Water Bill

Written Evidence submitted by Business Stream (WB 20)

Introduction and Summary

1. Business Stream is the incumbent retailer in the Scottish water market, serving over 93,000 customers. We are owned by Scottish Water, but legally separate from the rest of the Group. In addition to our experience in Scotland, we are also a new entrant retailer in England, having signed up our first customer there in January 2013.

2. We believe that the Water Bill must put in place all the necessary measures to establish a viable retail market in the English water industry. It is worth noting that over the years a number of steps have been taken to try to encourage competition, from the provisions made in the 2003 Water Act through to the recent reduction in the consumption threshold for eligible customers, but that none of these have succeeded. The Water Bill provides an opportunity to ensure that retail water competition is a success but in order to achieve this objective, a number of issues need to be addressed.

3. In order to help create an effective water market, we believe the following key issues need to be addressed, either by strengthening existing provisions within the Bill, or by adding in new ones. These issues are:

· The creation of a level playing field through the functional separation of the wholesale and retail arms of incumbents, and the placing of a duty on incumbents not to show undue preference or undue discrimination.

· The creation of a fair, transparent and efficient market through the publication of access agreements and wholesale schemes of charges.

· The establishment of appropriate controls on individual charging agreements to prevent incumbents using these to impede competition.

· The ability for incumbents to exit the retail market.

4. At present, there is not enough on the face of the Bill and as a consequence the regulator has been given too much discretion. Without sufficient direction, which would give Ofwat the statutory backing that it requires, there is a risk of creating a market that is designed to fail.

5. As currently drafted the Bill could also result in uncertainty for current and potential market participants. This will discourage market entry, as companies will find it harder to weigh up risks and rewards, making it more difficult for incumbents to plan properly for market opening.

Provided below are further details on each of the areas that we believe need to be addressed:

Level Playing Field

6. A level playing field: (1) encourages new entrants to the market; (2) prevents new entrants to the retail market being discriminated against; and (3) ensures a fair, transparent and competitive market that delivers benefits to customers and the economy.

Separation

7. The single most important measure to ensure that a level playing field exists in the market is the separation of the retail and wholesale arms of the incumbents. This protects new entrant retailers from anti-competitive behaviours such as information sharing or preferential treatment between an incumbent’s wholesale and retail arms. It also allows wholesalers to focus on delivery of their core business areas. In Scotland, this focus has led to substantial improvements in Scottish Water’s performance, to the benefit of household customers as well as non-household ones. Separation lessens the need for intrusive regulation, as making interactions visible will remove the need for complex rules to ensure discrimination does not happen. Finally, separation creates a situation where all retailers, whether incumbent or new entrant, operate under the same rules, as laid out in the industry codes.

8. Although legal separation is not under consideration, much the same effect can be achieved through full functional separation, which must include the separation of IT systems. Anything more limited than this is unlikely to produce the desired results. We therefore believe that the Bill should instruct Ofwat to secure a sufficient degree of separation between the incumbents’ wholesale and retail arms.

Discrimination

9. The Bill currently places a duty on Ofwat to secure that no undue preference or discrimination is shown by the incumbents towards their own retail business, other incumbents, or new entrants. We believe that in order to ensure correct behaviour in the market, and to create a level playing field, the Bill should be amended to include a statutory duty on incumbents to ensure they show no undue preference or undue discrimination. This should result in greater self-policing by market participants, rather than requiring an increase in the regulatory burden.

Access Agreements and Charging Guidance

10. Access agreements will govern the terms and conditions of supply between an incumbent water and sewerage company and a retail water supply licensee or retail sewerage licensee.  Charging guidance will govern the amount and types of charges that may be imposed under these agreements. Together access agreements and charging guidance should create a fair and transparent market, encourage competition and ensure that new entrants to the retail market are not discriminated against. 

11. The current system of negotiated access, whereby a retailer must negotiate a separate agreement for every customer they want to sign up, has been a significant obstacle to competition up until now.  The wording of the Bill suggests that access agreements will continue to be negotiated between incumbents and retailers.  It also states that Ofwat may issue one or more codes in respect of these agreements. We believe that the Bill should be amended to ensure that Ofwat must produce codes that establish: a standard form access agreement; the process for agreeing access and a process for how access agreements will be varied or terminated.

 

12. On charging guidance, the Bill creates a complex set of rules whereby Ofwat must issue rules about charges that may be imposed by an incumbent under the agreements above, but may issue rules about charges schemes that incumbents use to cover services provided to customers. We believe that this mix of powers could lead to a degree of confusion, and that to ensure transparency and consistency the Bill should be amended so that rules must be issued in relation to all types of charging scheme. In addition, rules for access agreements must require the publication of wholesale prices and establish the retail margin.

Individual Charging Agreements

13. Individual charging agreements (also known as special agreements) are agreements with customers that fall outside an incumbent water or sewerage company’s charging scheme under section 142 of the Water Industry Act 1991. Currently, Ofwat requires information to be provided by incumbents about these and regulates them through licence conditions and related guidance. The Bill creates a statutory duty for incumbents to notify Ofwat of such agreements, but we believe that it must go substantially further, in order to prevent an incumbent using more advantageous terms to tie up its most valuable customers on long-term deals. There should be a ban on any new agreements of this kind, except where the arrangement can be proved to make a difference to the wholesaler’s cost to serve. This would mirror what happened in Scotland, where it was considered important in establishing a level playing field.

Retail Margin

14. A further issue is that the Bill does not explain how a retail margin will be provided for in individual charging agreements. Sufficient retail margin is essential for competition and delivering benefits to customers, but the non-standard nature of individual charging agreements means that the calculations to provide a sufficient margin may be complex. For this reason, the Bill should be amended to place a duty on Ofwat to determine how wholesale and retail prices should be calculated for any such agreement.

Exit

15. The issue of exit remains politically contentious but it is worth repeating that no market can work as effectively as possible if inefficient participants are prevented from exiting. In addition, leaving out exit will make it harder for the market to achieve the economies of scale that are necessary for retail, and may push incumbents towards unnecessarily complicated ways of leaving the retail market, either through financial engineering, or white-labelling joint ventures. Both of these will make the regulator’s job much harder. As mentioned above, the evidence from Scotland shows that allowing incumbents to focus on what they do best will result in efficiencies that will benefit households and protect them against any negative impact. Therefore, we believe that the Bill should include provisions to allow incumbents to exit the market in an orderly fashion, with the necessary safeguard of approval from the Secretary of State. For background, please see a recent article published by Simon Less for Policy Exchange on the issue of exit: http://www.policyexchange.org.uk/media-centre/blogs/category/item/government-should-cease-requiring-water-companies-be-vertically-integrated

Conclusion

16. While this Bill goes a long way towards establishing th e conditions necessary for a successful retail market, it nevertheless has significant omissions, creating a major risk that the desired outcome will not be achieved. We believe that the measures outlined above are vital to ensuring that the rules of the market are transparent and fair, and that a true level playing field will exist for all participants. Without these conditions, the market will not deliver the anticipated benefits.

December 2013

Prepared 13th December 2013