Colin Skellett wants to revolutionise the water industry, and he plans to use the latest round of regulatory hoops – PR19 – to make a start.
Wessex Water’s chief executive is often referred to as the godfather of the water sector. The only water chief executive to have led a company since before the industry was privatised in 1989, he’s witnessed every change to the sector since.
There is perhaps a danger that working for the same company for 44 years may cause one to become stuck in a rut, but for Skellett this hasn’t happened. He always strives to keep Wessex Water moving, so it remains the best-performing company in all areas.
And not only does he want Wessex to remain one of the top performers, he also wants the mindset of the entire sector to change.
On 3 September, Wessex, along with every other water company in England and Wales, submitted its business plan for 2020-25 to Ofwat. The overarching theme of Wessex’s plan is that the water industry model needs to change completely. “We feel really strongly that we should be about changing the model. We shouldn’t be going through more and more regulation, and the more you can get competition and markets into the sector, the less you need regulation. That’s the overriding thrust – our board is really keen to try and promote a different model.”
Skellett meets Utility Week at the company’s head office in Bath to talk about Wessex’s recently submitted business plan, and Skellet’s vision for the future of the water sector. He has a glint in his eye as he jokes about the need for Utility Week to change its name. Although said in jest, his statement has a serious undertone. He doesn’t like the word “utility” – he prefers “service business”. “There’s something about the word ‘utility’ – a) it sounds very old-fashioned, and b) it sounds as though all you’re about is spending money to do stuff, whereas what you should be about is providing service.”
He gallops through his past, bored with going over old ground. The 73-year-old, Nottingham-born water boss joined the sector in 1961, when he started work in a lab at a sewage works. He joined Wessex Water in a junior management role in 1974 – when the company was created – and was made chief executive in 1988 to lead the company through privatisation. He now heads the empire that is Wessex Water Group, with six subsidiary companies.
During the time he’s been in the industry, Skellett has seen its many different facets. Now, he doesn’t believe taking the water companies back under public ownership – as proposed by the likes of Labour leader Jeremy Corbyn – is the way forward. “You can do it,” he says, “but there are difficulties.” Firstly, the large amount of money that would need to be spent on the renationalisation itself, at a time when there are all sorts of other demands on public money.
Secondly, and more importantly, maintaining the level of investment the water industry needs would be a tough task. “We need sustained investment,” says Skellett. “The reasons why the industry standards – whether it’s service, leakage, pollution, water quality – have been transformed since 1989 is because of investment. Unless you can guarantee that sustained investment, you won’t maintain those standards and those improvements.” History shows us that the public sector is not good at long-term investment.
Comparative competition has driven efficiencies and made companies more responsive, but we’re still dealing with monopolies
Skellett doesn’t believe the current model is perfect, however, and he does believe it is time for a change. Scrap monopolies, for a start. “It’s a mindset that says, somehow, we’ve got to stay as a monopoly – but we don’t. And if the industry does stay as a monopoly, then the mindset is that we need more regulation.
“Comparative competition has driven efficiencies and made companies more responsive, but we’re still dealing with monopolies,” he says. “We were publicly owned monopolies, we’re now privately owned monopolies. Inherently people don’t like monopolies, and monopolies generally are not the most efficient way of delivering things.”
He adds: “If you look at the whole service-chain in water, none of it has to be a monopoly, except perhaps the ownership and financing of the assets. All of the other parts of it – the operation of the assets, building new assets, the retail services – all of those subsets can be done on a market basis.
“The industry now faces the greatest challenges ever – particularly the impact of climate change, the need for new development and servicing new development, improving the existing asset-base, and changing customer expectations. All of that says that you are going to need to do things differently. I think turning it back into a state-owned monopoly won’t help at all.
“What you do need to do is to encourage innovation and new entrants, so if you open the sector up to more competition, you’ll do that. People will find ways of doing things that we can’t even think of. It’s not necessarily about ownership, regulation, renationalisation, it’s about a philosophy that says: how do you best encourage innovation, efficiency, and encourage people to offer services in different ways?” Wessex itself made a “record” £250 million investment in 2017/18 to maintain and improve its assets.
