Environment, Food and Rural Affairs CommitteeFurther supplementary written evidence submitted by the Water Industry Commission for Scotland (WICS)

I have been reflecting further both on the questions that the EFRA Select Committee raised in its letter to me and my response (dated 4 May).

Given the quite technical nature of the subject matter, perhaps it would be helpful to highlight what I see as four critical issues that I raised in explaining the background to the costs and savings associated with both legal and functional separation.

These are as follows:

1. Without some form of separation there is unlikely to be a level playing field that allows retailers to win customers from the incumbent supplier in any particular area. The level playing field is fundamental to a successful water and sewerage retail market and to achieving the innovation, improvements to customer service and lower charges that the Government seeks. The Water Services etc. (Scotland) Act 2005 required Scottish Water to establish a separate entity but allowed it full discretion to achieve this in whichever way it considered most conducive to meeting its statutory obligations. (In other words legal separation was one possible option; ownership or functional separation—appropriately policed—could equally have been possibilities.)

I do not think that the UK Government should mandate legal separation; however it should make it clear that a level playing field is essential. As such, it should also be clear that companies that opt for limited separation of their activities should expect to be policed rather more rigorously than those that choose voluntarily to separate their retail activities.

2. In any market, it is important for a participant to get the right balance between its revenues and its costs. This may be challenging for some of the new retail arms of the incumbent companies who lose a substantial proportion of their customers. Some of them may decide that it would be better to exit the market. It would clearly be better for these retailers to realise some value from disposing of their remaining customers than to continue to incur losses in their retail activities. There is no consideration in the Government’s White Paper as to how a company could exit the retail market. Not to allow this could lead to higher bills for all those customers (including householders) who continue to be served by the unsuccessful retailer.

3. It is essential to allow sufficient time to implement the framework. To design and implement the new retail arrangements may require up to three years after Royal Assent. The setting of wholesale charges by Ofwat (currently scheduled for November 2014) is also critical. In my view, it will take around two years to complete design and implementation after this date. This makes April 2017 the most feasible date for the opening of the retail market.

4. It will be important for all parties (the two Governments, customers, the companies, new entrants, Ofwat and ourselves) to work collaboratively to achieve the vision set out by the Government in its White Paper. We stand ready to play our part.

I attach a copy of a speech that I gave at the Institute of Water’s Annual Conference today. I hope this provides you with further useful background information. As I said earlier, I understand that many of the issues that the Committee is considering are quite technical—if you would find it helpful to meet up or discuss any of these further, please do not hesitate to contact me.

May 2012