This blog first appeared as a guest blog for Utility Week on 15 February 2013.

At a recent water industry customer conference I was struck by the enthusiasm shown towards Stephen Littlechild's interesting work on negotiated settlements and constructive engagement. Will customers now get what they want? Or just what others have decided that they ought to want?

Clearly, investment in maintaining public health or improving our environment benefits us all. But it benefits us to different degrees at different times - and sometimes it benefits people who do not normally live in the area (or indeed in the country) who pay little towards the benefit they have enjoyed. Decisions about whether or not to fund such improvements cannot be left to the paying customer or, indeed their representatives, as they are essentially political choices. However, I can see no reason why customers should not be involved in a discussion about how, and with what level of risk, we should seek to make such improvements.

The case for customer involvement in maintaining assets is perhaps even clearer. This would require customers to be given much better information about the risks that are being run and what the impact of any asset failure or exceptional event could be. Leakage rates are a good case in point of where we currently look at the symptom rather than the problem. The real issues are: how reliable is the service that is being provided to the customer; what environmental damage is being done in providing that service; and is there a cheaper/more reliable/more environmentally friendly way of providing the service? Customers can and ought to want to make judgements on what level of service they receive relative to the bill they pay.

The clearest case for greater customer involvement is, of course, in the area of discretionary expenditure to improve the levels of service provided to customers.

So how are we matching up? Are we ready to give customers real discretion in how the service is provided to them? In Scotland, with the support of Scottish Water and Consumer Focus Scotland, we have established a Customer Forum, a small group that includes the licensed water and sewerage retailers and individuals.

The Forum is charged with trying to reach agreement with Scottish Water about how, and for what price, the outcomes defined by the Scottish Government should be delivered. In the event that they agree, and we, in the Commission, can see that the Forum's independence has been maintained, our draft determination would be consistent with this agreement.

The Commission has already produced a detailed timeline for the Forum and for Scottish Water as well as seven guidance notes. We will shortly also begin to comment on briefing materials that Scottish Water produces for the Forum. The Commission will also comment on what it sees as the strengths and weaknesses of Scottish Water's strategic vision and its subsidiary six-year business plan. All of this material will be available on our website.

The aim is to ensure that the Forum can have a reasoned and reasonable conversation about priorities with Scottish Water and, hopefully, be able to come to an agreement of what should be done, how it should be done and at what cost.

To my mind, this is true customer engagement. It is a substantial change from the way in which economic regulation of utilities in Britain has been implemented. Customer engagement is not just more and better consultation - it is empowering customers to influence, in a real way, the services they receive and the prices they pay.

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?

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.