In the first of four articles based on an extended interview with Waterbriefing at the recent Water Event in Birmingham, Mark Powles, Chief Executive of Business Stream, sets out his views on non-domestic retail competition in Scotland and the prospects for its introduction in England in 2017. 

The articles make for interesting reading and provide a thought-provoking contribution to the wider debate that water industry regulator Ofwat wants to see around the issue of retail competition. Last week Ofwat issued two of its own separate discussion documents focusing on the subjects of a level playing field for the water market and water market governance arrangements. At the Conservative Party conference Environment Secretary, Owen Paterson, sparked some long-term crystal ball gazing with his comment that domestic competition “could come down the road” although it would not be introduced in the Water Bill.

Both Mark Powles’ insightful comments and Ofwat’s own current thinking suggest there is still a long way to go and widely differing views in the run-up to the market opening in 2017.

In this article Mark Powles outlines how Business Stream operates in the Scottish market and looks at issues regarding the need for a level playing field in England, including standardised tariffs.

Mark Powles:

We’ve had a competitive market in Scotland for over five years now and results for customers have been significant. We’ve delivered £35 million worth of water efficiency savings, offered £70 million in discounts and introduced more than 60 new services to the market – so customers have really felt the benefits of competition. Now that the Water Bill is a reality, we’re seeing customers in England engage with us more and more on water issues. This is clearly a positive step for the water industry and an exciting time for us as a business.

Whilst we’re owned by Scottish Water, Business Stream operates as a completely independent company. From a level playing field and governance point of view, we’re a separate legal entity, which has created real transparency in Scotland that i don’t think is quite there for the English market yet.

Q. As you’ve just intimated, you have some issues with the Bill – you want a level playing field, as far as possible, to be created in England and you want the ability for incumbents to exit the market.

Mark Powles:

We very much welcomed the Water Bill in June this year and overall, from a retail point of view, I think that the Bill creates the policy direction for a competitive retail market – however, there are a few areas that I think need to be reviewed.

My main issue is the level playing field. A level playing field ensures that new entrants to the market can’t be discriminated against and helps to create fair competition. In Scotland, we have legal separation of the wholesaler and retailer, and, as a consequence, a level playing field. Whilst this is not mandated in the Bill for England, functional separation would benefit both wholesalers and customers as it would enable the water network companies to focus on the delivery of their core services and drive transparency in costs between the wholesale and retail business.

A level playing field is also created by ensuring that incumbents can’t discriminate against new entrants by favouring their own retail business or by abusing their dominant position. The Bill puts the duty on Ofwat, and not those with the market power, so we believe that further steps are needed beyond the Bill to strengthen the undue preference condition and give retailers the confidence that they will be treated fairly both in terms of price and service.

It’s obviously important that we don’t end up with too much in legislation that has unintended consequences, however it’s vital that, in the absence of separation being introduced in the Bill, that we at least make sure that extended duty goes far enough to create an open and fair market. I’m looking forward to finding out more about how this will work when we have the Bill’s second reading in the coming weeks.

Another issue that I have concerns with is why retailers aren’t being allowed to exit the market. Clearly the Bill is now live but not on statute. The regulator has just launched the PR14 Price Review and a lot of those things will start to shape how we implement this – but exit is still an issue. You’re going to have 21 incumbents who’ll be forced to become retailers and not all of them will have either the appetite, the resources or skills that are required to provide for the customer. Retail is an economies of scale business – so I think there are more discussions to be had on this front in order to ensure customers receive the best level of service possible.

Q: Standardised tariffs – how will it work?

Mark Powles:

The water companies in England are asking the same question. The issue is that where you’ve got a multi-site company – with branches across all regions, different price structures, different prices, different standards available – I, as the retailer, need to take all that noise and create one water bill that the customer can understand.

We’ve created such bills in Scotland, so customers get one electronic bill instead of lots of paper bills - and our online service, My business stream, means that customers can manage their bills 24/7 too. But unless we can get some harmonisation on pricing in England it’s going to be more complicated to do this for customers in England when the market opens in 2017. Complexity equals cost and too much cost will limit market entry and reduce benefits to customers.

Q. That’s a major challenge – so how do you help the customer who wants for example to pay the same lowest standardised surface water charge across all of its sites across the country, regardless of location?

Mark Powles:

Our aim is to provide a seamless customer experience, not just across the various regions in England, but also across the border between Scotland and England. That won’t be easy because different water regions have different investment profiles, therefore their pricing will be different.

If one water company is charging £1 and another 50p, I can merge that together to create one price, but if the charging structures are different, that’s more complicated. So, if some charge fixed costs and a little bit of variable, and others charge by time of day, trying to bring that together into one will be more of a challenge.

We need to accept that England is a big geographic area so the unit costs could be different. What we would like to see is a standardised charging structure for wholesale access that is regulated and consistent across England. That would simplify access for new entrants, and allow for different prices across different areas.

At the moment, we have to negotiate prices with individual incumbents for access to their wholesale services which is time consuming and complex. Getting rid of the current access pricing methodology means that you’ll have regulated wholesale and retail prices, which will be fairer for competition and better for customers.

There is also the big issue of whether there will be enough margin left over for the retailer to justify the cost. As a retailer I want to do great things for customers, but there’s got to be enough margin in it to allow us to do it.

In the next article, Mark Powles discusses issues of cherry-picking and prospects for new entrants.