LPF

In April 2017 non-household customers of the water industry in England will be able to choose their supplier for the first time. It will be important that the opening of the non-household retail market enhances the customer experience. Customers will rightly expect that the levels of service that they experience will be at least as good as they were previously.

In considering the new market framework attention does have to be paid to how we can ensure customers see the benefits that they expect. The Open Water programme has made excellent progress, working collaboratively with new entrants to and incumbents in the water industry, in defining the codes, processes and procedures that will underpin the new market arrangements. One of the principal areas of focus in developing the codes, processes and procedures was the importance of establishing a level playing field for new entrants. The draft codes have gone a substantial way to ensuring that this happens.

The procurement of the central systems required to administer the registration of customers to suppliers and settlement of transactions between retailers and wholesalers is also now well advanced.

MAP 3 Included two important appendices: a draft assurance framework and a summary of the issues that market participants may want to consider. Experience from Scotland suggests companies should be supported as they prepare themselves for the new market framework. In Scotland, we supported both wholesale and retail arms of Scottish Water as they prepared for the new market arrangements. This support was both time consuming and resource intensive but was crucial in ensuring that the market worked well for customers.

New entrants will rightly expect that they are treated appropriately by the incumbent businesses. The codes, processes and procedures only take us so far. The devil is in the detail with issues such as the level playing field. For example, how does an incumbent retailer communicate with its wholesale arm? It would not be fair for the retailer to have access to internal telephone numbers or a common email. Similarly, should it be able to capitalize on its knowledge of who is good at solving a particular type of matter arising?

Then there are a series of information issues. Has all information been shared? Is the administrative burden reasonable? The new entrant may perceive that he is being treated unfairly or has less access to information. And this may be the case – how could it be suggested that an incumbent’s prior knowledge of customers' payment histories or complaints should be forgotten. While a substantial amount of this information could be documented and shared, it could never be exempt from challenge. Memories are, after all, fallible!

As for the management of existing staff, how are issues of spouses, family, relatives and friends working on different sides of the 'Chinese wall' to be managed. Training can be important but can training be 100% effective in redirecting a long-standing commitment from solving a customer's problem as quickly as possible to a new set of systems and processes? Is there advantage to sharing of HR, legal, accounting, VAT management between wholesale and retail? Is any such advantage proportionate?

 

And finally, what about the conclusion of a contract? How long does it take to sign an agreement? Is this time reasonable?

In short, there is a whole raft of soft organizational issues that market participants will have to address if a level playing field is to be ensured.

Such questions are some of the most challenging that the incumbent companies will have to address. It relates to the actual experience of a new entrant trying to participate in the market. It relates to the behavior and relationships between former colleagues – not to the day to day operational; and financial issues that arise from documenting how retail interacts with wholesale.

So what are the consequences if these issues were not to be addressed? The likelihood is that entry to the new retail market is discouraged and less benefits would accrue to customers. In some cases, these non-price discriminatory issues will be so serious that a new entrant will seek to refer them to the competition authority. In many, perhaps most, cases, the costs in time, resources and loss of focus will result in the new entrant's effectiveness simply being blunted.

There is an alternative approach. Whether an incumbent company chooses to use the 'exit' regulations or stays fully vertically integrated, it would be possible to require the wholesale and retail activities of each incumbent to set out all their commercial and other relationships and how they would seek to manage the informational and behavioral issues set out earlier. These ‘governance’ statements would be specific to the circumstances of individual water companies and could be more or less onerous depending on how the company chose to structure its operations. A breach of a clear and detailed 'governance' statement would be easy to identify and would be likely to be much easier to resolve than a potential issue of non-price discrimination and the ensuing competition law process.

Importantly, perhaps, the introduction of 'governance' statements could also be a real benefit to the wholesale businesses as, appropriately policed through the use of compliance officers, they could substantially reduce the risk that an incumbent falls foul of competition law and the draconian penalties that could result. Moreover, an incumbent need not wait for the regulator to take the initiative - a well-prepared business may want to set an example to its peers!

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.