The separation of retail activities allows a more commercial relationship to develop between empowered buyers of water and sewerage services and wholesale network and treatment businesses.
Such a dynamic could change economic regulation almost as dramatically as the replacement of rate of return with price cap regulation. And it could substantially reduce regulatory risk.
But separation takes time and must be done carefully, allocating risks and responsibilities where they are most easily dealt with.
In Scotland we have successfully separated retail activities and agreed the remit of the new Customer Forum. The forum will negotiate with Scottish Water to achieve as good a settlement as it can. The Commission will chair these negotiations and provide comments for discussion.
Ultimately, it would remain the Commission’s role to formalise the outcome of these negotiations in its draft determination. But customers will have a direct say over those aspects of service that they most worry about – such as security of supply, sewer flooding, odour and water pressure. And the Commission would not want to second guess the views of customers on such important matters!
Could this approach be used without a wholesale/retail separation? Yes, perhaps – but I do not believe that it would be likely to be as effective. The counterparty representing the customer needs to have real “skin in the game” if it is to be maximally effective. And the more effective it is, the less the regulator needs to intervene!
Involving customers in the price review also allows us to invite Scottish Water to pursue NPV-positive projects, which either require a higher return or a longer payback than the previous framework would have allowed. As such we could envision agreeing incentives for Scottish Water to pursue water efficiency, asset rationalisation, water trading or any other initiative that benefits customers and provides an appropriate return.