Almost everyone associated with the water industry recognises that there is a need for change. Change in how companies meet the on-going need for environmental improvements. Change in the way that companies are regulated. Change in the way companies interact with the economic regulator. Change in the voice given to customers in what we ask them to pay for.
I understand the attractions of the status quo. But a series of small steps allowing customers to be involved in key decisions and to encourage companies to innovate and pursue positive NPV projects would help us to address these challenges.
More controversially, it is time to change the current vertical integration of the water and sewerage industry – but limited to separating wholesale and retail activities.
I recognise, because I have been through it, that separating retail takes time and that there are many steps involved – although none of these are particularly difficult. And the evidence – and not just from Scotland – is that the benefits to customers, investors and managers are very real.
The case for separating retail activities is based on our experience in Scotland and the success of the Wessex/Bristol Joint Venture. But it is equally the case that there are no obvious economies of scope which require retail and wholesale activities to be performed within a single legal entity.
We now have approaching three years’ experience of the actual costs and benefits. The costs are much lower and the benefits rather more wide-ranging than we originally assumed.
I will restrict myself to talking about costs. The NPV of the steps that we have taken in Scotland is some £138 million. To this we should add the benefits of the on-going rivalry that exists in a competitive market and is usually considered to boost trend improvement – so-called dynamic efficiency.
If we make even more conservative assumptions about the opportunity for dynamic efficiency than were included in Martin Cave’s review, the NPV increases to £333 million.