Looking forward to how we explain the changes in the industry that will result from the Government's Water White Paper, it seems to me that we have to seek out the common interest. The interest of investors (whether public or private) are wholly aligned, except perhaps in the very short term, with the interests of customers.
Both customers and investors will want reassurance that when wholesale and retail prices are set, both the wholesale and retail arms of the previously single vertically integrated companies will be capable of standing alone and independently of each other. To do otherwise would make new entry difficult or impossible to the retail market or it would make investing in the wholesale business unattractive. This would, of course, be in none of our interests.
So as we set out to create an Anglo-Scottish market, we should learn from experience in Scotland. Whether it was luck or good judgement, we ensured that Business Stream and Scottish Water were financially sustainable businesses. We did this by thinking hard not just about activities and their direct and indirect costs but also the financial flows between the two arms of the business. These financial flows are very important. So too are asset allocations, depreciation and a consideration of the return that a retail business should be allowed to earn at market opening.
These are issues that the industry needs to work through as a matter of some urgency!
... and no doubt for those dealing with macro-economic issues, there may be a sense that these times may be a tad ‘too interesting’. The water industry, however, stands on the brink of an important further step towards improving customer service and environmental performance, and increasing the legitimacy of charges in the eyes of its customers.
But the ‘interesting times’ could use rather more direction. Perhaps the publication of the EFRA Select Committee report on the Water White Paper will provide the much needed momentum for the process. Hopefully, Government will shortly make its intentions clear and set a date for market opening. This would be most useful as it would focus minds. There is much that needs to be done.
I look at our work in Scotland as having been delivered in two distinct phases:
- the steps that had to be formalised in the price review; and
- the more detailed steps on tariffs, cost allocation and settlement and registration which can only be successfully completed after the price review has been put to bed.
In my view the aim of the price review should be to ensure that, whether legally separate or not, there are two sustainable businesses: the retail and the wholesale. Key to this is deciding what the financing flows are, how assets will be transferred and any allocation of liabilities. These assessments are best achieved through an analysis of accounting rather than economic information.
Creating initially sustainable retail businesses is critical to ensuring that there is an appropriately level playing field both between the retail businesses of the incumbents and between them and the genuine new entrants.
I await even more ‘interesting times’!!
I am looking forward to hearing what the EFRA Select Committee has to say on the Water White Paper. In my evidence to the Select Committee, I sought to differentiate between Government mandating that each and every water company legally separate its retail activities and allowing for a company that was minded to separate to be able to do so.
At one level, I am optimistic that a company should be able to separate its retail activities - simply because I am aware that Bristol Water and Wessex Water were able to establish BWBSL, a joint billing and customer service company. However, there is an important principle at stake: companies should not be required to continue to operate in a competitive market if it turns out that it would be more advantageous for both their customers and their shareholders for them to exit the retail market.
In many ways, just as it was important that Government should not mandate separation and impinge unnecessarily on property rights, it should avoid dictating who must participate in the retail market. If it does not allow for divestment of retail operations, there is a risk- a not insignificant risk- that the bills of non-contestable customers could be adversely affected.