Draft Water Bill

Written evidence submitted by the Federation of Small Businesses (FSB)

The Federation of Small Businesses (FSB) welcomes the opportunity to respond to the inquiry.

The FSB is the UK’s leading business organisation. It exists to protect and promote the interests of the self-employed and all those who run their own business. The FSB is non-party political, and with 215,000 members, it is also the largest organisation representing small and medium sized businesses in the UK.

Small businesses make up 99.3 per cent of all businesses in the UK, and make a huge contribution to the UK economy. They contribute 51 percent of the GDP and employ 58 per cent of the private sector workforce.

We trust that you will find our comments helpful and that they will be taken into consideration.

Introduction

1. For some time the FSB has been campaigning for greater competition in the water market in England for small businesses. Currently, small businesses are not able to choose who supplies their water and this has led to a lack of price competition, concerns about the quality of customer service and the inability for new suppliers to enter the market.

2. The FSB believes the proposed reforms outlined in the White Paper will offer a greater choice of water supplier for small businesses and offer greater cost efficiencies for customers who procure for a number of business premises/sites. Further to this, making it easier for suppliers to enter the market can drive better customer service for business consumers as seen in Scotland.

3. However, the introduction of competition in the water sector also has potential pitfalls and FSB believes government needs to learn the lessons from the introduction of competition in the water industry in Scotland and from the lessons from our electricity and gas markets . Learning these lessons will ensure the introduction of competition does actually lead to reduced costs for consumers.

Post-reform concerns

4 The FSB believes the key objectives of any reform of the water sector should be :

a) s ecure the necessary capital infrastructure investment in the water sector and

b) t he development of cost efficiency gains that lead to lower prices for business consumers and an improvement in customer service.

c)Maximise the efficient use of water resources to limit the impact of any drought periods.

5 The consultancy firm, Deloitte, has reviewed the coming introduction of competition in the water sector and has highlighted two possible negative effects of the opening up of the market.

6 First, i t has estimated that average prices could rise by around £60 for non-household customers in the short term in order to provide sufficiently attractive margins to encourage new entrants into the non-household sector. The firm estimates that it could take up to 11 years before prices begin to fall below pre-reform levels.

7 Second, Deloittes highlights the possible consolidation of the market following the introduction of competition. Some in the industry believe sufficient efficiency gains can only be achieved by substantial consolidation of water retailing businesses and the FSB would be concerned that the potential benefits of the reforms could be wiped out if the current 21 retailers were to consolidate into around 6 as Deloitte has predicted.

8 The FSB believes, given the se twin concerns above, that OFWAT, needs to give urgent consideration to how competition can be introduced without, or at least with minimal, cost implications for consumers.

9 OFWAT also needs to be confident that any possible consolidation of the sector following the introduction of competition does not adversely affect small businesses by stifling innovation, customer service and downstream competition in the market as was the case following introduction of competition in the electricity and gas markets.

A Joint Anglo-Scottish Market

10 The FSB is supportive of the proposed joint Anglo-Scottish water market believing this will help to increase competition. However, we believe careful consideration needs to be given to avoid any duplication of regulator responsibilities since this could lead to confusion, an unlevel playing field and additional bureaucracy. We therefore believe Defra and the Scottish Government should consider the implementation of a single regulator for the market with its’ duties and responsibilities clearly laid out prior the opening of the market.

Future structure of the water sector

11 The FSB believes Defra should consider setting out a requirement for functional separation of water companies which both have wholesale and retail functions in the draft Water Bill. Defra should also consider setting out in legislation a lighter-touch regulatory regime for companies which have legally separated their retail and wholesale functions. We believe this would serve to encourage water companies, who have both whole and retail functions, to separate these functions and deliver real competition and efficiency into the market.

Switching

12 Whilst the FSB appreciates there are structural differences between between the Scottish markets and that of England, we are concerned that our survey data is showing that relatively few small businesses have chosen to switch supplier in Scotland. The FSB believes DEFRA should undertake further analysis of why the reforms in Scotland have not led to greater attractiveness of switching supplier for small businesses in Scotland.

