Utility Week

Utility Week 18th October 2013

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Comment Chief executive's view Alan Sutherland, Water Industry Commission for Scotland (Wics) Glasnost good for regulation Provided the process is transparent, customers are empowered, and the benefits of outperformance can be shared, detailed dialogue b etween the regulator and those regulated is good for all parties. T here are many lively, ongoing debates about utilities – how they should be regulated, how further competition should be introduced, have market experiments failed, should there be more state intervention… Unfortunately, however, there seems to be much less attention on how best to promote the customer interest in the round, in both the short and long term. This increasingly polemic debate suggests there is a growing need for companies, regulators, financers and governments to understand and respect each other's roles. Without the detailed discussion necessary to balance the interests of all those parties, outcomes for customers and the environment may be far from ideal from an economic and wider sustainability perspective. Furthermore, any lack of political consensus will only delay capital expenditure or increase its cost. Regulators tend to shy away from detailed dialogue with those they regulate, fearing accusations of regulatory capture. But is such a fear justified? In my view it need not be, providing the process is transparent, customers are fully empowered, and mechanisms are in place genuinely to share the benefits of outperformance. The Glas Cymru model is an interesting case in point. This not-for-dividend, public interest but private sector company appears to engender transparency, stability and customer acceptance. It might have been thought that the absence of profit-maximising shareholders, and accountability only to customers through members essentially appointed by the board, could have resulted in an unduly cosy consensus – particularly as Ofwat cannot set the company as tight a budgetary constraint. But the fact is that customers in Wales do now receive better value for money, and Glas Cymru is able to reduce its net debt while also providing continuing customer rebates (the only company to have done so). Implementing a Glas Cymru-like structure in Scotland is not an option. However, we wanted to achieve a transparent governance framework, one that would encourage dialogue and build on the kind of customer involvement that exists in Wales. 6 | 18th - 24th October 2013 | UTILITY WEEK Our role is to set charges that are consist- Scottish Water. This dialogue started in earn ent with "the lowest reasonable overall cost" est when we shared our initial thoughts of for Scottish Water to deliver the Scottish gov- what might be possible for the next regulatory ernment's objectives for the industry. The control period with Scottish Water and sought key word here is "reasonable", for it seems its response. We then published our methodolto imply a balance between the interests of ogy, which we had discussed with stakeholdg overnment, the company and customers. ers over many versions. In between, Scottish Government has many potential interests: Water published its 25-year strategic plan, customers, timely delivery of environmen- then a series of service improvement reports. tal improvements and the wider economy. Once the business plan is published this Customers want both value for money and month, the forum will start its discussions investment in the environment, with Scottish Water. We will pubin improving resilience, and in lish a series of papers identifying addressing leaks. Scottish Water what we see as the strengths and rightly wants to feel it can realistiweaknesses of Scottish Water's cally meet the challenges set and be plan and setting out our views on recognised for its performance. the range of regulatory inputs conThe current Strategic Review of sistent with 'the lowest overall cost' Charges includes all the elements we of delivering ministers' objectives. had when setting prices previously, The aim is to allow the forum but with two main differences. to negotiate with Scottish Water The first is the establishment of All stages on a level playing field and to the Customer Forum. Chaired by a reach informed agreement with it former Scottish government min- of the price on a reasonable outcome to the ister, the forum includes house- review now price review. If the forum agrees hold and retailer representatives. take place in an outcome for customers and Its role is to interpret the word the open the environment that is consistent "reasonable". with our published range of reguThe second change is that all stages of the latory inputs, their agreement would form price review now take place in the open. the basis of the draft determination. As such, At previous reviews, in best "sherpa" the forum is fully motivated to achieve the fashion, we assessed what might be possible best possible outcome for customers. based on our analysis of Scottish Water's perImportantly, Scottish Water also has the formance, the performance of other compa- opportunity to know what will be required nies, and the external environment. In doing of it in the next regulatory control period – a so we would take account of emerging pri- full year before it starts. This is good for the orities from the government and the drinking company, the supply chain and customers. water and environmental regulators. But we Our new regulatory framework is characwould not have shared this preparation with terised by a "trust but verify" approach. The Scottish Water. prospects for a successful outcome appear Scottish Water's sherpas would then to be very good. It appears that customers in develop its business plans and propose an ini- Scotland may end up paying less and getting tial, then revised price profile. Next we would more than seemed likely at the start of the proanalyse the revised plan in some detail, then cess. Our benefit sharing mechanism further publish an alternative version in a draft protects customers and allows Scottish Water determination. Further diplomatic ping-pong to enhance its reputation with its customers. ensued, leading to a final determination. Increased dialogue, transparency and the What has already become apparent is the addition of customer challenge – in short, impact our two changes in approach have had Glasnost – seem likely to achieve a better on the level of engagement between us and result for all parties.

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