Competition is not an end in itself. It is useful if it increases the chance that customers will be happier with the service they receive or if better outcomes or lower costs can be achieved. It is not easy to introduce a competition framework either for the regulator or the regulated company. And it takes time! But it will be more effective if it is part of a package of measures designed to achieve a more sustainable water industry. This is what we, working with Scottish Water and other stakeholders in Scotland, are seeking to put in place.
What does such a package contain?
- A more flexible approach to regulation: this could include treating operating costs and capital expenditure equally; setting upper and lower bounds for the acceptable cash return earned by investors in the industry; allowing for different approaches and returns to be earned in different circumstances; allowing for capital investment planning and delivery over a longer time horizon; and allowing for payback on company initiatives that may stretch beyond a single regulatory control period.
- Customer involvement: offering household and non-household customers and retailers the opportunity to engage directly with the water company to decide (within the defined policy framework) on key service and price priorities and to influence other key decisions such as how to meet mandatory improvements or on the scope for future efficiency. Involving retailers and household representatives is key – just imagine comparative competition devolved to customer representatives: “They can do it, why can’t you?”
- Encouraging and rewarding collaboration: trading water, jointly developing resources, working with farmers may all bring about better outcomes for the customers of the companies who pursue such options. Allowing space for experimentation or enhanced rates of return (provided the overall cost to customers is lower) could be a useful step forward. By continuing to improve our dialogue with Scottish Water, I believe that we can create the necessary space.
- Offering non-household customers the chance to switch supplier: our experience in Scotland is that this can be done in a cost-effective way that reduces total industry costs. Careful joint working with Scottish Water allowed us to develop an effective operational code that has stood up well to two of the most severe winters in recent memory. Avoiding some of the mistakes that we made could mean that the same benefits may be available to companies and customers in England at lower cost.
- Reducing the bureaucracy of regulation: there is little doubt that the econometric models served customers (and the industry) well – even if there was some temporary pain.... But these models born of a study of detailed costs and drivers triggered further pursuit of new and better information either to substantiate or undermine conclusions.
Business plans got to be so long they were unactionable – and if unactionable, what is their point? Does ever more information really address information asymmetry between companies and their regulators? Or might more frequent, more strategic dialogue be at least as effective? If so, the cost reductions on both sides of the regulatory divide could be substantial!
Customers’ interests are that utility services continue to be provided in an efficient, effective manner, meeting their needs at a price they can afford. Most investors in utilities would take a similar view. Perhaps then we should regulate appropriately, recognising the success that has been achieved but preparing for the new challenges that lie ahead.....