Consumer protection

13 We believe it essential that OFWAT, the water regulator, learns the lessons of small businesses experiences in the energy markets and ensure increased competition in mirrored by adequate safeguards for small businesses . Small businesses often consumer goods and services in a similar way to domestic consumers yet all too often they are not afforded the same levels of consumer protection. In the electricity and gas markets, a significant proportion of small businesses consume energy on a similar level to that of an average household yet they are expected to have the level expertise similar to that of a large business when negotiating energy contracts. Whilst Ofgem is going some way to rectifying this, we believe it is essential that Ofwat adequately protects small businesses following the introduction of competition.

Consumer Representation

14 It is essential that there is a strong voice to represent the interests of consumers through the far-reaching reforms to the water sector to be implemented over the coming years. We recommend that Defra commit to retain the Consumer Council for Water in its current form for a period of three years after the White Paper’s market reforms are implemented. Any new arrangements for consumer representation which are introduced subsequently must take account of the unique needs of business customers and done in consultation with relevant business organisations.

Contract terms

15 Many small businesses lack the expertise to negotiate contracts and, in the FSB view, are penalised by utility suppliers because of their limited purchasing power, relatively low energy consumption and unpredictability of their demand. Again, this highlights the need for action to address the problems unique to small businesses, as they lack the expertise of large businesses and the regulatory protection afforded to domestic consumers.

16 The FSB has particular concerns regarding the use of contract rollovers in the energy markets. There is evidence that many small business consumers are unaware of their contract terms governing change of supplier and contract roll-over, and that this is being used by suppliers to lock in their small business customers.

17 In the context of the proposed reforms OFWAT needs to ensure it does not replicate the mistakes of other industry regulators by allowing the practice of unfair contract rollovers that lack transparency to become commonplace in the water sector. We return to the important issue of transparency below.

Tariff transparency and comparability

18 The Deputy Prime Minister recently announced that he had come to an agreement with the big six energy companies that domestic consumers will be proactively informed by their energy supplier as to which is the best tariff for them.

19 Given the similarity between domestic and small business consumers in the utilities markets we are campaigning for the agreement to apply to small businesses as well. Indeed, we believe not only should all consumers be informed as to what the cheapest tariff is for them, we believe steps need to be taken to ensure one suppliers tariffs is directly comparable to another’s to ensure consumers get the best deal in the market.

20 The FSB believes OFWAT have a unique chance to set a leading example in the utilities markets by ensuring consumers are able to benefit from directly comparable tariffs.

Difficulty switching suppliers

21 One of the biggest sources of complaint from small business in the utilities markets is the difficulties they face when attempting to switch suppliers. Opaque termination procedures and unclear notice periods all too often give suppliers reason to object to small customers switching supplier. OFWAT needs to enforce a strict code of practice to ensure switching water supplier is made as easy as possible to create a truly competitive marketplace and let small firms enjoy lower costs.

Complex bill formats

22 For years small business energy consumers have faced complex supplier bill formats which make it difficult to understand how they consume energy and how they are charged for it. The FSB has long campaigned for transparent pricing structures and it is essential OFWAT learns the lessons from small firms’ experiences in the energy markets.

Water efficiency

23 The FSB also advocates that water companies are mandated to promote water efficiency to its customers. Increasing water efficiency is not only good for the environment but can help firms cut costs as well.

24 All businesses can benefit from using water efficiently. In some areas of manufacturing, water bills can cost over 1 per cent of turnover. Most businesses could halve their water bill by implementing simple and economical water minimisation measures and the water companies should be mandated to promote and advise of how their customers can maximise the potential of water efficiency in their businesses.

25 To further maximise the efficient use of water resources, the FSB would like to see the roll-out of water metering across the non-household sector as well as using tariffs to increase the efficient use of water once the reforms have been allowed to bed in.

September 2012