Expert view: Karma Ockenden

“The blueprint’s vision does not assume English water firms will be legally separated into wholesale and retail companies”

Welcome to 2014. It’ll be a big year for water. Aside from the climax of the new-style price review, we can look forward to legislation that, among other things, will open up the retail water and sewerage market to competition.
Good to see then that Open Water, the multistakeholder group set up to facilitate the implementation of retail competition, lost no 2014 time and last Friday (2 January) published a market blueprint. This puts considerable flesh on the bones of the high-level policy currently making its way through Parliament in the Water Bill. It is out for consultation for six weeks, with an updated and extended version due in the summer.
So what kind of market are we looking at? The blueprint’s vision is broadly consistent with the Scottish retail market, which has been operating since 2008. The services on offer to customers and the allocation of activities to wholesale or retail functions are very similar in Scotland and England. A non-discrimination requirement on wholesalers is common, as is the creation of a central register and switching processes administered by a single market operator.
In fact, it is envisaged that all services provided by the Scottish market operator, the Central Market Agency (CMA), will be provided by a new market operator (MO) in England. Its duties will include registration and switching, financial settlement (the MO will determine usage and calculate charges, but billing and payment handling will be managed bilaterally), industry data exchange and market governance.
However, the proposed English market is not a carbon copy of that north of the border. Some lessons have been learned; adjustments made for the existence of a score of wholesalers rather than one; and on a handful of issues, Ofwat and English ministers have simply taken a different stance from the Water Industry Commission and Scottish government. Chief among these is that the blueprint’s vision does not assume English water firms will be legally separated into wholesale and retail companies as Scottish Water was. Separation is not provided for in the Water Bill, though all is not yet lost on that front.
Among the amendments listed as the Bill entered the report stage on Monday (6 January) is the clause: “The Secretary of State may by regulations make provision about the transfer of an undertaker’s assets and liabilities associated with its non-household retail business into a separate company”. This is a sensible clause that could provide for market exit for unwilling incumbent retailers. As it stands, though, the blueprint suggests incumbents with an appetite to win business should set up competitive retail arms to sit alongside their in-area incumbent retail businesses.
Elsewhere, greater scope for specialisation is being built into the English model. Switching will be managed at ‘service type’ level (comprising potable water, non-potable water, foul water, surface water drainage and trade effluent), rather than at the higher ‘service group’ level (for example, water) as in Scotland. Moreover, ‘retailing developer services’ is being treated as a separable service from the retailing of water and sewerage – a bid to encourage competition from outside traditional water industry players.
There will be a variance in the role of the English MO compared with the Scottish CMA. The MO will take on a number of jobs not performed by the CMA, notably responsibility for calculating charges for operational services and passing service requests and notifications between market participants. This, the Open Water document argues, is because there is a degree of inherent centralisation where Scottish Water is the only wholesaler; to lower costs and increase transparency where there are multiple wholesalers, the MO should pick up these tasks.
Finally, on financial settlement, the blueprint proposes payment terms and settlement timelines similar to those of the Scottish market. But Ofwat’s decision that retailers should pay wholesalers for their services in arrears rather than in advance will be a departure. To limit credit risk to wholesalers (and ultimately to household customers), the regulator has proposed retailers will need to have a letter of credit from a guarantor with a minimum investment grade credit rating, or an agreement with a wholesaler to use an escrow account.
With little more than three years to go until business customers can switch supplier, it is great to see the Open Water programme setting out greater detail on how the market will look and work. But the more detail that emerges, the more apparent the far greater complexity of the English market over the Scottish market becomes.
Twenty-odd wholesalers; 20-odd in-area incumbent retailers; say even half the number of incumbent out-of-area competitive retail arms; not to mention any actual new entrants – plus switching at a more specialised service type level. It all looks fearfully complicated, which makes the prospect of retail exit for those who don’t want to play all the more attractive. Fingers crossed for that amendment, and a happy 2014.