Water and sewerage retail competition in Scotland

Transcription

1 Water and sewerage retail cmpetitin in Sctland

2 Water and sewerage cmpetitin in Sctland All nn-husehld custmers (every business and public sectr rganisatin) can chse wh supplies their water and waste water services (including trade effluent) regardless f the custmer s size r lcatin Scttish Water cntinues t perate the netwrk f pipes, resurces and treatment assets Scttish Water s retail activities (t nn-husehld custmers) are carried ut by a separate cmpany, Business Stream New entrants cmpete with Business Stream, purchasing whlesale services frm Scttish Water at regulated prices and prviding retail services t custmers Retailers ffer value added services t custmers (ften reducing the ttal bill) as much as ffering lwer tariffs Self-supply licences are available t nn-husehld custmers, allwing them t purchase whlesale services directly

3 Water and sewerage cmpetitin in Sctland There were a number f reasns fr pursuing retail cmpetitin: Custmers wanted chice: Meeting custmers expectatins is imprtant if the level f charges is t be seen t be legitimate. Rle f retailers: Retailers can maximise custmer benefit by champining the custmers interest in their interactin with the whlesaler. Efficiency: The fcus n areas f cmparative cmpetence was likely t increase efficiency. But t achieve these gals we had t: Ensure access was regulated, nt negtiated: New entrants d nt need t negtiate terms f access individually with Scttish Water. Ensure there were n lsers: Intrducing cmpetitin had n adverse impact n prices t custmers (whether cntestable r nt) r n service standards. Recgnise that cmpetitin is a means nt an end: Cmpetitin is nt an end in itself, but is the best means t achieving value fr mney fr custmers alngside envirnmental, public health and ther gals.

4 Water and sewerage cmpetitin in Sctland As a public crpratin (and n verall hlding cmpany) the 2005 Water Services (Sctland) Act required the separatin f Scttish Water s retail activities Business Stream the retail arm f Scttish Water was established as a whlly wned subsidiary in Nvember 2006 Legal separatin was easier than unpicking the statutry duties placed n Scttish Water (which has n licence). Prvisinal licences were granted in Nvember 2006 Permanent licences were granted in January 2008 after assessment against three tests (in additin t nrmal licensing criteria): Business peratins are demnstrably separate Business Stream can take decisins independently There was a level playing field fr cmpetitin between Business Stream and new entrants There is a published Gvernance Cde (which new entrants were able t, and did, influence). This ensures that decisin making in each activity is discrete and des nt favur the ther Grup activity. Ring fencing arrangements between Business Stream and Scttish Water are established by licence and the Gvernance Cde Crss-subsidies are prhibited Intra-grup cntracts require Cmmissin apprval Business Stream als has three special licence cnditins Charges must be published Charges must be cst-reflective Gvernance arrangements independence frm Scttish Water, gvernance is thrugh hlding cmpany ACHIEVING ARM S LENGTH OPERATION (WHETHER THE WATER COMPANY OPTS FOR SEPARATION OR NOT ) WILL TAKE TIME-BUT IT IS ESSENTIAL TO THERE BEING THE LEVEL PLAYING FIELD WHICH IS A PRE-REQUISITE OF AN EFFECTIVE COMPETITIVE MARKET

5 Water and sewerage cmpetitin in Sctland Frm the beginning we sught t adpt a cllabrative apprach... The first step was t agree a definitin fr retail activities. It may seem bvius nw, but we defined retail as all thse activities which tuch the end custmer. The devil is in the detail, hwever, in designing prcesses that wuld wrk fr new entrants and were cnsistent with the n-ging effective peratin f the whlesale business The Cmmissin, Scttish Water, the Scttish Gvernment, ptential new entrants and even interested parties wh did nt intend t enter the market all wrked tgether as members f the Licensing Framewrk Implementatin Grup. This Grup was independently chaired Withut the active cperatin f the members f this Grup, it wuld have taken even lnger and been even mre difficult t implement the retail cmpetitin framewrk successfully The Grup agreed a wrkable plan, with a clear date fr market pening. This helped maintain a single-minded fcus n delivery fr all parties It als meant that new entrants culd plan and custmers were clear abut when chice wuld becme available t them

6 Water and sewerage cmpetitin in Sctland The result was that rles and respnsibilities were well defined and agreed by all market participants. Whlesale (Scttish Water) Operates the publicly wned resurces, treatment and netwrk assets Retains respnsibility fr drinking water quality and envirnmental standards Manages trade effluent cnsents Retail (licensed prviders) undertake all custmer-facing activities, including Billing Value adding services such as water audits, grey water harvesting and autmatic meter readers Custmer enquiries Liaisn with the whlesaler The Central Market Agency Maintains the central custmer register, with all cnnectin and charging infrmatin Registers custmer switches between licensed prviders Calculates whlesale charges based n the custmer s cnsumptin

7 Water and sewerage cmpetitin in Sctland The market framewrk has a number f elements - the develpment f each element invlves at least tw f whlesaler, retailer, regulatr and custmer Operatinal Cde sets clear accuntabilities fr situatins where a custmer needs t apprach its licensed prvider fr a service that is Scttish Water s peratinal respnsibility: New cnnectins Metering peratins Trade effluent cnsents Custmer enquiries and cmplaints Emergency handling Frm 1 April 2012, new retail activities will be included in the market, including: trade effluent cnsent management; new cnnectins and discnnectins and the fitting f new meters. Frm 1 April 2013, repairing and replacing existing meters will als becme a retail activity Market Cde sets ut the gvernance rules fr the market, and the prcedures fr settlement, payment and registratin. It psitins the CMA as the settlement and registratin hub fr the market Whlesale services agreement: a template n which new entrants can cunt if they are unable t negtiate smething better Discnnectins Cde: sets ut the rules fr discnnectin Gvernance Cde: sets ut the rules fr separate gvernance f Business Stream and Scttish Water in rder t demnstrate that the playing field is level

