Until recently, competition has been a small yet discrete team in our office. Increasingly, however, as we look at our reform of how we regulate Scottish Water and the lessons that we have learned from watching retail competition develop, we see that these two work streams are merging.
The retail market ensures that retail activities focus on what customers need and are ultimately accountable (because they can lose customers) for the level of service that they provide. Initially, I had expected competition to be principally about larger customers wanting a reduction in their charges. In actual fact, the market has proven to be about smaller users and owners of larger property networks wanting more tailored services.
In my view three lessons can be drawn from this experience:
- Regulators may not be best placed to know what customers actually want (accessing the silent majority is far from easy).
- If there is space to innovate, a commercially minded company will seek to achieve the benefits that are available.
- Reputation is critical – and managements tend to respond quickly if their reputation is at risk.
These lessons are also fundamental to the changes we are seeking to make in the economic regulation of Scottish Water.
We want to empower Scottish Water and for it to take full ownership of its business plan and its customer service. As such it should be immediately accountable for its performance, and any shortfall in performance would impact on its reputation.
We want to empower customers. We are working with both Scottish Water and Consumer Focus Scotland to establish a Customer Forum. The Forum will be well placed to gather and synthesise the views of customers (of all shapes, sizes and locations) and negotiate the delivery of appropriate levels of service within the policy framework set by the Scottish Government.
So what then is the role of the economic regulator?
- To work with Scottish Water and other stakeholders to set out, before the business plan drafting process begins, some of the key planning assumptions that we would see as being reasonable. (This may include views on future base operating costs and capital maintenance, reasonable rates of return and other similarly high level, yet fundamental inputs to a business planning process.)
- To provide an objective view that customers and Scottish Water can draw on in coming to their view of the best combination of price and service.
- To set prices within the policy framework set by Ministers and the agreements reached between the Customer Forum and Scottish Water.
- To provide the space for innovation to happen.
- To facilitate planning for the longer term (for example providing certainty that longer term outcome delivery would be financed).
- To monitor and comment on the performance of Scottish Water against its regulatory contract.
- To monitor and comment on the Innovation Report that will be produced periodically by Scottish Water.
As regulator we act as a surrogate for the competitive market. This requires us to enable, be flexible, be adaptive and to encourage. It may also require us to set out areas where we consider performance has fallen short. But in essence the main driver of progress should be Scottish Water's determination to meet its customers' needs (whether that is retail or household customers).