Alan Sutherland, Chief Executive of the Water Industry Commission for Scotland, has struck a note of caution about adopting the structures of other markets to the water sector, warning that "water is not oil, or any of the other commodities that lend themselves easily to trading on spot and futures markets."

Speaking at the Institute of Water conference on Friday, Mr. Sutherland said that unlike oil or other commodities, there was no guarantee that water would be available when and where it might be needed. Expressing his concern at the “complexity, cost and pointlessness of creating a commodity market for water”, Mr. Sutherland said that such a market required there to be both winners and losers, citing the following scenario as an example.

“One company concludes a very lucrative contract to deliver water to a neighbour who relies on this bulk supply to serve its customers. Let’s assume, even, that for many years the seller's customers have already enjoyed the benefits through lower bills. But one fine day, after some dry winters, the seller can only meet its obligations by imposing use restrictions on its own customers. How will its customers react? How will the press react? How will politicians react?”

Mr. Sutherland also said that he did not view transporting water as a solution to building resilience across the country and it was “simply not conceivable that the transportation infrastructure could be developed efficiently for an effective commodity market.”  The collaborative transporting of water was only one potential solution  – water efficiency, increasing storage, reducing leakage, water recycling and desalination could all be appropriate options.

He expressed surprise that water desalination had been rejected out of hand by one company, commenting that no solution out should be ruled out and each should be assessed on its merits. Keeping an open mind on how to best solve problems was key to a sustainable water and sewerage industry, operating in the interests of all.

It was vital that the legitimacy of water bills in the eyes of those who pay the bill should be increased, with the involvement of customers in the real strategic challenges facing the industry playing an important role.  There should not be an assumption that the industry, Government, or the economic regulator knows best.

Potential for delay in introduction of retail competition to England

 Mr.Sutherland went on to warn that the practicalities of opening up the non-household market in England to competition could mean the new regime might not become operational until the second half of 2016.

He drew on the experience of implementing the retail competition framework in Scotland to highlight potential challenges in opening up same market in England. In terms of timescale, if it were to take the same amount of time as in Scotland (in other words the slowest company is as fast as Scotland), this would suggest that, even if there were no appeals to Ofwat’s determinations, wholesale tariffs could not be in place before the end of 2015 in England. The new tariffs would then need to be incorporated into settlement systems – which could take a further six to nine months i.e. the late summer or autumn of 2016.

Mr. Sutherland said:

“I believe that April 2017 is the earliest realistic date for the opening of a competitive market in England. I firmly believe that any deadline should be challenging – but any deadline will only be seen as a valid challenge if it is also considered to be realistic. Just as in Scotland, it is essential that water companies are given the time and space to make the changes that they will have to make – but are then held to account for achieving it.”

He also warned that if proper attention was not paid to setting default retail tariffs, there was a risk that some customers would not, in reality, benefit from choice as new entrants could consider them impossible to serve profitably. It could also mean that too much gross margin was available on some other classes of customer and could lead to the incumbent retail business losing customers and facing an increased operating risk by potentially having to supply an unprofitable rump of customers. Mr. Sutherland commented:

“I suspect there may be objections from companies and their investors once the implications of being unable to exit the market are understood.”

UK Government appears to be following in Scottish steps

Mr. Sutherland concluded by saying that the UK Government’s White Paper appears to be generally well-balanced and sets out a clear vision for an effective retail market where customers will enjoy choice and benefit from lower charges and more innovative and tailored services. In his view the UK Government appears to be following in the steps of the Scottish Parliament, which gave Scottish Water a clear signal that it wanted a level playing field, but left it to Scottish Water to decide which governance arrangements it would choose.