This blog first appeared as a guest blog for Utility Week on 18 April 2013.

I am heartened that many senior figures in the water industry recognised the need for collaboration that I outlined in my earlier blog 'Water, water every where (or at least more than we think)'.

But there have also been two challenges in response to the ideas put forward in my blog, which, I think, it is important to consider carefully. These are that:

• some stakeholders may see interconnection as an excuse simply to boost the RCV and, consequently, the returns available to investors; and

• interconnection may be seen as the only way to improve resilience.

Although I understand these challenges, I do not believe that they stand up to scrutiny.

Taking them in reverse order: interconnection, while important, is not the only way to build resilience. In my blog I referred briefly to the potentially important area of water reuse. I have also previously set out the importance I attach to retailers working with their customers to reduce their consumption of potable water; such initiatives should certainly be pursued in addition to greater interconnection. Similarly, greater emphasis on interconnection should not prevent investment in improving or extending the storage of raw or potable water if that is the most effective solution.

My point in zeroing in on interconnection was two-fold. Firstly, I cannot see how, in the absence of greater interconnection, we could expect there to be more bulk transfers of water. In this regard, it is irrelevant whether the mechanism for resource allocation is competition or regulated collaboration. Second, it seems to me that the industry should be able to demonstrate that it is making the most effective use possible of available water resources. Large differences in long run marginal costs between neighbouring companies for any required new resources do not sit easily with those companies operating in the best interests either of their customers or our environment.

Turning to the second challenge: could a company use interconnection as a convenient excuse for building its RCV and enhancing shareholder returns? Yes, but if only if there is a failure of regulation and a failure on the part of government to be clear about the level of resilience that should be achieved. Investment in interconnection should be subject to the same regulatory scrutiny that applies to any other water company expenditure.

There should be a clear outcome from the investment, the investment should be efficient and, in the case of intercompany connections, there should be a clear impact on the long run marginal costs of water resources. This is not a free lunch!

It should also be emphasised that a company would be subject to an efficient procurement obligation. This would require the company to pass the savings in future water costs on to its customers. And such an obligation would also require an incumbent water and sewerage company to work constructively with third parties who may offer innovative and effective solutions to deliver a sustainable water industry for customers that represents excellent value for money.

This blog first appeared as a guest blog for Utility Week on 16 April 2013.

Competition has become a very emotional issue for the water industry. But what exactly is it we are arguing about?

Competition is already used by, and brings benefits to, the industry. This includes market testing the substantial capital programme, and using competition to secure the best prices from the energy markets. Water companies also compete for skills in the labour market.

Yet there was a time - not so long ago - when the companies in England and Wales resisted retail competition for non-household customers. Was this because there was insufficient evidence that the retail function could be separate from the wholesale activities?

Well no - there was already strong evidence that the retail function could be managed separately. In Wales, Glas Cymru let a separate contract for customer service to Thames Water while operations went to United Utilities. And in England, Wessex and Bristol Water were pioneers in establishing their separate joint billing company.

Scotland merely built on this experience and went a step further: not competition 'for the market' but allowing different licensed companies to compete in offering water services to non-household customers.
Was there a fear about asset stranding? Perhaps, but, as has now become clear, if retail competition is implemented sensibly there is no risk of this happening.

So turning now to potential concerns about upstream competition. Perhaps there could be none! It depends...

In a world where there is 'in the market' competition it is right to be concerned; in such a world there is a real potential issue that assets might be stranded, and a real risk that the regionally averaged prices that benefit both households and non-households could be sacrificed.

By contrast, when fixed costs are high (and represent a substantial proportion of total costs) competition 'for the market' is likely to be an efficient way to procure the services or products that are required. Just as the industry already does when it needs a new water treatment works! If it were better to have had two water treatment works competing with each other, would those who held the purse strings not have pursued, or at least trialled, such an option?

But, in looking forward, there is no reason why water companies should seek to deliver all of the solutions to all of their problems by themselves (in the same way that they no longer deliver all of their own capital expenditure).

So what is the best way forward? Is it to have companies competing with each other to develop resources or treatment assets and increase the risk that assets could be stranded? Or is it to recognise that there are substantial upfront costs and that best value is likely to be had when there is genuine competition to supply the available market. This should allow the innovative and efficient to thrive and for the benefits to be available to customers and the environment.

This is, of course, easier to say than to implement. The current companies would need to be rewarded for managing the procurement process. New entrants upstream would have to contract with the local network operator (this would prevent them from taking advantage of regional cost differentials) but would benefit from the efficient procurement obligation placed on that network operator. The playing field would not just be level - it would be seen to be level.

This is a vision worth pursuing. It would reduce the risk of financing the regional water and sewerage company. It would increase the opportunity for innovative solutions and for best use to be made of all of our available resources. In short, it would lead to an industry that is both more resilient in what it does and more legitimate in what it charges its customers.

This blog first appeared as a guest blog for Utility Week on 31 January 2013

There is no shortage of water in Great Britain. Yet, according to the Environment Agency's rather informative map, many areas of the country - particularly in the South East - are in water deficit.

It may seem surprising, but the map is not at all inconsistent with my opening statement. It simply demonstrates that there are local shortages of water, brought about by a lack of water for abstraction combined with a lack of appropriate infrastructure for transporting that raw water.

So how can we tackle this conundrum?

We should attempt to increase the water that is available for abstraction in a local area (how we handle surface drainage and return that water to the environment would be one example). This will require investment in new infrastructure.

But there is much more that could be done to improve water availability, ensure more resilient supplies and reduce the amount of water abstracted from vulnerable sources.

Water companies should be encouraged to make the most of their existing sources by developing interconnections between their own supply zones. Although many companies have taken steps in this direction, more could be done.

Companies should also be encouraged to develop interconnections with neighbouring companies. This would ensure that resilience is maximised and environmental damage through over-abstraction is minimised. Those are outcomes on which almost all in the industry could agree. And maybe too the annual obsession with leakage targets (an important factor, but not the only one) should be replaced with a focus on these initiatives?

There is an important question about how best to pay for reinforcing and extending the mains so that best use can be made of the water resources that we have. Who should pay for the new capacity created? Payment based on the amount of water transported could lead to perverse results, not least uncertainty about revenue. Some form of capacity charging would be necessary and this would reflect the value provided to the area receiving the water.

But this will not be easy to implement: a 'take or pay' arrangement could backfire on the supplier. What if the supplier could not make water available without adversely impacting its own customers? How could a water company explain that it is profiting from providing water to a neighbour if it is contemplating supply restrictions at home? But if the supplier interrupts supply, to what extent can the normal recipient of water expect it to be available in future when planning their own resource needs? These issues need to be addressed, not consigned to the too difficult or 'more incentives required' box.

Interconnections (between supply zones or between companies) are long-life assets and the vast bulk of their 'whole life' cost is committed when they are first built. The priority should be to ensure that their cost of capital is as low as possible. This, in turn, requires there to be a guarantee (as is currently afforded by the RAB) that the assets will earn a reasonable return. Their cost will, after all, be more or less the same irrespective of the volume of water they convey over any particular period.

One of the key elements will be to ensure that the use, and development, of resources forms part of a regional Water Resource Plan that is subject to challenge (before it is implemented!). Part of the process should be a realistic assessment of the plan's ability to ensure that likely levels of demand are met. As for the individual parties to any agreement, they will have to work constructively together to agree the details of the supply - price, operation and risks.

Developing resilience will take much greater collaboration between companies - a spirit that they are all in it together - rather than creating an environment where a supplier or customer could benefit to the detriment of another.