Benefits of retail separation in water should not be overlooked

I read the ICS Consulting report on vertical integration in the water industry with some interest. It contains many thoughtful and important observations, which companies, regulators and policy makers should consider carefully. I will return to these points in a future blog.
I cannot help but feel however that the likely impact of the report will be reduced by the limited consideration it gives to the separation of retail activities. To compare water and energy retail is to miss the point of what we have done in Scotland. Energy retail is vertically integrated with generation and gas supply. Water retail has no such interest in the wholesale activity. The retailer will therefore look critically at its supplier and highlight those things that could be done better or cheaper for its customers. It will also have, as its primary focus, the interests of the end customers. This is not the case in energy and cannot be (unless forced by regulation) because the value of added services will always be trivial in Group terms relative to the successful operation of generation capacity.
This leads me to my second point. The report asserts that retail is all about price. I will admit that my original expectation when we set out on introducing retail competition was that price cuts would be the primary benefit to customers. I was very wrong! It has actually been principally about value adding services – advice on water efficiency, managing waste water (see my last blog on important changes to trade effluent arrangements in Scotland) and improving the information available to customers in their bills and drawing out some important lessons. These services are material in retailer revenue and profit and, as such, are pursued keenly.
Customers are the real beneficiaries. Water retail is no longer one size fits all. Bills are lower but most often this is as a result of these value added services – not merely a race to the bottom in cutting retail margins to the bone.
Is it any coincidence that Business Stream’s EBITDA has increased and its bad debt reduced?
The ICS Report – and its paymaster, United Utilities – would have had more impact on the debate around the Government’s White Paper if it had recognised some of the benefits that could flow from a separate retail function. This is a pity because, as I said earlier, the report makes several interesting observations about the economics and operation of the wholesale water and sewerage activity.

About Alan

Alan Sutherland

I’ve been Chief Executive of the Water Industry Commission for Scotland since its establishment in July 2005. Prior to that I was the Water Industry Commissioner for Scotland having been appointed to that role by Scottish Ministers in November 1999. In 1998 and 1999 I was a managing director of Wolverine CIS Ltd, a division of Wolverine World Wide. Prior to that I worked in strategic consultancy with Bain and Company and in the investment banking industry with Robert Fleming and Company.