There should be significant economies of scale in establishing a retail competition framework in England and Wales. In order to try and understand the potential benefits, we need first to consider the set-up and on-going costs of the framework.
If I assume that there is nothing that can be learned from Scottish Water’s experience in separating its retail activities and the same effort is required to develop the industry codes and contracts, we could say that the companies will spend - on a per customer basis - broadly the same amount as Scottish Water.
I further assume that the Scottish CMA could be made fit for purpose for a pan-GB market for around £10 million (around four times what was spent originally). And lets further assume that Ofwat spends 1.5x as much as the Commission in setting up the framework. This may not seem like much extra but approaching 70% of what the Commission spent was on the legal costs of drafting codes and contracts from a zero base. The market structures work in Scotland and so the incremental legal work should be relatively modest.
As to ongoing costs: I have assumed that Ofwat would incur an additional £2 million costs in managing the framework, an additional cost of capital of £6 million a year and a CMA operating cost increase of £7.5 million a year.
I assume that the companies south of the border can achieve only two-thirds of the savings realised by Business Stream - despite the fact that Business Stream’s costs at separation were lower than the average in England and Wales as a percentage of non-household revenue.
This gives a potential net present value of over £750 million without any dynamic efficiencies and nearly £2.5 billion if dynamic efficiency is included. We have published an audit trail for these numbers, which is available here.