Plunging into a new market

Thursday, April 03, 2008

The retail market for non-household water and sewerage customers in Scotland is now fully open to competition. As of Tuesday 1 April, uniquely in the UK, if not the world, more than 100,000 companies, councils, schools, hospitals and other public bodies have been free to switch their water provider.

The Scottish Government has warmly welcomed the opening up of the market, saying that resulting keener prices, innovation and improved customer service will be of major benefit to those able to choose from newly licensed water suppliers.

Any opportunity to benefit from the new competitive market will be of considerable interest to Scotland's public sector as it seeks to drive up efficiency and provide better, more streamlined services in response to the Government's public service reform agenda.

The chance to generate savings on bills that, for some bodies (just think of how much water is used to fill your local swimming pool) can run into six-figure sums is not one to be passed up lightly.

The new market is administered by the Water Industry Commission for Scotland (WICS) under a regime established by the Water Services (Scotland) Act 2005.

"Choice is good for Scottish businesses and public bodies," says Alan Sutherland, chief executive of WICS. "Scottish Water's retail arm, Business Stream, has already saved up to £10 million in the run up to April 1 to pass on to clients, and we anticipate more in the future."

The commission has licensed four retailers to offer services so far: Aquavitae; Satec; Osprey, (which is part of the Anglian Water group); and Business Stream. A further application by Ondeo, part of the international Suez group, is also proceeding through the process.

Licences are only granted to those judged sufficiently competent and financially viable to participate in the market and they contain various conditions to be policed by the commission.

Scottish Water will continue to own and operate the public water and sewerage networks, as well as continuing to provide water and sewerage services directly to its 1.5 million household customers.

In addition, it will now provide wholesale services, that is the physical supply of water and removal of sewage, to all licensed retailers on transparent, non-discriminatory terms under wholesale services agreements regulated by the commission.

Retailers are able to negotiate price and other terms with their customers, although they must usually also offer a default tariff and level of service to all customers on demand.

The default tariff and service are designed to help ensure that no customer is disadvantaged by the new market; the commission has set the default tariff at no more than the maximum charge that customers would have paid to Scottish Water if competition had not been introduced.

Given that it starts off with the lion's share of the market, Business Stream (Scottish Water) is also obliged to publicise the prices charged by it within two months of striking a relevant deal, as well as having to ensure its charges reasonably reflect costs.

The commission has established a simple, clear and user-friendly approach to regulating the market.

An independent body owned by and accountable to all market participants, the Central Market Agency (CMA), is responsible for keeping a record of which customers are served by which retailer and also for calculating the money owed to Scottish Water by each retailer in payment for wholesale services.

Interestingly, the Water Services (Scotland) Act 2005 also creates an opportunity for retailers to work with customers on projects that may, in turn, lead to a reduction in Scottish Water's costs.

In such cases, the commission has the power to permit Scottish Water to grant a discount on the wholesale charges paid by the retailer. This would happen where Scottish Water made an application to the commission, and there are processes in place to allow licensed retailers to make sure this happens. If the commission approved such a discount then the customer might well share the benefit with its licensed retailer.

Additionally, the commission has created the facility for customers to establish self-supply arrangements. In this context, a group of connected entities, such as members of the same corporate group or public body, can set up their own licensed retailer to negotiate wholesale terms with Scottish Water and allow them to benefit collectively as a result.

These self-supplied customers will not, of course, be able to benefit from the services offered by other retailers but would avoid paying a licensed retailer in addition to Scottish Water.

The introduction of competition in the Scottish water market is a significant challenge for public sector purchasers of water and sewerage services. At the very least it will mean revie
wing existing procurement arrangements for these services to ensure that they comply with the applicable rules on competitive tendering.

Now that public authorities have a choice in this matter, they will need to exercise it in an open, fair and non-discriminatory manner. More importantly, perhaps, these buyers, who make up a considerable slice of the market, will now have to consider how best to engage with those bidding for their custom with a view to striking the best possible deals in the interests of stakeholders.

However, how far savings made by those public bodies will be passed to you and me, in terms of cheaper swimming sessions for example, remains to be seen.

• Gordon Downie is a partner in Shepherd+ Wedderburn LLP's energy and utilities group and led the legal team that advised the Water Industry Commission on the introduction of the new competitive market.

This story was featured on The Scotsman website

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