It is approaching a quarter of a century that Colin Skellett has headed Wessex Water. Perhaps it is the length and breadth of his experience that leads the executive chairman to assess the latest tranche of water policy first and foremost in terms of how well it sets up the industry for the long term.
He mostly has praise for the direction of travel of government policy. He says: “The key feature of the Water White Paper is resilience. The industry has to deliver customer demands, demands from the EC, climate change and get on top of maintaining the existing asset base. What you need is a long-term stable framework in which to be able to do these things, and in which to be able to access the finance. I think the White Paper broadly does that.
“What it’s not talking about, which could have been a possibility, is fragmenting the whole industry, which I think would have made it much more difficult to deal with resilience issues,” he explains.
The biggest exception Skellett makes to this overall positive view concerns some of the proposals for upstream reform put forward in the White Paper, such as resource trading, licence unbundling and allowing third-party access to water companies’ treatment and storage systems. “It’s been ill thought out,” he says. “If you look at this section, what people don’t talk about are the fundamentals – the hygiene issues, the safety issues. Start from there. What you can’t have is people just plugging into your network.”
Skellett believes the government would do better to concentrate on another prong of its upstream policy to achieve better use of water resources – incentivising greater interconnection. “At the moment there is no incentive for companies to actually work together on water resources,” he points out. “What we should be doing is looking at how we can incentivise the surplus water in the north and the west to migrate to the south and the east. Encouraging interconnections – you can do a lot of that.
“I’m not sure a complicated trading system actually helps – in fact it probably makes it more difficult,” he continues. Aside from potentially stranding some existing assets, it would hinder – if not outright prevent -companies collaborating in the national interest.
Skellett provides an example: “As water companies, we had a meeting recently about how we can mutually help each other on the current drought arrangements – there’s a lot of work going on right now on how we can move water around. The lawyer pointed out, had we got the new arrangements in place, we would not be allowed to sit in the room doing that because it would be a breach of competition law.”
The Wessex stalwart urges policymakers to recognise the water industry is a key national asset and needs to be kept in a position where companies can help each other out in extreme situations, which he notes will become more common given the changing climate. “We are going to get more periods when we get long dry spells, more periods when we get extreme rainfall, more extreme coldness. We’re never quite sure when it’s going to happen and just saying the market will deal with this? It won’t. You need to preserve an arrangement whereby companies have the incentive and the ability to co-operate to deal with what are national problems.”
He hopes work this spring and summer to deal with the drought in parts of the country will focus minds. He returns again to his theme of thinking for the long term: “People come in and out of this; some of us have been around in the industry for a long time. It’s very easy to think there are superficial solutions to problems when actually this industry is about long-term investment and long-term making sure we have the ability to deal with a changing environment, changing customer needs, all of those things. It’s not about quick-fix solutions.”
In contrast to his views on increasing upstream competition, Skellett welcomes plans for retail competition for business customers. Although he takes care to stress it should not lead to further disaggregation – “retail competition for business customers is fine but I think it would be a retrograde step if you then said ‘well, we can chop these businesses up into lots of different boxes'” – Skellett believes exposing the retail part of the business so companies’ costs to serve can be compared should encourage efficiencies, which can only benefit customers.
He clearly believes retail competition will lead to structural change in the industry, ousting many water companies from customer-facing services. “My guess is, ten years down the line, every company will not be in retail. I think it will come down to a small number of retailers providing those retail business services. There’ll be people coming in from outside. If you’re a business customer, you might want to get British Gas to aggregate it all, or Tesco.”
So Skellett is comfortable with the idea of separate wholesale and retail price caps, but what about the other changes Ofwat is working on for the next price review? As the company that started, and has had great success with, catchment management, Wessex is glad of moves – for example, to address the capex bias – to put greater emphasis on sustainable solutions. “At the moment we are effectively penalised for coming up with sustainable solutions; you make money by spending capital,” he observes. Wessex will be pressing for proper incentives for sustainable solutions, and for the Environment Agency to press on with its increasingly pragmatic approach to regulation at the next review. Skellett explains: “There needs to be a recognition by regulators that catchment management does not deliver the absolute certainty treatment delivers.”
He is enthusiastic too about Ofwat’s plans for consumer engagement at the next price review, which essentially give companies greater ownership of the customer relationship and a responsibility to make sure business plans reflect customer preferences.
Wessex has had customer panels in one form or another since 1976. It has now refined its model so four separate, independent panels (domestic customers and communities; business customers; local authorities; and environmental interests) report to both the Wessex board and the new customer challenge group prescribed by Ofwat. Skellett believes the new structure will ensure all stakeholder views are taken into account so Wessex’s business plan can be firmly rooted in what customers actually want, given price constraints.
Perhaps his biggest concern for the next price round and beyond is ensuring the industry continues to have access to reasonable-cost financing. “The worst thing you can do is to raise the cost of capital, the cost of financing these businesses, because that will dwarf the efficiencies in everything else,” he says.
“The White Paper I thought did a pretty good job. The White Paper was pretty clear that it wasn’t going to be revolutionary change, it was going to be evolutionary change – RAB would stay, etc. The Ofwat consultation – the Section 13 consultation that’s been going on – has probably not been best handled. To come out with something saying ‘we might want to change the time period, oh and by the way, we might want to move away from RPI’ – I mean, that’s what spooks investors.”
He notes the markets have calmed somewhat since the consultation was issued, and is confident of the sector’s financeability going forward, but wants Ofwat to take on board that it has to “manage the messages, take account of how it might be perceived by people who aren’t really focused on the water industry”.
Before Wessex grapples with the full price review next time round, it will be going for an interim determination on the back of private sewer adoption, most likely in 2013. Skellett says: “We haven’t actually made the decision yet, but I doubt we will go for an IDoK this year. But we will want to get it under our belt before the next price round because there are significant sums of money being expended and the business is carrying the cash consequence of that in the short term.”
Even without private sewer costs factored in, affordability is becoming a higher profile issue for the industry. The government’s solution is social tariffs, set and run by water companies. Skellett thinks these will necessarily be confined to a very small group of customers: “I don’t think you’re going to see massive cross-subsidies because customers won’t wear it.”
Although he supports the non-compulsory stance of the White Paper on metering, he sees more metering, and the far greater range of tariff options that accompany it, as the key to dealing with both affordability and demand management in the future. He gives an example: “If somebody’s got a big garden and they want to use a sprinkler, why shouldn’t they pay a hefty amount and that helps cross-subsidise somebody who has more difficulty paying?”
He continues: “I think tariff structuring and metering longer term takes you down a much more constructive road than the social tariff. You will still have some people where you’ve got to look via social tariffs, but it would be crazy if we got a situation where you’ve got 25 per cent of your customers on a social tariff.”
Wessex failed to secure funding to install meters on change of occupancy at the last price round, but will be pushing hard on this again next time around. It is also running an extensive smart metering trial in Dorchester later this year where, aside from the technology and how data is presented to customers, a range of incentives will be tested to see what makes people change their water consumption behaviour most effectively.
Skellett says: “If you came down from outer space and found that a lot of people in this country still pay on the basis of rateable value which was set in the 1970s – it’s madness! So we want to find a way of accelerating the move to metering but with the right tariffs to protect affordability but also really incentivise water efficiency.”
This article first appeared in Utility Week’s print edition of 23 March 2012.
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