Environment, Food and Rural Affairs CommitteeWritten evidence submitted by Scottish Water
1. Scottish Water was the first company in the United Kingdom to implement retail competition for business customers. We separated our business retail activities into a separate wholly owned subsidiary, Business Stream, and established a wholesale service facility to deal with all licensed retailers in the market. With our experience, we are pleased to submit our views on whether the White Paper sets out the right principles for customers and the water and sewerage industry for taking forward reform of the market for water supply.
2. We are generally supportive of the retail competition policy aims sets out in the White Paper, but have a small number of important observations based on our experience in Scotland.
3. We support the Government’s proposal that it should not take risks that would reduce investors’ confidence in the sector. However, the introduction of retail competition changes the nature of the credit risks facing water companies and we are concerned that this does not appear to have been recognised in the White Paper.
4. As retail competition becomes established, water companies will supply increasing numbers of their previous customers through competitor retailers. The credit risk diversification that currently arises by supplying many thousands of business customers will be reduced and sales will become increasingly concentrated towards a small number of retailers, thereby increasing the inherent credit risk of incumbent water companies. From our experience in Scotland, the key to avoiding this increase in credit risk is to require retailers to prepay their wholesale charges and, if necessary, to provide additional financial guarantees.
5. We note that there is no intention to require the legal separation of retail businesses from the incumbent water company, unlike our situation in Scotland. In the absence of legal separation, we believe that there must be adequate governance arrangements between the incumbent wholesale and retail businesses to ensure fair access for the innovative new entrants. From our experience, we suggest that the governance regime should contain obligations to ensure that there is no discrimination in treatment between retailers, including the incumbent water company’s own retail division.
6. We support the proposal that there should be compatibility of market arrangements between Scotland and England as we believe that this is in the interests of customers, particularly those operating on a multi-site basis across both countries. We particularly encourage the Committee to review the lessons learned since market opening in Scotland nearly four years ago to ensure that the arrangements in England build upon our market experience and are compatible with those operating in Scotland.
7. From our experience, we believe that a future Water Bill should place a clear duty upon Ofwat to ensure that the market is opened and administered in an orderly manner. This will necessitate Ofwat working with all interested industry players in establishing market arrangements that meet the government’s objectives and which are appropriate for, and build confidence with, market participants. An on-going obligation to ensure an orderly market would require Ofwat to continue to refine market arrangements based on the lessons learned from market operation.
8. One particular aspect of an orderly market that has been important in Scotland, but will be even more critical in England because of the scale of the market and complexity of multiple wholesalers, is data accuracy. We suggest that careful consideration is given to the necessary cost and timescale of cleansing customer data adequately, and establishing the necessary market trading and settlement arrangements, prior to market opening to allow the proper and effective switching of customers after market opening.
9. We would be delighted to provide oral evidence to elaborate upon the matters set out in this submission.
January 2012