Designer water

Paul Witton-Dauris spells out the choices facing those grappling with the design and governance of the competitive water market

More than a year after the government issued its Water for Life white paper, and around six months after the draft Water Bill was published, the Department for Environment, Food and Rural Affairs (Defra) has assembled a high level steering group to plan the implementation of market reform proposals. While there is some uncertainty about proposals for upstream competition, many stakeholders accept that full business retail competition will happen in England in 2017, and are now looking to the steering group for decisions on how this will work.

Group members include senior representatives from the Defra, the Welsh and Scottish Governments, Ofwat, Wics, and water companies. They face critical choices on how the new retail and upstream markets should be designed and governed. Fortunately, while there are some unique characteristics of the future England water market, these decisions can be informed by experience from other functioning utilities markets, including gas, electricity and the retail water market in Scotland (see box, Model markets).

The market’s design needs to accommodate a number of factors that the government has proposed, namely:

· competition in both retail and resource ­management;

· the introduction of competition in both water and sewerage markets;

· no requirement for legal separation between retail and wholesale operations;

· different timelines: retail competition is proposed for April 2017 – competition in resource management may take longer;

· encouragement of increased water trading between companies;

· linkage of the English with the existing Scottish retail market;

· the possibility that the Welsh Government may subsequently decide to extend competition;

· continued operation of the inset appointment regime for existing customers in England and for new customers in Wales.

In addition, the market design will need to reflect key regulatory decisions to be made regarding: the classification of existing water company activities into retail and wholesale; the definition of eligible customers; compliance rules and a level playing field for new entrants; and structure and rules governing access charging. On this last point, the draft Water Bill removes the existing cost principle basis for calculating access charges. The degree of complexity regarding settlement and invoicing will be heavily influenced by these decisions.

As a priority, the group needs to develop a vision for the design of the market both in terms of its ­component parts (retail, wholesale, resource management and trading) and how these fit together as a coherent overall model. Once a vision is developed, early decisions will need to be taken on important elements such as registration and customer switching (the key decisions required are listed in the box, Design decisions).

Linked to the vision for the market design are related choices regarding the governance of the market. Again, other markets can inform the choices facing market players and regulators. Most other markets feature: licences for both incumbent players and new entrants; central codes setting out the rules of the market, services provided and technical specifications such as processes, data structures and data exchanges between participants; and legal agreements where bilateral services are provided between market parties.

In terms of the England water market, there are a number of decisions required at an early stage (these are set out in the box, Matters of governance).

Clearly, key choices on market design and governance face the group. Features of the water market in England will be unique, but there is much to learn, good and bad, from earlier utility market deregulation. Throughout it will be important to remember that the new market is there to deliver benefits for customers, so it is essential that customers’ needs are at the heart of the new arrangements.

Paul Witton-Dauris is business development manager, water, at Gemserv

Model markets

· GB gas: largely centralised for retail with a central metering point

database; bilateral trading model with centralised settlement.

· GB electricity: retail market built on regionally-based distribution businesses, with

14 metering point databases, linked with a national portal and database; bilateral

pan-GB trading model, replacing separate regimes in Scotland, and the England

& Wales Electricity Pool. Central settlement for electricity sourcing but localised

distribution invoicing.

· Scotland water: retail only, with centralised database and settlement calculations;

wholesale invoicing from Scottish Water.

· Elements of the existing Water Supply Licensing regime in England and Wales,

which can provide insights.

Choices facing the group include:

Registration and customer switching: one central database and operation or a company-based approach?

Settlement: one central database and operation or company-based?

Trading: national trading arrangements or bilateral trading?

Metering: competition or monopoly arrangement?

Design decisions

· A consistent numbering system is needed. How should this be structured

for each water company – separate numbers for water and sewerage, based on

metering points, a central database?

· How and when should these be communicated to customers – on customers’ bills?

· Can the existing Scottish or English change of supplier process be adapted?

· Must customers switching supplier be metered or will there be a profiling system

for unmeasured customers?

· Who can supply change of supplier reads?

· How can consistency in opening and closing reads be assured?

· How can confidentiality of commercial information be secured?

Matters of governance

· Will retail, wholesale and trading activities be governed under one over-

arching code or separate codes for each functional area?

· Will there be a central market body or separate bodies for retail and wholesale?

· What will be the legal status and ownership of such bodies? Will rules be enforced

by legal agreement or by licence obligations?

· What will the roles of customers, governments, regulators, water companies and

new licensees be in the governance of the market?

· Given the intention to operate an Anglo-Scottish market, will there be one

common code?

· Can the electricity governance model with multiple distribution businesses be

drawn on to meet the circumstances of the water market?

· How will metering operate; what role will meter agents play?

· What will market entry requirements be? Will there be assurance and testing to

ensure all can inter-operate and deliver quality service for customers?

· What services will exist and at what service levels and charges?

· How will issue resolution and change management operate?

This article first appeared in Utility Week’s print edition of 15th February 2013.

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