28/11/08
Water UK has responded to Ofwat’s consultation on its proposals for accounting separation and queried the approach.
Essentially the argument is this: if Ofwat’s intention is indeed to use accounting separation to increase the water industry’s cost transparency and promote competition in contestable activities of the industry’s supply chain, then its proposals on accounting separation will not achieve these objectives.
The essential flaw in the work so far is that Ofwat is dealing with accounting separation as a pure cost recording project, without considering economic and managerial objectives.
The project entails extensive cost allocation and apportionment processes, and the recharge of costs from one department to another, but fails to discuss the principles that should guide such processes to ensure that the cost information they produce is meaningful.
Also, the project needs to be supportive of the continued efficiency of the overall supply chain even if it is accounted for in separate business units.
Water UK is also concerned by the proposal to include customer contacts on operational matters within a separate retail function. While the principle of including all customer-facing activities within a separate retail function has logic, its practical result – if reality is intended to follow accounting rules, as it might – could be to delay customer feedbacks to operational departments in cases when a swift reaction, with no retail intermediary, is required.
Contact: Jeanne Golay
