It is never easy to admit that you got it wrong. But this is what I have had to do when it comes to how retail competition has developed in Scotland. I had expected that the prime movers would be the largest users of water – who often operated in relatively low margin commodity sectors. I reasoned that even a relatively small additional reduction on their bill would be useful. Large users of water had been understandably vocal during each price setting process!
However, it has been instructive to see how the market has developed. What I see is an unexpected – at least by me – demand for something different from a part of the customer base in Scotland that had not previously been all that vocal.
Perhaps the best example of this is from multiple-site customers. A tender by Procurement Scotland placed only a 35% weighting on price – favouring instead value added services such as water efficiency.
Similarly, some of the best known retail names have opted for tailored services. In one case, the customer enjoys substantial savings in their own administration costs because they are billed in a manner that is convenient for them.
There is still more to do in building awareness of the market and the opportunities that could exist for new entrants. Potential returns are attractive but the amount of capital required is relatively low. This may discourage new entrants to the market. It is for this reason that we believe an Anglo-Scottish market could be attractive. Such a market would offer a scale that could be more attractive to both incumbent water companies and, potentially, the large energy retailers. Having said that, I find it interesting that one of the smaller new entrants should see the potential of targeting smaller non-household customers.
However, we must also look closer to home to identify whether there are other bottlenecks that limit the level of competition or the extent of choice available to non-household customers. Our review of market arrangements appears to confirm that potential new entrants were put off by a requirement to serve any customer, anywhere in Scotland at the default tariffs. With 20-20 hindsight, I can certainly see that with no knowledge of customers’ payment histories I was requiring them to take on a potentially significant risk – especially when the incumbent had the best available information on each customer!
Reviewing this experience, I do wonder how well we understand the constraints faced by regulated businesses and how complete our understanding of what customers want actually is. This suggests that better regulation may require two distinct steps:
- involving customers in setting prices; and
- creating a sufficiently flexible framework where innovation and commercial competence can result in a higher return.
It seems to me that involving customers may begin to reveal that the actual priorities and trade-offs that customers would make are quite different from those that we might make on their behalves. And at the same time there may be a difference between the constraints that we, as regulators, may regard as most significant and the actual experience of market participants. The same is likely to be true of incentives devised, somewhat artificially, by regulators!