The wholesale water business of Scottish Water should be a lower risk activity than the currently vertically integrated water utility. But I, for one, have no ambition to cut its allowed for cost of capital – my focus is on ensuring that customers benefit in the form of lower bills and better, more sustainable services. What matters is the outcome for customers – not the means by which that outcome is delivered.
So, if it is cheaper for a relatively low return to be earned on building an asset then Scottish Water should choose that option. If an alternative solution exists that is cheaper overall – although perhaps more risky to implement and requiring a higher return – then Scottish Water, in the interests of customers, should opt for this solution.
In looking forward to the next regulatory control period, I see no reason to adjust ex ante the return that we have allowed for historically. But we should respond positively to proposals from Scottish Water that would lower costs to customers in the short, medium or long runs. To do otherwise would run a risk of disempowering Scottish Water and any such loss would not be in customers’ interests.
Two particular thoughts come to mind:
- I would like to see Scottish Water become more innovative in pursuing the outcomes that are agreed with Government and with the Customer Forum.
- A business that is truly focussed should potentially opt for different solutions – perhaps with a greater reliance on operating costs, perhaps on collaboration through trading or asset development with a neighbour, perhaps on longer term structural initiatives such as asset rationalisation.
Our approach will be to allow Scottish Water the flexibility to operate within a range of indicators of financial strength. This range would take account of any proposed solutions that are more risky or more innovative. It would be for Scottish Water to set out in its Business Plan the benefits to customers that could accrue from, for example, innovation or asset rationalisation. If the NPV is positive and customers’ bills will be lower over time, we would be pleased to see any such initiatives – provided, of course, that the Customer Forum regards Scottish Water’s suggested approach as reasonable.
As regulator we need to avoid, intentionally or otherwise, appearing to favour one approach over another. To do so would be to step away from regulation of outcomes, which, it seems to me, is most likely to deliver the sort of value for money that customers want. The management of Scottish Water should choose the option that is likely to deliver the best possible value for money to customers – in some cases that will be the tried and tested, in others it may be something rather different.
My commitment is that there will no longer be any bias in favour of capital expenditure and that we are prepared to discuss longer term ring financing of initiatives that will deliver value for money to customers. We recognise that Scottish Water is accountable to its customers first and last. If it does well and delivers in line with its contract with customers, it will be well on its way to achieving its ambition of becoming Scotland’s most trusted and valued business!