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Utility Week 5th June 2015

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UTILITY WEEK | 5TH - 11TH JUNE 2015 | 15 Policy & Regulation Research F rom 1 April 2017, non-household water customers will be able to choose their water supplier. Aer initial opposition from some parts of the sector, the reality of non-household competition has now been accepted and companies are working with the regula- tory authorities (Ofwat, Open Water, the Department for Environment, Food and Rural Affairs (Defra) and the Drinking Water Inspectorate (DWI)) to prepare themselves for the opening of the market. It's a big job. Introducing competition, even for a relatively small subset of custom- ers, necessitates far-reaching reform of the existing incumbent businesses. Water com- panies have to split out their wholesale and retail operations so their own retail arms and new entrants to the market can transact with the wholesale business on equal terms. The regulator has not mandated compa- nies to formally split into two new legal enti- ties – though it has hinted heavily that it may be easier for them to do so than to attempt to operate Chinese walls in the existing busi- ness. Moreover, work on the market structure has been delayed, with certain crucial deci- sions about how and when companies can exit the market yet to be taken. Methodology Utility Week, in association with CGI, felt this was an opportune moment to understand companies' approach to competition, their operational plans, and their hopes and fears for the market in detail. We have focused on the nine water and sewerage companies (WASCs) that make up the English market. This is no reflection on water-only compa- nies (WOCs); indeed, their plans for market opening are wide-ranging and represent some of the most innovative thinking in the sector. However, for manageability, and in recognition of the concerns WASCs share, we have focused on WASCs at this stage. Utility Week approached all ten WASCs in England and Wales requesting a confiden- tial interview with the chief executive with regard to market opening, in early spring 2015. Six of the English WASCs agreed, with Utility Week conducting in-depth interviews under the Chatham House Rule with the chief executives of four of the WASCs, and senior executives at head of wholesale or head of retail level at a further two. Utility Week also conducted confidential interviews with a further five organisations with a cen- tral role in the market. The questions set for the interviews were developed in consulta- tion with an independent market research firm. The findings were confidential to Utility Week, with the responses given here in an anonymised and aggregated form. Policy background The opening of the water market was enacted in legislation in the Water Act 2014. The reform serves a twofold purpose: first, to give business customers, who oen have multiple sites and thus multiple water retailers, a bet- ter service; and second, to improve efficiency and service across the water industry. The reform was first mooted in the 2009 Cave Review. Professor Cave argued that lim- ited competition (for customers using at least 50 megalitres of water per year) in the sector hampered innovation. He argued that in the absence of competition, the only driver for efficiency was economic regulation by Ofwat. The Cave Review said: "Over the long term, ongoing customer gains and environ- mental improvements are driven primarily by innovation. This could be the result of competition in the market or for the mar- ket, market-like instruments or regulation encouraging companies to compete, either individually or in partner ship, for business." Retail exit While the government initially planned to refuse companies the option to exit the non- household retail market, it changed its mind at the 11th hour, aer an intense lobbying Countdown to competition Utility Week, in association with CGI, has produced an exclusive research report on preparations for market opening. Read an extract below. effort, as the Water Bill passed through the House of Lords. The option to exit the market raises a number of questions about how and when companies can leave, which have yet to be answered. A consultation by Defra this autumn is expected to clarify the process. The Scottish market Competition for non-household customers was introduced to the Scottish water market in 2008. The experiment has been broadly judged a success by the regulators and water companies both sides of the border, with 18 suppliers – including Business Stream, the incumbent – now licensed to operate in the market. The Scottish example was influential in persuading politicians and regulators to introduce competition in England, and both the Scottish regulator, the Water Industry Commission for Scotland (Wics) and Busi- ness Stream have been active in discussions about the market south of the border. Context While market opening is of undoubtable sig- nificance to all UK water businesses, it is not happening in isolation. English water com- "The big shareholder value is still in the regulated business, around delivering AMP6.That dwarfs anything we might do on business retail" Brought to you in association with

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