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The Topic: Competition UTILITY WEEK | 18TH - 24TH NOVEMBER 2016 | 13 W holesale competition in the water sector is coming. Not only is Ofwat promoting it as part of its Water 2020 programme, but the sector itself is already adopt- ing market-based and competi- tive solutions to deliver better upstream solutions. Sludge and wastewater, tipped as the next big market by the regulator's chief execu- tive, Cathryn Ross, is set to see significant changes from the traditional vertically integrated model. Severn Trent head of strat- egy and regulation Tony Bal- lance said competition in sludge treatment is likely to be formally introduced before 2020. "There is scope for commercial sludge trading, and we don't have to wait until 2020," he said. However, he added, introduc- ing sludge competition requires key changes including: fair access for appropriately licensed parties to compete effectively; appropriate commercial and pricing practices; a level playing field for all parties; and mak- ing sure the right information is available. Ofwat's Water 2020 plans encourage the development of markets, and Ross said "they create options, they enable choices, and those choices reveal information". "We see scope for new mod- els, with companies potentially choosing third party solutions that include designing, build- ing, owning and potentially also operating new infrastructure," Ross concluded. Wessex Water chief execu- tive Colin Skellett agrees that competition will create oppor- tunities, but goes further saying it is "essential" in order to drive forward the change the sector needs. "We are at a crossroads. We can either keep doing what we have been doing, but it won't get us there, or we can do some- thing different," he said. "An industry driven by mar- kets and competition is the only way we'll get the amount of innovation we need to do things customers want, and [push us] to do the things we need to do to meet the challenges of bills going down, not up." Competition is coming, and it will shake up the industry, changing the face of the com- panies within it, as well as how they operate. However, the com- panies are ready for it and will- ing to embrace it. Water wholesale competition The introduction of competition to the wholesale water market sector will challenge the fundamentals of incumbents' water businesses. T he non-household water retail market opened in April 2008. Customers across Scotland, from the largest industrial users to small businesses, are benefitting from lower charges and better levels of service. Many retailers offer value-added services to custom- ers and, perhaps contrary to initial expectations, some of the larger savings to business have come from retailers identifying the scope for reductions in the use of water or wastewater services. These reductions had two unanticipated consequences: they have released capacity for new connections and they have contributed to more sustainable management of water resources. What is clear is that all retailers have a clear incentive to work with their customers. The non-household retail market has developed significantly over the past three years. There are now over 20 licensed providers. Business Stream, the original incumbent, has seen its market share fall to around 50 per cent. Wics has responded by reviewing the mar- ket framework in Scotland. Our aim is to ensure that all customers, household and non-household, trust and value the sector. • We introduced a market audit that looked at the processes of licensed providers and their compliance with these processes. This built on the audits commissioned by the Central Market Agency. • We encouraged market participants to work collaboratively to develop a code of practice. • We are working closely with Scottish Water to ensure that we understand the wholesale cost to serve of different classes of cus- tomer across Scotland. • We are in the process of changing the payment terms, both to allow us to simplify further the licensing process and to ensure, in line with our statutory duty, that the activities of licensed providers do not adversely impact Scottish Water. • We are currently consulting on proposals that would raise the bar for licence applicants who have been found wanting in their management of customers. There are three pillars of the Scottish framework that we see no reason to change: Strong governance: Business Stream is ring-fenced from Scottish Water. There is a published governance code that allows new entrants to have confidence of a level playing field. Transparent wholesale trade terms: The terms of trade between Scot- tish Water and licensed providers are published. Fair wholesale tariffs: At market opening, Wics worked hard with Scottish Water to ensure the retail cost to serve of different classes of customer across Scotland was reflected appropriately in the gross retail margin. This required retail charges for trade effluent and drainage to be increased without customers, on average, paying more. This work appears to have been very worthwhile as we have seen different retailers target different classes of customer and we have seen large, multi-site and small customers all change supplier. It is impossible to know with certainty how the opening of the non-household retail market in England – let alone the potential extension of competition to other areas of the industry value chain – will impact the Scottish market. We will watch developments carefully. Our focus will remain on ensuring that the industry is as customer and community-centric as possible. We will take whatever steps prove to be necessary to ensure that Scottish customers trust and value their water industry. "Quite simply we start from the basis we should pursue it where there are clear customer benefits." • Colin Skellett, chief executive, Wessex Water, on domestic competition "Overnight the programme and everyone in it cease to be working on a 'project' and start operating in an as-live environment." • Ben Jeffs, chief executive, MOSL on the transition to shadow market operation Comment: Alan Sutherland, chief executive, Wics "Scotland shows water competition can work for customers."