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.

I have met with a number of companies over the past several weeks. One area of discussion concerned the suggestion that more focused regulation of retail services could lead to better outcomes and that this could represent an alternative to retail competition.

It seems to me that this would take regulation in a new and potentially undesirable direction. Do we really want the regulator defining the level of customer service that should be provided to customers?

It is conceivable that, with the engagement of customer representatives, a view could be reached on the minimum levels of service a household customer could expect. It may also be possible to establish the maximum levels of service that households would be prepared to pay for in the medium to longer term.

However, it is more difficult to determine similar minimum service levels for non-household customers. It would be even more difficult to develop a robust understanding of the aspirations of many of these non-household customers. Experience from the retail market in Scotland suggests that these customers want a more tailored service. It cannot be assumed that customers know all of the services that are or could be available. They certainly will not have an understanding of the potential costs and benefits of different services to their business. It is therefore difficult to see how the regulator could ever gain an appropriate level of understanding of the aspirations of many non-household customers in order to set regulatory targets.

The tailored services that are offered in Scotland are likely to be available from a range of different suppliers. Coming to a view on retail price caps would be difficult if judgements have to be made about the efficient cost of these services as well as their appropriateness for individual customers.

Regulating the appropriate level of retail costs would be even more problematic. It would require the regulator to take a view on the appropriate level of bad debt for each regulated company. It would also require consideration of an appropriate level of receivables for a company to run. If the regulator was to take decisions in these two areas, it would require qualitative judgement on customers' ability to pay. Such decisions are likely to be controversial and regarded as subjective. It is also not clear that requiring such decisions from a regulator would be consistent with lighter touch regulation.

What is the alternative to regulating retail? In a retail competition framework, there is a need only to protect those non-household customers who choose not to exercise choice and not to take advantage of the new services that become available.  The ‘default’ tariff and level of service does this. There is, in my view, no need for any further regulatory intervention unless the return being earned by the incumbent in an area became unreasonable.