The boy who cried wolf is an instructive fable, and an important lesson that we all should heed. But the lesson is not that there was no wolf. Rather, it is that it isn’t a good idea to claim you’ve seen a wolf when actually all you saw was a sheep!

So it is with implementing retail competition in the water industry. I can understand that a monopoly company is always likely to be unwilling to give up even a relatively small part of its monopoly. It will fight its corner. It will warn of potential consequences. It will cry “wolf!”

But just because it cried “wolf” in the initial policy debate, this does not necessarily mean that it is crying “wolf” in discussions on how the framework proposed in the Water White Paper may be implemented.

If anything, my view, from our experience of having implemented a similar, if smaller scale framework in Scotland, is that the industry may actually now be mistaking a potential wolf for a sheep. It seems to be underestimating the time and effort that will be required to ensure that non-household customers have a choice of supplier.

In Scotland we set April 2008 as the date for market opening. We did so in 2004 when the Water Services (Scotland) Act was well through the parliamentary scrutiny process.  Achieving market opening was challenging. We coped well, I think, with most of the challenges that we faced. But even so we did not have the time for parallel running of systems and processes that I would have liked to have.

There are four particularly challenging implementation issues:

• Competitive retail tariffs will have to be developed, reflecting appropriate retail cost drivers and scope for savings (for example, bad debt charges for different classes of customer). There will inevitably be trade-offs between how wholesale charges are constructed and the ‘default’ retail tariffs that the retailers will be happy to offer. In the multi-wholesaler world, south of the border, this could be more challenging than it was in Scotland. Incumbents’ retail businesses may seek out anomalies. If governance arrangements ensuring a level playing field are ineffective there may be an opportunity to establish default retail tariffs that are unattractive to retailers from other areas.
• Wholesale charges will need to be designed. The definition of wholesale activities and the results of the next price review will need to be taken into account, as will the appropriate retail margin for each customer class. In Scotland, working closely with Scottish Water, this process took well in excess of a year. This would suggest that even if there are no appeals to Ofwat’s determinations, wholesale tariffs could not be in place before the end of 2015.  These new tariffs need then to be incorporated into the settlement systems – perhaps a six-month process. This takes us to the summer of 2016.
• Registration and settlement processes are fundamental to a smoothly functioning market, allowing wholesale charges to be calculated and retailers to transfer customers. Transparent governance rules are also key to efficient market entry, exit and alteration of market codes. Much of this can be done in parallel with the development of wholesale charges and other elements of the market arrangements. But they cannot be finalised without the Governance Code and the final version of the wholesale charges.
• Any data accuracy issues (around definition of premises and information on customers, particularly with regard to connection type) will need to be improved before market opening – otherwise the effectiveness of the market is reduced. With hindsight, WICS and other stakeholders in Scotland could have paid more attention to this issue. We are about to embark on a root and branch review of customer data (involving all market participants) in order to ensure that the information on customers is as accurate and as consistent as it ought to be. I now wonder whether it takes time for all parties to realise the downside for them of inaccurate information before a proper data cleanse can be achieved...

Perhaps my message is: “Beware the wolf in sheep’s clothing!” It will not help anyone if companies are not given the time and space to make the changes that they will have to make. Any deadline should be challenging – but it is only truly challenging if it is seen to be realistic.  The message of the fable is clear: do not confuse the false warnings of a wolf with the false certainty that there is no wolf!    

The European Policy Forum’s roundtable event earlier this week (20.02.12) showed a welcome consensus that the Water White Paper has set a clear direction of travel and that non-household customers should indeed be able to choose their supplier.

Obviously, we are pleased that the Westminster Government has taken this decision. It is no secret that we have argued that such an initiative would benefit all customers – not just the non-household customers who will be able to choose their supplier. Our view was and remains that customers in Scotland would benefit by being able to choose between more and more active retail providers. We are also aware that many multi-site customers would ideally want a single bill across Great Britain. The Westminster Government's decision should now make this possible.

We very much welcome the proposal to establish a quadripartite steering group to achieve a market framework that will allow customers across England and Scotland to benefit from the new arrangements. However, we do think that this group should be quintipartite and include company representation. Clearly, if this were to be achieved in an effective and manageable way, the companies would have to settle on one or perhaps two representatives at most.

Our role in this Group would be principally to share our experience of having implemented a well-functioning, but imperfect, market framework. We would also be concerned to ensure that any new Anglo-Scottish arrangements work at least as well as what we have in place just now.

Some appear to believe that the Commission’s intention is to ensure the imposition of a Scottish model in England. It is true that the arrangements are made easier by having a single wholesaler – but I am confused why the public sector ownership of the wholesaler is an issue in the development of a framework. If a Scottish model were to involve a single operating code, a single market code etc. being introduced in England and Scotland, this is certainly not something that I would advocate.

Indeed, my view is that each regional water company – which inevitably will have different wholesale charges – may well seek to interact with the new retailers in different ways. Unless we plan on insisting on the same service levels being offered everywhere, it will be necessary to have different operational codes for each wholesale company. There may be much that is common – indeed they may become more common over time (as happened in electricity distribution) but that will not be the starting point.

This leads to the debate on settlement and registration systems. I can understand how, if England were to adopt a single system to handle all of the companies and all of the retailers, these systems could become very complicated, very quickly. I would certainly not advocate such an approach – the only winners are likely to be IT companies! But that does not mean that there could not be centrally managed but separate registration and settlement systems.

From a Scottish perspective, we will happily change our arrangements and bring them in line with England once these arrangements are well established and proven to be working at least as well as those in operation in Scotland. But there is a lot of implementation work to be done between now and then!

There was an interesting meeting of the European Policy Forum last evening. Perhaps it was inevitable on a day that a drought was announced in the South East of England, but rather than focus on the substantive issues that will empower customers (choice and incentives to reduce costs to supply), most of the discussion surrounded increasing upstream competition or debating whether collaboration becomes impossible when competition is introduced.

There are three things that strike me from this debate on upstream reform.

First, we may have surveyed or consulted customers – but we have never truly empowered them to make decisions. Certainly, in Scotland, our understanding of what customers want from their water industry is now quite different to the period before the market opened. Their actual choices appear to be different from the conclusions of surveys. Customers are keen to work with their retailers to reduce their environmental footprint and would be open to more innovative and cheaper solutions. Experience shows, however, that such initiatives take time to progress.  How do we ensure that upstream reform is consistent with the expectations of customers? We should always remember who pays the bills.

Secondly, is water trading (or the agreeing of bulk supplies at it used to be called) competition? There were some who appeared to argue that it was. Could it not, however, be the result of a collaborative approach and the conclusion of a mutually beneficial agreement between two water companies? It would seem to me that the latter approach does not risk becoming a zero-sum game. A more adversarial approach would offer no such guarantee.

Thirdly, it is unhelpful to think of water resources in a vacuum. The management of drainage and waste water has to be considered. Waste water not only contains potentially valuable heat and minerals – it could also relieve pressure on raw water sources.

There is clearly a need for better definition of the issues. We all agree about the importance of resilience and affordability – the themes of the Government's White Paper –
but we will best achieve these aims by working collaboratively.