As economic regulators we like to assert our independence from Government. In matters of price setting this independence is essential to maintaining the legitimacy of the process in the eyes of both customers and those who make capital available to the industry – whether private investor or Government.
But changing the governance framework of a regulated industry is more than just an economic process. Indeed, I would go as far as to say that it is essentially a political process. This requires there to be an effective multi-lateral dialogue including all interested parties.
Key political considerations, the answers to which could change the design of market arrangements would include:
• Are we prepared to tolerate some customers losing out when the new market arrangements are introduced?
• Do we consider that averaging of charges (ie the same tariff in any water company area for the same class of customer) should be maintained?
• Should companies that decide retail is not a core skill be allowed to exit the market?
There are many more such questions.
Whether or not we, as economic regulators like it, we have to accept that changing the governance of an industry is a highly political process.
... and no doubt for those dealing with macro-economic issues, there may be a sense that these times may be a tad ‘too interesting’. The water industry, however, stands on the brink of an important further step towards improving customer service and environmental performance, and increasing the legitimacy of charges in the eyes of its customers.
But the ‘interesting times’ could use rather more direction. Perhaps the publication of the EFRA Select Committee report on the Water White Paper will provide the much needed momentum for the process. Hopefully, Government will shortly make its intentions clear and set a date for market opening. This would be most useful as it would focus minds. There is much that needs to be done.
I look at our work in Scotland as having been delivered in two distinct phases:
- the steps that had to be formalised in the price review; and
- the more detailed steps on tariffs, cost allocation and settlement and registration which can only be successfully completed after the price review has been put to bed.
In my view the aim of the price review should be to ensure that, whether legally separate or not, there are two sustainable businesses: the retail and the wholesale. Key to this is deciding what the financing flows are, how assets will be transferred and any allocation of liabilities. These assessments are best achieved through an analysis of accounting rather than economic information.
Creating initially sustainable retail businesses is critical to ensuring that there is an appropriately level playing field both between the retail businesses of the incumbents and between them and the genuine new entrants.
I await even more ‘interesting times’!!
I am looking forward to hearing what the EFRA Select Committee has to say on the Water White Paper. In my evidence to the Select Committee, I sought to differentiate between Government mandating that each and every water company legally separate its retail activities and allowing for a company that was minded to separate to be able to do so.
At one level, I am optimistic that a company should be able to separate its retail activities - simply because I am aware that Bristol Water and Wessex Water were able to establish BWBSL, a joint billing and customer service company. However, there is an important principle at stake: companies should not be required to continue to operate in a competitive market if it turns out that it would be more advantageous for both their customers and their shareholders for them to exit the retail market.
In many ways, just as it was important that Government should not mandate separation and impinge unnecessarily on property rights, it should avoid dictating who must participate in the retail market. If it does not allow for divestment of retail operations, there is a risk- a not insignificant risk- that the bills of non-contestable customers could be adversely affected.