Written evidence submitted by The Water
Industry Commission for Scotland
EXECUTIVE SUMMARY
— The Water Industry Commission for Scotland
(WICS) believes that the recommendation made in Professor Martin
Cave's "Independent Review of Competition and Innovation
in Water Markets", that step-by-step retail competition should
be introduced to all non-domestic customers, should be taken forward
as a legislative priority.
— Water competition to all non-household
customers was introduced in Scotland in 2008. Important lessons
can be learnt from the Scottish experience to help ensure that
the introduction of water competition to non-domestic customers
in England and Wales is a success.
— The introduction of water competition
to all non-household customers will help to reduce costs, generate
innovation and bring environmental benefits to England and Wales.
We believe it would add to the benefits already being realised
in Scotland.
— Regulation of the water industry has
been successful in reducing running costs and improving water
quality, environmental compliance and levels of service to customers.
However, changes to the regulatory framework are necessary. The
current framework is no longer fit for purpose and is limiting
the potential for further innovation.
— The forthcoming Water White Paper is
well-timed and offers a real opportunity to address the issues
facing the water industry and the challenges ahead.
INTRODUCTION
1. This evidence is submitted by the Water Industry
Commission for Scotland (WICS), the economic regulator of the
Scottish water and sewerage industry. The Water Services etc.
(Scotland) Act 2005 (the Act) established WICS with the power
to set charges that would allow Scottish Water (SW) to deliver
the Scottish Government's (SG's) objectives for the industry at
the lowest reasonable overall cost. The Act also created a framework
for "supply" competition in the water industry in Scotland.
It limited the contestable market to non-household customers,
but allowed new entrants to supply both water and sewerage services
to all organisations, irrespective of size or location. The Act
required the legal separation of the non-household retail activities
of SW; the wholly-owned subsidiary to SW, Business Stream (BS),
was set up in autumn 2006. Water competition to all non-household
customers was introduced in Scotland in 2008.
2. WICS recommends that the introduction of
water competition to non-household customers, as proposed in Professor
Martin Cave's "Independent Review of Competition and Innovation
in Water Markets", should be taken forward as a legislative
priority.
THE BENEFITS
OF INTRODUCING
WATER COMPETITION
3. Since water competition was introduced to
all non-household customers in Scotland, around 45,000 business
and public sector organisations (approximately 40% of the market)
are benefitting through lower charges, better customer service
and environmentally-friendly initiatives.
4. Water competition generates innovation. The
framework in Scotland ensures that new suppliers and their customers
are able to benefit if they help SW reduce its costs. For example,
discounts may be available to organisations that can plan their
water use or waste disposal.
5. Water competition can help to reduce costs
and reduce the UK's carbon footprint. Retailers are competing
to offer services that allow consumers to monitor their water
use. In Scotland, BS, for example, has so far helped customers
save over £7 million; in terms of water that is a saving
of more than 2 billion litres. In terms of carbon, this is the
equivalent of taking 1,000 cars off the road.
6. Since introducing water competition in Scotland,
there has been growing awareness and interest in the new competitive
opportunities for businesses and public sector organisations.
During 2009-0 approximately £43 million of annualised income
(around 12% of the market) was put out to competitive tender.
BS recently secured a £45 million contract with Scotland's
education sector and further tenders are in the pipeline.
THE SCOTTISH
EXAMPLE: LESSONS
LEARNT
Separation between SW's wholesale function (operation
of treatment works and the pipeline network) and its retail function
(dealing with the end customer, including billing and other customer
service activities) has been crucial. Evidence shows that the
new retailers are putting additional pressure on the wholesaler
to improve its performance. Customers are also demanding a better
level of service. The Cave Review also recommends the introduction
of a similar retail/wholesale split.
Regulatory leadership is required. A clear vision
for the market will need to be outlined, which should include
a high level description of how the market would work; the process
for ensuring that the market arrangements were transparent; and
clarification that new entrants could rely on a level playing
field. A clear timeline and deadlines for the opening of the market
are also needed.
9. The lack of a threshold has meant that all
non-household customers in Scotland can participate in the new
market. Ladbrokes, one of the largest switchers in Scotland, would
not have been able to do so had there been a threshold. The benefits
to others, such as some councils and universities, may also have
been substantially reduced.
10. An independent Central Market Agency (CMA)
was established in Scotland to ensure the effective and efficient
operation of the market. The CMA is a company limited by guarantee
and all market participants are required to become members.
11. The total cost of establishing the competition
framework in Scotland has been around £17 million. This cost
has been incurred over approximately three years. WICS published
an analysis of the savings that have already been achieved by
SW and BS; the findings show that even if there are no further
costs savings or any improvements in the level of service provided
to customers, the pay-back on the investment in establishing the
new framework for the industry in Scotland is less than five years.
The activities could be scaled or adapted to ease the transition
to a competitive market in England and Wales.
12. It is important to be realistic about how
long it takes to separate retail activities, define wholesale
charges and develop market arrangements. It will be important
to allow sufficient time for a similar framework to be implemented
in England and Wales, especially as Ofwat regulates over 20 companies.
However, some time could be saved by incorporating some of the
lessons learnt in Scotland to date.
THE CHALLENGES
FACING THE
WATER INDUSTRY
13. Regulation of the water industry has been
successful in reducing running costs and improving water quality,
environmental compliance and levels of service to customers. Changes
to the regulatory framework in both Scotland and England and Wales
are however needed, as the current framework is no longer fit
for purpose.
14. Some of the incentives appropriate to reducing
costs limit the potential for innovation, reduce the efficiency
of the supply chain, mitigate against the coordination of water
resource planning and may cause the carbon footprint of the industry
to be higher than necessary. The customer is also insufficiently
engaged in the price setting process.
15. There is a real opportunity to do better
and changes and improvements to the regulatory framework, as proposed
below, will ensure that the water industry is better equipped
to face the challenges ahead:
(a) Customers should be more engaged, which
will, over time, improve customer service and improve customer
satisfaction, even as customers' expectations become more demanding.
(b) Retail activity separation and competition
can bring real benefits to all customers, even if only non-household
customers can switch supplier.
(c) There should be incentives to encourage
economically-justified innovation.
(d) Water trading, providing there is a proper
framework incorporating an understanding of waste water discharges,
could play a limited but important role.
(e) Some flexibility in the regulation of discharge
consents could be introduced if a customer experiments with a
more innovative or lower carbon solution.
(f) Fixed regulatory periods could be reconsidered
if customers and companies are satisfied with current tariff levels.
16. The forthcoming Water White Paper provides
a very timely opportunity to address the issues facing the water
industry.
October 2010
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