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Scottish Water: A Public Water And Sewerage Company Subject To Independent Economic Regulation And With Private Retail Competition -- Some Lessons Learnt

Congress: 2015
Author(s): Fiona Parker (Edinburgh, UK), David Walters
Water Industry Commission for Scotland1

Keyword(s): Sub-theme 16: Public and private sector management,
AbstractIntroduction

A paper on how Scotland has combined public and private participation and the lessons it has learnt in doing so.

In Scotland, * Scottish Water is a publicly owned company created by an Act of the Scottish Parliament. * It owns and controls essentially all the network assets and resources. * It receives most of its funding from water charges but also receives direct funding from the Scottish Ministers who could, in theory, take a dividend. * The charges it levies are regulated by an independent economic regulator, the Water Industry Commission for Scotland and, more recently, through engagement with customer forums. * It is a monopoly in all areas other than the retail of water and sewerage to non-domestic customers, which is a contestable activity and which more than 15 different private providers currently compete for.

Regulation has driven efficiency within the company, making it more efficient than many of the privately owned or funded water and sewerage companies in England. Regulation has also been used to create a competitive retail market where privately owned companies compete with a subsidiary of Scottish Water to sell services to non-domestic customers.

This model has delivered significant capital and operational efficiencies, reduced prices and water use. This paper describes how that model works and highlights key lessons from the experience of introducing competition without privatisation.

Methods/Materials

An analysis of the two main forms of public/private competition within the Scottish model:

Comparative Competition -- the economic regulator has used data from comparable privately owned or funded English companies when setting Scottish Water's charges. Overall policy objectives are set by Ministers and include environmental and social requirements. However, Ministers do not set prices. Rather prices have historically been set by an independent regulator, the Water Industry Commission for Scotland (WICS) in a periodic price review process, using the UK price cap model. In more recent years a customer forum has been established to challenge Scottish Water's plans and ensure a more direct customer voice in the process of setting charges. The University of Dundee are proposing a sister paper reflecting on the lessons learnt from that exercise.

Retail Competition -- Retail competition has been introduced for non-household customers only. SW established a ring-fenced subsidiary (SW Business Stream) to supply these services, and it and its competitors are licenced by the WICS. The actual treatment and delivery of water, and removal and treatment of wastewater, insofar as through the public system, remains with SW alone. Confidence and fair play in the market is enabled through a 'central market agency'. A company limited by guarantee owned by Scottish Water, WICS and the retailers, it operates the database of customers and suppliers and helps calculate usage and the specific charges each retailer owes to Scottish Water.

Results and discussion

Scottish Water is widely considered to have been very successful in the 10 years of its operation. The competitive benchmarking pressures have helped Scottish Water to make significant efficiency and other performance gains, moving to the upper quartile of performance against the English water and sewerage companies against which it has been benchmarked, This is reported to equate to at least £2.5bn in efficiency savings / £110 p/a per household. Latest analysis of results would be presented by the WICS.

The retail competition is also considered to have been successful. Most customers have re-negotiated their terms and/or achieved a lower price. The public sector in particular has achieved significant reductions in its water and sewerage bills. Crucially, competition appears to be on service as much as on price. The competitive space has shown that there is real, untapped value in water efficiency advice. The new Water Act 2014, passed by the Westminster Parliament would introduce similar reforms in England.

Some of the lessons which probably are of global relevance include:

* Political confidence is vital but it takes time to build. Customers have to benefit and public investment need not be undermined. Political interference in pricing and other matters can deter nascent competition. Introducing competition slowly and showing it works over time can give Ministers the confidence to step back.

* Governance models for regulation and engaging with customers in particular will keep evolving. This will be discussed in a sister paper from the University of Dundee.

* Competition will thrive when the rules of the game are demonstrably balanced between public and private interests.

* Open and transparent pricing models ensure that all customers can compare the prices and other services offered by competitors. However the full benefits of competition cannot, and should not, be predicted in advance.

Conclusion

The "privatisation" era led to a new focus on economic regulation, which can be broadly defined to include environmental and social goals. However, most water services provision is and will remain in the public sector, hence there is a pressing need for better regulation and greater efficiency and effectiveness, for delivery in that sector, whilst meeting broader social goals.

The detail of the "Scottish model" will not suit every jurisdiction; however it offers proof that the public sector can be regulated and competition introduced which delivers private sector efficiency, whilst not losing ultimate public ownership and control. Given the critical need for better service delivery in many parts of the world, the achievements here may be of wide interest.

Fiona Parker, Senior Solicitor, Shepherd+ Wedderburn LLP with the support and input of the WICS.

Note: A similar paper was delivered to the South African National Energy Regulator's Conference in March 2014.

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