Environment, Food and Rural Affairs CommitteeWritten evidence submitted by Business Stream

Executive Summary

Customers will welcome the Government’s intentions to establish an Anglo-Scottish market for retail water and sewerage services in partnership with the Scottish Government.

Our experience in Scotland leads us to believe the Water White Paper sets out the right principles for customers and the water and sewerage industry for taking forward reform of the market.

To retain customer confidence it is vital that the Government meets its commitment to publish a draft Water Bill in early 2012 and that it is included in this years Queen’s Speech.

Evidence shows a genuinely competitive retail water market for all non-household customers will help reduce costs, increase innovation and bring environmental benefits to England, as has already been the case in Scotland.

In the absence of legal separation the success of the market will rely on a robust compliance regime to create a level playing field for competition. The strength of this regime will be critical to giving new entrants confidence to enter the market.

Based on experience of other markets, consolidation will be required to maximise efficiency, economies of scale and customer benefits. Consideration should be given to how this can be achieved given existing license conditions for integrated water companies.

Introduction

1. This evidence is submitted by Business Stream, the leading water retailer in Scotland. Business Stream was created in 2006 in response to the Water Services etc (Scotland) Act 2005. It is a wholly owned subsidiary of the Scottish Water Group, a public corporation. At the time of market opening Business Stream was separately financed, governed, operated and managed, this remains the case.

2. Customers will welcome the Government’s intentions to introduce retail water competition as set out in the Water White Paper. Customers will also welcome a Water Bill being brought forward as a legislative priority thus ensuring they benefit from retail competition as soon as possible.

Benefits of Competition in Scotland

3. Evidence shows customers have benefited from improved and tailored service, keener pricing and new product innovation.

4. Since 1 April 2008 over 60% of customers are benefiting from lower prices and are better off now than they would have been without competition.

5. Around 40% of the market has gone out to competitive tender. The largest single contract tender will deliver the public sector savings of over £20 million. Customers in England now have an opportunity to reap similar benefits.

6. Total savings in the market are predicted to reach £110 million over the next decade.

7. We have developed propositions to generate environmental benefits via water efficiency initiatives. To date customers have realised £19 million in consumption savings, equivalent to 8,200 tonnes of C02 emissions.

8. Through separation and focus on delivering what the customer wants, we have achieved savings of £25 million (18%) against our inherited cost base, this has enabled us to reinvest to improve our customer offerings.

9. A greater focus on customers will generate benefits for both non-household and household customers.

Retail Competition has worked in Scotland

10. Legal separation was fundamental for our success. Separation allowed us to create our own identity, brand and culture befitting of a customer focused and performance driven retailer. It also enables us to challenge our wholesaler to provide a consistently high quality of service.

11. Transparency, simplicity and certainty in the market have created an environment which has allowed retailers to deliver for customers and the wholesaler to focus on their network.

12. Fairness and customer protection has been a cornerstone of the market, in particular default tariffs and services have given customers certainty and a benchmark for comparison.

The right Principles

13. The proposals set out in the White Paper contain the appropriate building blocks that will allow high performing retailers to deliver benefits for customers. Critical proposals are:

(a)inclusion of water, sewerage and trade effluent billing meaning retailers can provide a complete service, to minimise customer confusion and the risk of discrimination;

(b)creation of a level playing field for new entrants;

(c)removal of the cost principle and regulated wholesale prices;

(d)an automated switching and registration system supported by common codes and market documents;

(e)a market which is visible to all participants with clear eligibility rules for who is in the market;

(f)an Anglo-Scottish market where regulators recognise the need to work together for customers; and

(g)customer protection including default tariffs, standards and codes of practice.

While the proposals for retail competition are positive there are issues which will require careful consideration.

Ensuring a Level Playing Field

14. We understand that legal separation was excluded from the White Paper to retain the confidence of the investor community. In the absence of legal separation new entrants and customers will need confidence that a level playing field can be created and that there is no discrimination in the market.

15. A robust compliance regime will have to ensure staff, data and knowledge are not passed between incumbents wholesale and retail businesses. Transparency in determining wholesale and retail charges, and how incumbents interact with customers will also be crucial.

16. The market should be an easy place to do business. Discrimination can facilitate itself in making business transactions difficult to undertake. It is important that new entrants find wholesalers fair and efficient for all interactions.

Defining the Market

17. Customers and new entrants need a clear understanding of what “retail” is. This definition may evolve but must be simple and not create barriers to entry. Initially retail activities should be where a retailer:

(a)adds value as a customer champion rather than a policeman;

(b)does not impact on the network;

(c)does not need to become an asset owner; and

(d)does not need significant historic knowledge of the network to succeed.

Making the Market Work

18. Retailers will be keen to realise efficiencies and economies of scale. Inefficient incumbents may want to exit the market, thus also ensuring customers in areas with inefficient incumbents are not detrimentally impacted. Consideration should be given to how this can be achieved given the current licence obligation to provide retail services.

19. The registration, switching and settlement system will be critical to the efficient operation of the market. The system must be independently administered and data monitored in a transparent manner. Maintaining a high level of data quality will be critical to the orderly functioning of the market.

20. A clear set of market data should be presented and transferred in a consistent manner across regions. Separation in Scotland facilitated the sharing of market data enabling new entrants to search market data by customer and postcode.

21. The market must place the right incentives on participants to meet their market obligations. The market in Scotland has a mix of incentives and these are critical to ensure that the market is performance driven and customer focused.

Delivery of a Market

22. Strong leadership in Scotland meant unnecessary delays to market opening were avoided. Achieving progress with multiple incumbents will be a challenge but will be critical to create certainty and confidence.

23. A simple Anglo-Scottish market which works for customers will require regulators to work closely together. Desirable outcomes will include common standards for customers and common protocols and procedures for market participants.

24. In Scotland Licensed Providers are required to make advanced payment of wholesale charges or provide other financial guarantees. In England under the existing Water Supply License regime wholesale charges are payable in arrears.

(a)any form of advanced payment will protect both the “core business” and investor confidence

(b)payment in arrears will reduce barriers to entry and arguably create a more competitive market

It may be desirable to allow both options to new entrants thus encouraging wholesalers to consider the relative benefits of each option to their business, this would then be reflected in wholesale charges. There are also variants within these options including daily or weekly settlements or reduced periods of advanced payments. Whatever approach is taken transparency, fairness and simplicity should be key principles.

25. Larger customers have an expectation that a competitive retail market, including site aggregation for multi-site customers (ie including where a customer uses five megalitres in total across their sites) can be introduced by April 2015.

26. To retain the confidence of the remaining non-domestic customers an automated market solution should be in place by April 2017.

27. We would encourage those developing the market to continue to listen to customers. Customer groups such as FSB and MEUC, customers, retailers, and experts such as the Policy Exchange have already provided valuable contributions.

20 January 2012