Utility Week (24 June) reports some comments that I made to the Water UK Innovation Seminar and attempts to contrast these with those of Richard Flint of Yorkshire Water. This is a rather mischievous misrepresentation. Indeed, I do favour removing the bias that exists in favour of capital expenditure but this does not mean that I am biased against capital expenditure.
One of the points that I made in my talk (available here) is that capital expenditure was unlikely always to break down neatly into five year periods and, as such, we should be ready to consider committing funding for the duration of the project. I also noted that I would be pleased to see proposals for capital expenditure or other initiatives that had a positive net present value but paid back in longer than a standard regulatory control period.
Our approach for the next price review will be to consider the total expenditure of Scottish Water. Yes, we want to see Scottish Water become more innovative and to plan for the long term - but in our view the best way to do that is to allow Scottish Water the flexibility to choose the best solution available. It should not feel a bias in favour of capital expenditure or that experimentation in approach may lead to automatic criticism.
A clear and stable regulatory framework should help - particularly if we can remove the regulatory barriers to doing the best things for customers and for the environment.
In today’s Daily Telegraph Boris Johnson argues in favour of transporting water from where it is abundant in Scotland and Wales to where it is in relatively shorter supply. Even if it were true that all of Scotland has an abundance of water resources, such an approach is somewhat simplistic.
In a water stressed area there are a number of options by which the potential supply-demand balance could be corrected:
- provide water efficiency advice to customers;
- reduce leakage further;
- develop a new resource or increase the movement of bulk water;
- reconfigure a network such that surplus water in another part of the company’s network can contribute to the deficit;
- trade with a neighbouring appointed water companies;
- increase water reuse;
- trade abstraction rights with another holder; and
No doubt other options are also available. However, the key point is that some of these solutions are limited by the regulatory and governance framework within which the water industry operates.
Per capita consumption is some 15% higher in the South East than it is in Severn Trent’s area. But will a vertically integrated company that makes its money out of selling water and reducing the unit costs of its operations provide the best water efficiency advice? Or would a separated water services retailer – along the lines suggested by Professor Cave, endorsed in the Coalition agreement and already working so well in Scotland (with substantial benefits for customers and the environment) – be more effective?
Ensuring that water efficiency advice is effective with retail customers is critical. It would reduce the carbon footprint of the industry. It may reduce maintenance and asset renewal costs, could allow further economic development in regions where natural resources have been a constraint, and could ultimately free up water that could be traded between water companies or between water companies and other users, or could be left in situ and benefit the natural environment.
The bias in favour of capital expenditure solutions that permeates the current economic regulatory framework (and which was created deliberately by Ofwat in the immediate post-privatisation period because of the need to deliver the environmental improvements required by European law) will also make it less likely that effective trading, reuse, leakage reduction and other approaches are likely to be considered by water companies.
The answer, of course, is that wholesale water companies should find the most cost-effective approach to resolving issues with the supply/demand balance for water resources and should be rewarded appropriately irrespective of the type of solution. Pressure from water retailers allow the regulator to step back from signing off particular solutions. Water is an intrinsically local industry and the solutions in different water supply zones are likely to be quite varied. Until we have removed the regulatory and governance barriers and understood the result, it is much too early to suggest that Government start to pick “winners”.
At the end of this month Sir Ian Byatt will stand down as Chairman of the Commission.
Yesterday, Sir Ian invited the office and a wide range of friends and colleagues from his time as Chairman to a reception in the Office. This was an excellent opportunity for us to recognise his contribution to the improvements that have been delivered within the Scottish water industry over the past six years.
On a personal note, Sir Ian has assisted me throughout my time as Commissioner and now as Chief Executive. He has been an amazing mentor. I trust that I have learned as much as I should have.
I hope very much that Sir Ian will take away good memories of his time in Scotland – even if he had to pay all the costs of having his own farewell party! I and other continuing Commission members did however invite Sir Ian, Mike Brooker and John Banyard to a dinner to show our personal appreciation of their efforts on the Commission over the past six years.