I am struck that there is so little focus on the opportunities that could arise from innovation in the water industry relative to what is being discussed in energy. At a recent investor conference, there appeared to be considerable interest in new initiatives that had an energy focus but far less on those suggesting new innovative approaches that could benefit either the water undertaker or its customers. Given that so much of our energy consumption goes to heating water for one purpose or another, such a skewed focus may be to the detriment of both the investor and the end water customer.

The introduction of retail competition has resulted in a much greater focus on meeting the needs of customers and tailoring a package of service appropriate to the individual user. The Section 29E provision, which allows the customer and its retailer to benefit from any initiative that reduces Scottish Water's costs, has not yet been triggered although several market participants are beginning to consider opportunities. In my view, there is a real opportunity for Scottish Water, as the wholesaler, to use the creativity of the retailers and their strengthened relationship with customers to identify opportunities to reduce costs.

Opportunities have been created by the introduction of the retail competition framework but it is now up to market participants to realise the potential. As industry regulator, we will stand ready to make whatever changes are required to ensure that the framework works in the best interests of customers and does not do detriment to Scottish Water’s core business.

Turning to the upstream activities of Scottish Water, our I-cubed initiative is targeted at removing or, at least, reducing regulatory barriers to innovation. This is why we will regulate on a cash, total expenditure basis rather than assess operating costs and capital expenditure separately. It also explains why we will focus on ex-post returns earned rather than setting an ex-ante cost of capital. We also stand ready to work with Scottish Water and its customers to ensure that NPV positive projects with an extended pay-back can be encouraged and appropriately rewarded.

Even a cursory review of some of the innovative approaches being adopted in other parts of Europe would suggest that there is considerable scope for value to be realised from what could be seen (wrongly it seems) as a staid, boring industry. Recovering minerals from sewage, capturing the heat differential between the effluent discharge and the ambient water course, and recycling sewage to create slow-release fertilisers are all examples of initiatives that may prove beneficial both to the water undertaker and to society more broadly.

The onus is on all of us to work together to realise the potential of the water industry.

One of the more telling arguments in favour of a retail competition framework is that customers would be able to deal with a single company. At a couple of my meetings with companies, there was a suggestion that they could join with other appointed businesses to serve and bill these multiple-site customers.

There may well be a Competition Law issue that would need to be considered, particularly as there is a 2003 water supply licensing (WSL) framework. There are new entrants under the WSL who, it might be reasonable to expect, would want to have a say in how these customers were served. Would incumbents be excluding such new entrants from the market? For the sake of this blog, let’s make the heroic assumption that Competition Law would not be a barrier.

Consolidated billing would be a new additional activity. Presumably, it would have a cost. Would the customer have to pay more? I think not. It is not credible that we ask customers to pay more because they cannot choose to opt for a single supplier. So costs would have to be shared between those incumbent companies whose bills are to be consolidated.

Who does the customer pay? One would assume that the customer pays the bill consolidator, who would then have to forward the proceeds to each of the other companies who had sites of this customer in their area. It would seem likely that this would increase the length of time that industry receivables would be outstanding. Again, such a cost would ultimately have to be borne by the participating companies.

And what would happen if there were a dispute about a part of the consolidated bill? Who would handle the query? Perhaps one of the most telling difficulties would be the management of reputational risk for the company actually issuing the bill. Having thought about this issue only a little, I can see no sensible way of managing such an eventuality.

In my view having a single supplier across the country is not just about convenience in billing – it is about the opportunity to take strategic steps to reduce both a carbon and a water footprint. This is now a service frequently offered in Scotland to multi-site customers and involves comparisons of consumption between sites and the fitting of loggers to meters. It is not clear, who, in a consolidated billing initiative would offer additional services. And would each of the companies have to agree to these services and harmonise their billing periods?

If we develop this thought a little further, let us take an example of a supermarket. It realises that the service it receives in one area has led to an unusually high level of consumption, but a much lower level in a neighbouring area. Who would provide water efficiency advice? Is it credible that the supermarket has to pay the company whose comparatively poor service has resulted in the original outcome?

The functionality of the CMA in Scotland is broadly similar to what would be required to produce an aggregated bill across England. As such, I would expect that the set up costs required for a consolidated billing initiative would be broadly the same as that required for a retail competition framework similar to that in operation in Scotland.

A final challenge to those who would advocate joint consolidated billing is to define the limits of it. Is it just for the truly national operators like the major retailers or the Royal Mail?  Or would it be available for regional customers? It is worth noting that a company operating just in Essex could have to deal with five suppliers. Similarly, Kent County Council also has to deal with five different companies.

Some have argued that retail competition is a sledgehammer to crack a nut. So, help me out, what is bigger than a sledgehammer?

Perhaps one of the biggest benefits of a retail competition framework is the changed dynamic that is created in the regulation of the new wholesale business.

The wholesale business is still dominant in terms of its share of revenue and, because it is now being pre-paid by the retailers, it has no credit risk for its non-household activities. It does, however, now have larger and, probably, more demanding customers: the retailers. The retailers have a clear focus on the end customer – they will succeed (as is the case with other retailers) only to the extent that they keep their customers happy.

A successful retailer understands its customer base in detail and will seek to find ways to meet customers’ needs. Experience from Scotland suggests that customers of the retailers have a substantial interest in more tailored services. It also appears to be the case that the expectations of these customers has increased. 

Water efficiency advice has become a basic expectation. More and more non-household customers are having loggers fitted to their meters in Scotland. There is increased attention on more sustainable, lower carbon solutions. The incumbent retailer can no longer say "sorry but we cannot do this" when the initiative might harm the vertically integrated company. It can no longer do this because there will be a retail competitor, not related to that area’s wholesale business, who would offer that service if it is in the customer’s interests and is profitable.

This new framework has changed the dynamic of economic regulation of the water industry in Scotland. The interests of Business Stream (Scottish Water’s retail subsidiary) are now quite different from those of Scottish Water’s wholesale business. Business Stream and the other retailers have to hold Scottish Water – as their supplier – to account so that they can meet their customers’ expectations.

As a result, although still a monopoly, Scottish Water has to face up to five powerful new customers. This is quite a different prospect to dealing with a customer base where only a few of the largest industrial sites had as much buyer power as the smallest of the active retailers.

We expect the retailers to become increasingly demanding over time as customers continue to look for ever more tailored services at ever better prices. This changed dynamic allows us to regulate differently, to focus solely on outcomes and to direct our attention primarily to the satisfaction of the customer base and to ensuring that ex-post returns are reasonable.

The Customer Forum will benefit particularly from having the expertise of the retailers available to it in determining whether it is happy with the levels of service and the prices being proposed by Scottish Water.