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8 | 8TH - 14TH MAY 2015 | UTILITY WEEK Interview that the market opened in Scotland, there were a number of restrictions that were placed on us as the incumbent in order to be able to ensure that new entrants had the comfort that they were able to compete on a level playing field. From our point of view we are keen to make sure that those rules of engagement are the same in England as they were for us as an incumbent." Any specific examples? "In Scotland we have a number of unique licence conditions that don't apply to anyone else – for instance we have to publish all our tariffs within a set number of days. That's one key area. "Equally, we had to be able to demonstrate that we were separate from Scottish Water – I know Ofwat is not advocating full separation in England. But I think there is a way to go to be able to demonstrate separate funding, separate governance for the retail parts of an incumbent's business." While Dow doesn't go as far as to say she disagrees with Ofwat's decision not to require full separation of domestic and non-domestic water businesses, she does comment: "What we found in Scotland, was that having that separation was actually a positive thing for Busi- ness Stream because it very definitely drove a different culture in our business compared to Scottish Water. "I think that, by its very nature, separation makes it easier to demonstrate that we are different from Scottish Water and that we get no benefit from being associated with Scottish Water." Linked to Business Stream's questions about the fairness of the new market for new entrants, is a desire to see standardisation of industry processes across geographies. This is required to reduce the complexity that Dow says will be inherent in a market involving 18 wholesale providers, compared with Scotland where there is just one. "Eighteen wholesale providers means 18 structures for charges and at the moment there are no plans for harmonisation. So, in effect, you will have one set of wholesale structures in one region of England compared to another region. Equally, the different levels of service standards that exist between the different geographies – as far as I'm aware, at the moment, there are no plans to harmonise those." What problems might this cause? "So – in Scotland, we are very reliant on Scottish Water at the moment for replacing a meter. We will be equally reliant on the cur- rent wholesale incumbents in England, but they all have very different service standards. "It may take several days to exchange a meter in one region but it may take twice as long in another region." The disparity will make processes difficult to manage internally for companies working with non-domestic customers across regions, but equally it will make for an inconsistent and potentially frustrating customer experience for multi-site users. Finally, margin – an essential element to get right if competition is really going to work. Business Stream is by no means the only party to express doubts about the scope of the proposed margin in England – the net profit is set at just 2.5 per cent 4 per cent – to spark the market. "The most important thing to remember, at the end of the day, is that the only point of opening a market to competition is to benefit customers," says Dow. "If that margin is not high enough, new entrants will not come in and the customer will not be able to benefit." While Dow allows that it is too early to make "a judgement call" on the effective- ness, or lack thereof, of the English retail margin, she does say, "The early infor- mation that we've had through the final determinations points to the margins being significantly lower than they are currently in Scotland. And that does cause us concern." That said, the margins allowed to players in the Scottish water retail market have not always been as generous as they are today. Since 2008, the retail margins prescribed by the Water Industry Commission for Scotland (Wics) have risen from around 3 per cent to around 7 per cent. Dow explains that this is due to an evolving definition for retail and wholesale activities north of the border, with incrementally more activities being allocated to the former. This has led to a higher allowance for retail costs and, therefore, higher margins, she says. We can expect similar, if not more pronounced, movement in the allocation of retail and wholesale activities in England – at the discretion of the regulator – according to Dow's logic. The chief executive – formerly finance director – explains that dividing domestic and non-domestic markets requires a company to "take its entire cost base and split those costs down into how much is associated with wholesale versus retail. "That is an incredibly difficult task to do for the first time. Particularly if you are not asking the businesses to completely separate, because invariably there will be an element of judgement that is applied about how those areas are split." Dow clearly has a ready stream of knowledge and advice on the lessons that Scotland can provide to those developing the English non-domestic market structure. But there are many who would point out that the Scot- tish model for water competition is far from perfect. The current dispute over the awarding of a public sector contract to Anglian Water places a clear question mark over the integrity of market forces in Scotland. And although the number of companies operating in the market has grown significantly since 2008, Business Stream – the incumbent – still holds more than 90 per cent of the market share. While Dow is unable to comment on the Anglian Water case at the moment for legal reasons, she is quick to refute that Business Stream's retention of a strong customer base is indicative of weak competition or customer inertia. "We have always encouraged competition, and yet, seven years in we are still the dominant player. To me, that simply says we are getting something right. "I think customers chose to stay with us because they're getting great value and a great level of service." Thames Water Commercial Services thinks differently. In April, the firm announced its intent to double its Scot- tish customer base – it currently services 130 businesses across 600 sites – by undercutting the incumbent by as much as 20 per cent. Dow is unperturbed by this bold ambition. "The maximum margins available in the market are only between 20 and 26 per cent. That's the maximum price range we've got to operate within. "I don't want to get drawn on what Thames's strategy is," she concludes. "All I would say is that we are comfortable that we continue to offer great value to customers and that we are very competitive on price." "When the market opened in Scotland, there were restrictions placed on us as the incumbent. We are keen that those rules are the same in England"