In Scotland, the Commission has a duty to facilitate entry to the retail market but, in so doing, to do no detriment to the core (wholesale) business of Scottish Water. As the debate around market opening in England continues, I have frequently been asked what we mean by "no detriment". At first, I thought this was a trick question!
But the answer is actually quite simple in principle, if more difficult to implement effectively.
The rationale of having retail suppliers compete for business is essentially two-fold: to encourage suppliers to offer non-household customers the best price for appropriately tailored services and to have these retailers, who are closely focused on the needs of their customers, challenge Scottish Water to improve its performance in both levels of service and costs. This avoids the potential conflict of interest that can arise when the same management team make decisions about the levels of service provided to customers – particularly when what is best for customers may not immediately, and obviously, be good for the supplier.
But to ensure that the wholesaler acts objectively, it is important that they can count on there being no detriment to their underlying performance from the actions of the retailer. In an industry where there needs to be a long-term commitment to the financing and operation of assets, it is essential that additional risks associated with asset capacity utilisation are not created. The presence of an asset in the RCV of a company is not sufficient because this does not address changes in unit operating costs.
Our approach is to build on our closer dialogue with Scottish Water and discuss the impact of changes to wholesale services that arise from the changing profile of demand for services experienced from retailers. For example, a retailer may profitably sell water saving advice to a customer and this could have quite different effects on the wholesaler. If supplies in an area are limited there could be real benefits to the wholesaler and its costs could even be reduced! On the other hand, there could be plenty of water supply in a particular area and the only cost savings for the wholesaler could be the variable operating costs such as chemicals and energy. In this case, we would expect that there would only be a modest reduction in the revenue allowed to the wholesaler.
Our aim in making this commitment to do no detriment to the wholesale business is to encourage dialogue between the retailers (who will thrive only if they meet the needs of customers) and Scottish Water. This should ensure that, over time, services become increasingly aligned with what customers are prepared to pay for.
Establishing this dialogue between retailers and Scottish Water could also have a secondary benefit. It may make it easier to pursue innovation within the sector. Innovation to be sustainable needs to benefit all parties: wholesaler, retailer and customer. In my view, innovation is likely to be essential to delivering the improved services that customers will increasingly expect at a price that they are willing and able to pay.