8 Water and sewerage cmpetitin in Sctland Fr the framewrk t be successful, a slid fundatin is required. This requires that the interest f all custmers are prtected. Default tariffs and standards f service ensure that n custmer is wrse ff than they wuld have been... Licensed prviders bear a universal service bligatin they cannt refuse t serve any custmer wh requests the default services at the cmmn default tariff (agreed by the Cmmissin and cnsistent with the Determinatin f Charges) Default tariffs are set at the level Scttish Water wuld have charged if cmpetitin had nt been intrduced This prvides an imprtant safety net n custmer can be wrse ff because f cmpetitin Gegraphical harmnisatin f charges Charges cannt vary between custmers just because f their lcatin Nn-discriminatin Licensed prviders cannt shw undue discriminatin between custmers within the same class Prvider f last resrt Where a licensed prvider exits the market, custmers can switch t anther licensed prvider Outging licensed prvider (r its administratr) can sell the custmer list In the last resrt, the CMA allcates custmers amngst the ther licensed prviders default tariffs and services apply

9 Water and sewerage cmpetitin in Sctland The licence prcess is quite straightfrward... Applicants must demnstrate Knwledge, expertise and experience Business acumen and financial viability A key factr is that retailers have t pay whlesale charges in advance, s there is n need fr extensive credit checks (which culd quickly becme ut f date) in rder t prcess the applicatin We have develped a tailred apprach such that even a cmpany with n trading histry can successfully enter the market The applicatin prcess includes pprtunities fr interested parties t make representatins t the Cmmissin n the applicant s suitability - as such it takes abut six weeks t cmplete the prcess

10 Water and sewerage cmpetitin in Sctland There are numerus pprtunities fr new entrants t prvide specialist fferings Departures frm standard whlesale charges (sectin 29E) Where a custmer has dne, r agreed t, smething which reduces Scttish Water s csts Scttish Water may apply t the Cmmissin fr a departure frm the charges scheme This prvides ptential t uncver details f Scttish Water s csts and t intrduce sme cntestability int the whlesale business Specialist licences Fr retailers wishing nly t serve custmers with a sectin 29E departure Universal service bligatin lifted Self-supply Fr custmers wishing t prvide their wn retail service

11 Water and sewerage cmpetitin in Sctland There were fur substantially new, and time-cnsuming, activities... Develping whlesale charges These needed t reflect whlesale cst drivers and then be averaged fr each class f custmer acrss Sctland They set the prices Scttish Water may charge t retailers fr its services, i.e. the prvisin f water and sewerage services and the remval f trade effluent We had t ensure that the grss retail margin (i.e. the gap between the whlesale and retail charge) was apprpriate fr each class f custmer. The prprtin f a custmer s bill represented by retail csts is much higher fr smaller custmers than it is fr larger custmers (in percentage terms an rder f magnitude different!) We cncluded that whlesale charges included fixed, capacity related and vlumetric elements But retailers may achieve lwer whlesale charges if they lwer Scttish Water s csts Allwing fr changes in retail tariffs The retail tariffs which are apprpriate t a class f custmer may be different in a cmpetitive market This culd happen because cst items like bad debt may be skewed t particular categries f custmer (fr example smaller/micr-sized businesses), but at a default level it prevents discriminatin against certain industries r lcatins (althugh there may ultimately be less discunts available t such custmers) The csts f retentin r custmer acquisitin may be quite different acrss different categries f custmer

12 Water and sewerage cmpetitin in Sctland There were fur substantially new, and time-cnsuming, activities (cn t)... Imprving market and custmer infrmatin Each cmpetitive utility market has experienced data quality issues These can surrund items as basic as names and addresses (differences, fr example, between site addresses and billing details) Retailers are unable t rely n lcal peratinal experience (where is the meter lcated?); what services are prvided t a custmer?; what services is the custmer billed fr? There may be many different types f meter (five figure reads r six figure?) Dealing with vacant premises and changes in ccupancy Muddling thrugh is nt an ptin if there is t be a level playing field! This is an issue in which we shuld have invested mre time and resurce as we were preparing fr market pening. It has t be the respnsibility f the water cmpany and sufficient time has t be allwed fr. Establishing Market Settlement and Registratin Systems The apprach needs t be cllabrative as all market participants have t buy int the settlement systems The settlement and registratin systems shuld be separate frm the incumbent whlesaler- in rder t reassure that the playing field is level They need t be cnsistent with the way in which the whlesaler perates its business The lead time in establishing the systems is substantial (just under tw years in Sctland- despite having used an expedited tender prcess) There is scpe fr t much cmplexity and fr substantial csts t be incurred. Our cntract received bids which were in excess f 5 times the winning bid Quality staff need t be recruited t perate the systems

13 Water Industry Cmmissin fr Sctland First Flr, Mray Huse, Frthside Way, Stirling FK8 1QZ E: T: +44(0) Fllw us n