Skellett praises Ofwat for the way it has run the PR19 process, which has been much more understandable for companies than past processes. But it has been very time-consuming. Regulation has done a lot of good for the industry, but it is getting gradually more intrusive, he argues. “We used to have one price review, now we’ve got six,” he says. “We, as a business, are going to finish with 40-odd performance targets for which we get rewards or penalties. It’s all very well-meaning, but the danger is it distorts what businesses do. People become focused on: “how do I maximise the benefit from those particular targets”, rather than: “how do I deliver, overall, the best service I can?”
Skellett is pleased that a key focus for PR19, and indeed for the utilities sector as a whole, is on affordability. Wessex was the first company to introduce social tariffs, when it launched its “Assist” tariff in 2007. Skellett says the tariff came up against opposition from the Consumer Council for Water and Ofwat at the time, neither of whom were keen on the idea of cross-subsidy. “As long as customers support it, you can have cross-subsidy,” says Skellett. “For most customers, water and sewerage bills are a relatively small part of their household expenditure. But for some, it’s a really sizeable part.
“We’ve got 35,000 customers already on social tariffs, and we’re aiming to double that over the next five-year period. That’s important, because we have got to address the fact that household incomes have, for many people, been falling. Customers do find it difficult to pay and we must do everything we can to help. We’ve got an overall price cut for everybody, and then we’ve got a much greater focus on driving up the number of customers who we help by giving them tariffs that they can afford.”
Wessex has been at the top end of Ofwat’s Service Incentive Mechanism (SIM), introduced in 2010, for a number of years, and the company expects to be a top performer again this year. It also has the fewest complaints of any company in the industry – with 96 per cent of customers rating its service as “very good” or “good”. Yet Skellett is concerned that Ofwat’s new C-MeX measure – brought in under PR19 – will be more of a challenge for Wessex, whose brand identity is less pronounced than a company such as Welsh Water or Yorkshire Water. C-MeX will place more of a focus on the “general” customer base, as well as those that have contacted their water company.
One of the things that has gone wrong in the industry is where the wrong investors have been there
As well as performing well in customer service league tables, Wessex remains industry-leading for environmental performance, according to the Environment Agency, and top of the Drinking Water Inspectorate’s new league table for drinking water compliance. And it was held up as an exemplar in a report by the regulator looking into how water companies responded to the rapid freeze-thaw incident that occurred earlier this year. On top of this, the company performs well financially, making a profit after tax of £123 million from revenues of £541 million in the latest financial year (2017/18).
To what does Wessex owe its stand-out performance? It’s partly down to finding the “right sort of investors”, says Skellett. The “right sort of investor”, he explains, is one who thinks about the business in the longer term.
“One of the things that has gone wrong in the industry is where the wrong investors have been there,” he adds. “I can understand the media and political flak about some of the stuff that’s happened. It’s clear in some places that investors have had more than their fair share of rewards. Some of the financial structures that have been put in place are so opaque, people don’t trust them. The investors are key. Whatever model you introduce, you need to get that model to encourage the right sort of investor.”
Since 2002, Wessex has been owned by Malaysian infrastructure investment company YTL, under whose stewardship it says it has been “structured and ﬁnanced in a simple and transparent way that ensures it is ﬁnancially resilient”, with gearing under 70 per cent and a straightforward corporate structure.
Before this, however, the company had four-and-a-half years under the wing of Enron – the “investors from hell”. “They didn’t understand the industry, they thought it was a growth industry, they just wanted to strip money out of it,” says Skellett. “The base investors supplying the capital need to be the pension funds and investors who are looking for a safe steady return. We’re really fortunate with YTL to have that.”
He says when Wessex was bought by YTL, the board asked what they wanted the company to do, to which the response was “just make it the best” – which, as mentioned above, is something it is well on the way to doing.
Despite outstanding performance in so many areas, Skellett expects, and wants, Wessex’s business plan to be categorised somewhere in the middle. “My take on the ones that were ‘enhanced’ at PR14 is that they probably got less out of it than they thought they were going to get.
“We’re not trying to get into a category. We’re happy that we have produced a business plan that we believe in. It’s a business plan that will reduce bills, do much more to help with affordability, fundamentally change the model of the industry, and, I believe, get us into the top 20 service measures – not just in the water industry, but across the wider industry. That’s what we’ve focused on.”