Utility Week

Utility Week 12 12 2014

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Page 11 of 33

10 | 12th - 18th December 2014 | UtILItY WeeK Interview The part of the programme covered by the delivery partner arrangement has four key areas: work on codes and processes, or the "rules of the game"; establishment and finessing of the market operator; communi- cation and engagement; and maintaining the work plans. Certain other areas – the licens- ing framework, charging, questions of who is eligible to participate in the market – remain under Ofwat's direct control. The obvious question is "why?" Sutherland has an explanation: "Right from the start, there were exchanges of letters between the Scottish government and Westmin- ster about the potential value of having seamless mar- kets in England and Scotland. Clearly there's a market already in existence in Scotland, the white paper made reference to Anglo-Scottish markets and benefits, compa- nies operate on both sides of the border, if you're a multi- site operator you don't really want a different set of rules on one side than on the other. "From a purely Scottish customer standpoint, encour- aging English companies to compete for customers in Scotland has to mean better services and prices for end customers in Scotland. From a Scottish taxpayer stand- point, allowing Business Stream as a public entity an opportunity to compete on a level playing field with com- panies in England has to be good as well." But this is still a pretty unusual arrangement, isn't it? "I don't find anything unusual about it at all," insists Sutherland. "I think it's entirely sensible that there be collaborative working between regulators." He cites co-operation with Ofwat going back decades, and asks "what's the point of reinventing the wheel?" In similar vein, Sutherland bats away questions about costs ("Ofwat will pay costs as they are incurred, no more, no less" from the same special license condition used to fund Open Water to date, with a new budget set to be agreed from April 2015); governance ("we expect to work very closely with Ofwat at all levels"); and what happens to regulation in Scotland while he's busy down south ("it carries on as it is, I'll do that the rest of the time"), before concluding with a grin, "now, I think that's all pretty clear." On to the next thorny issue. Last week, the Drinking Water Inspectorate's chief inspector Jeni Colbourne told Utility Week that opening the market creates "a lot of risk" for consumers and supplies. Sutherland is respect- ful: "The DWI has an incredibly important role, you don't listen to them and any concerns they have at your peril." He says he's not clear what the "concrete issue" is, but that there have been ongoing conversations with the inspectorate and changes made to the plan to accommo- date its concerns on various points. "I understand that there could be a perception that when you have a separation between retail and whole- sale functions then you make conditional risks, I think that is [just] a perception. The reason I say that is even within the current vertically integrated structure, the people who take the call are not necessarily the same people who commission the bit of work or the team who resolve the issue, and they're certainly not the peo- ple who go out and fix the issue, so there are a series of human hand-offs that take place today within a vertically integrated water company and it depends how well man- aged that company is as to how effective those hand-offs are. It's not entirely clear to me what the difference [with competition] actually is." Those two troublesome areas ticked off, Sutherland happily moves on to the real business of the day: the publication of the MAP2 and the subsequent questions that companies must now answer, which he neatly arranges into four headlines. Number one is about creating a level play- ing field. The statutory codes provided for in the Water Act 2014 govern how an appointed wholesale business interacts with a licensed retailer – but do not apply to the ways in which the two parts of a vertically integrated company interact. Therefore, if a company chooses to remain vertically integrated, it will have to work very hard to provide, and be seen to pro- vide, a level playing field between its relationship with its own retailer, outside the statutory code, and competi- tor retailers. One alternative that has arisen from the 11th hour introduction of the option to exit the retailer market is for a company to transfer its non-domestic customers outside its regulatory ring fence, consolidate them with any customers it may win in the competitive market, and operate the whole as a separate company. "Water companies have historically much preferred vertical integration, and water companies have always had a strong culture of compliance. These two things come a little bit into conflict – the more that one stays vertically integrated, the more risks one could be seen to be running with regard to the level playing field." Headline number two concerns the gross retail mar- gin. On Friday, as part of the final determinations, Ofwat will tell each company its permitted gross retail margin for the non-domestic market. The company must allocate that between different classes of customer in a way that both reflects its costs and avoids accusations of margin- squeezing – in other words, not too high and not too low. Companies must also be mindful of the newly com- petitive arena: for example, if a public sector client is paying the same averaged cost of bad debt as other busi- ness customers, when its risk of bad debt is much lower, that opens the door for a competitor to come in and undercut the incumbent by charging a price that reflects the actual risk of bad debt. Headline number three is data. Companies must cleanse their data and prepare it to be uploaded to the market systems in a format compliant with that set out in the MAP. Headline four is about setting up the market opera- tor, and questions about public or private ownership resurface. Sutherland insists the market operator must be a private entity to give it flexibility with staffing and procurement. Three water companies – United Utilities, Anglian and Northumbrian – have helpfully set up just such a body, Industry Market Operator Services Limited, which Sutherland says "is potentially very good news indeed". The next question is about the procurement of the central systems that, if done by a private body, could be either a public or private process. Both options are being explored. It's complicated, technical stuff, and Sutherland is understandably anxious that water companies absorb the implications of the numerous decisions they now have to make. The near-simultaneous publication of MAP2 and the final determinations this week puts them in a good position to do so, as does the final, pragmatic solution to the governance issues around Open Water. As Sutherland bids Utility Week farewell and settles down in his empty office to put the finishing touches to MAP2, 2017 seems very close indeed. Right from the start, there were exchanges of letters about the potential value of having seamless markets in England and Scotland

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