The DEFRA consultation on Martin Cave’s excellent review of competition and innovation in the water industry will close soon. The Commission will respond, setting out some of the lessons that we have learned from the implementation of retail competition in Scotland. One of the most interesting lessons has been that competition has led to more tailored services (before even the benefits of increased margin allowed for in our Final Determination) and better outcomes for the environment. If we want a genuinely innovative water industry and to meet the environmental challenges that lie ahead, it will be critical to get the incentives right and reward water companies, retailers and customers for adopting better and lower cost environmental solutions.
At our stakeholder meeting to discuss the Final Determination, I was asked about what the Commission would do to ensure that new entrants could gain market share and earn a fair return. My initial reaction would have been to say that this is a matter for the new entrant. New entrants should gain market share by being more innovative and meeting the needs of customers better. However, I answered that new entrants should take advantage of the increased retail margin to target those customers who would most benefit from their expertise.
On reflection, I still think my answer is right- but with two important caveats. It is important that the playing field stays as level as feasible. I would be concerned if the increased margin was competed away quickly and customers were deprived of more innovative and more tailored services as all market participants sought to minimise costs. We will watch the response of retailers to the opportunity that we have created. Second, I have noted comments from the Federation of Small Businesses that market participants are less interested in smaller businesses. It is important that retailers do offer improved services and lower prices to all businesses- given that the retail margin is a higher proportion of the total bill, there should be an opportunity for retailers to build an interesting market niche in providing improved services to smaller businesses.
We can encourage and cajole retailers to do better and be more innovative in supplying more customers- but the ball is firmly in their court. The Commission will monitor developments carefully...
Phew! Another price review, done and dusted. I think the charge caps are challenging but fair and that we have taken account of Scottish Water’s views- a referral to the Competition Commission would therefore seem to be unlikely.
Our decisions today are set out, I hope, clearly and succinctly. The challenge for next time is to maintain the simplicity of presentation and the robustness of the analytical content, while further widening our consultation with customers.
The water and sewerage industry will continue to face challenges. We have made huge progress and, of course, credit is due to the Board and staff of Scottish Water for the improvements in efficiency that they have achieved. But much remains to be done. The industry will have to play its part in mitigating the effects of adapting to climate change. We can make further progress in improving the efficiency of the industry by encouraging Scottish Water to adopt the genuinely cheapest whole life cost solutions, by improving our understanding of the costs of key activities and by focusing on those things that customers are prepared to pay for. This may be the end of the beginning: Scottish Water is broadly comparable to the companies south of the border; we are making good progress in tackling the environmental challenges.
But it is much too early to say that it represents the beginning of the end- Scottish Water must deliver on the regulatory contract that we offer them to-day, a new regulatory framework needs to be in place for 2014 and retailers must take advantages of the changes to the competition framework to deliver the services that Scottish businesses and public sector organisations need at a price they can afford to pay. Yes, many challenges lie in wait. I’d better go for a lie down!