in Great Britain to deliver business competition. In previous market openings various models have been used, giving rich case study material.
The box shows learning points from the opening of the business electricity, business gas, residential electricity, and Scottish water markets. Each was pioneering, and many encountered substantial difficulties.
Drawing together experience from these markets generates the following learning points for market design:
· ensure customers’ needs, protection and satisfaction are the foundation of the new market;
· develop an end-to-end market design with clear roles and responsibilities and the correct incentives;
· involve key stakeholders and industry experts in the market design;
· design a commercial framework that is attractive and fair for all players;
· set the regulatory framework to define outcomes, but allow market players to define the model at a detailed level to remove scope for misinterpretation;
· align the market design between England and Scotland, but recognise the fundamental differences, especially multiple distribution businesses;
· consider appropriate central processes and systems for customer switching, settlement and trading; ensure interoperability with existing water company systems
· ensure clarity on metering arrangements;
· interoperability is vital; drive standardisation of market processes, data structures (such as supply point identification) and transfer arrangements;
· set up a central design authority to test the new design with market players and ensure all players can interoperate;
· prioritise high data quality; ensure extensive data cleaning exercises in advance of market opening.
Likewise, learning points on water market governance are:
· operate an appropriate governance model with a fair and balanced representation of market stakeholders;
· ensure a balance between regulatory rules and self- regulation, allowing scope for market innovation;
· create a central market body to oversee the operation of the market, and central functions, with an elected executive;
· use licences to ensure minimum standards – for example, in safety, quality and performance;
· require all participants to sign a multi-party agreement to underpin market rules;
· consider separate legal, regulatory and commercial frameworks for retail and resource management and trading, but ensure overall end-to-end governance and coherence;
· operate centralised functions for change management, issue resolution, market entry and appeals.
Paul Witton-Dauris is business development manager, water, at Gemserv
Lessons from…
1. The business gas market
Attempts to open the business gas market in the early 1990s stalled because market arrangements were inadequate to allow successful entry. Business customers, looking for more competitive gas supplies, became frustrated and successfully lobbied for regulatory changes.
Resulting regulatory interventions towards British Gas included:
· restrictions on gas purchasing and mandatory gas auctions;
· retail share targets and price schedules;
· organisational separation of distribution and retail businesses;
· faster roll-out of competition;
British Gas introduced a separation compliance regime, the Transco business unit was established, and the development of a comprehensive rule book, the Network Code, with market governance started.
The initial regime of negotiated access was abolished and has been replaced with a flexible, transparent, operational and balancing regime facilitating liquid retail and wholesale markets.
2. The business electricity market
Severe problems in customer invoicing and settlement occurred when the competition threshold was lowered from 1MW to 100kW in 1994, adversely affecting customer experience and market players’ workload. The causes included:
· the market design was not robust; commercial incentives and market discipline were inadequate. Instead there were market parties wanting to “control” their traditional processes; inadequate incentives on incumbent players; and multiple agents operating a fragmented design.
· suppliers were unable to access sites and meters, and had no control over centralised metering and data collection processes;
· meter data collection and transmission failed at a technical level and there was no overall accountability for these processes. Public electricity suppliers as meter operators and data collection agencies made errors at a data and process level, including installing incorrectly programmed meters, creating major errors. These were compounded by the use of new, untried technology for meter data collection and transmission.
3. The residential electricity market
This market opened in 1998/99. The market design was developed inclusively with multi-party input through working groups, accessing experts in a central design authority. However, the design was not in sufficient detail. There were data quality issues and inconsistencies in operation between companies, and inadequate incentives, especially regarding metering agents. This led to early difficulties in processing customer switching.
The decision to keep 14 registration systems added to complexity. This issue was subsequently addressed by the addition of a central enquiry system. Customer mis-selling experiences required additional customer protection and codes of conduct. The Master Registration Agreement provides successful self-governance for the market, operating under an elected executive committee.
4. The Scottish water market
Opened in 2008, this market was designed with many of the learning points from energy. It is generally viewed as operating successfully. The market provides significant relevant content, which can be potentially applied in the English market. Fundamental differences exist: it is retail only, and has only one wholesale and distribution business. In England multiple wholesalers and distribution businesses will exist, which means a tailored model, adapted appropriately with energy and Scottish experience. A key learning point from Scotland, and the GB gas and electricity markets, is the overriding need to ensure high data quality.
This article first appeared in Utility Week’s print edition of 3rd May 2013.
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