18/06/10
We need to change water regulation policy in the coming two years, to make sure service and quality go on improving in the coming two decades.
The water companies, through Water UK, have published a joint blueprint for action showing how this can be achieved.
The blueprint shares the views of many people – about the challenges the industry faces, its record, and the two-year opportunity it has to shape up. But it is more rigorous, and more realistic, about priorities and how to use the time available.
The aim is to build on the successes of management and regulation since 1990.
Some people apparently see this success as a flimsy foundation for development; the challenges to future health are too great; the only prescription is complex and radical surgery, however uncertain the prognosis. The industry, including many senior people joining in recent years from other sectors, sees it differently; consistent regulation and responsive, effective management have created a strong platform for real change.
Real it must be. There is nothing half-hearted about the industry blueprint. Consider, for example, plans for bringing consumers directly into price reviews and competition through water trading upstream. The principle is to remove barriers to innovation in the framework of regulation, but leave the framework itself, and the confidence it commands, stronger than ever.
Confidence is vital to customers, regulators and ministers. To investors, it is the one thing that really counts, as one of the biggest City supporters of UK infrastructure, Invesco Perpetual, warned this month. Equity capital, the firm said, had been taken for granted in the last price review; at the next, the system should not “expect shareholders to be holding the baby”.
Not surprisingly then, one of the four priorities in the blueprint is sustainable access to capital markets – understanding, avoiding or managing whatever gnaws away at market confidence. The other three priorities – putting customers first, renewing incentives, and making regulation more flexible – are essential for meeting the challenges ahead, but also for getting the industry fit to retain market confidence.
The challenges are chronic strategic conditions: tackling pollution of raw water; managing surface water and flooding; combining sustainable resources with affordable public supply; reducing greenhouse gas emissions; adapting to climate change. They are different from past challenges – more like alligators snapping at vital industry organs, than elephants such as inadequate sewage treatment or poor drinking water quality, trampling its reputation. The right medicine is to use the complementary roles of regulation and competition to discover new ways of managing water by both companies and consumers.
Priorities
1. Putting customers first means a more measured pace to environmental improvements where customers are required to pay. Customers and companies should jointly take more responsibility for service levels, negotiating through a consumer representative body such as a strengthened Consumer Council for Water.
2. Renewing incentives for efficiency and sustainability is removing the bias between capital and operating solutions while improving incentives for operating savings. It is also a better balance between risk and reward, for example if a company (with customers’ acceptance) decides to go beyond official minimum standards.
3. Developing flexible regulation will produce a new focus on what matters to customers and other interests, rather than on compliance perfect in every tiny detail. More use of price signals will achieve the same end, for example through abstraction and discharge permits with variable prices reflecting environmental costs at different times and locations.
4. Ensuring sustainable access to capital markets requires policy to re-emphasise the industry’s continuing need for equity and debt capital and Ofwat’s continuing duty to enable companies to finance their functions. It will mean ringfencing, or allocating, Regulatory Capital Value to stop the competition agenda destroying capital by stranding assets.
The industry blueprint is an ambitious but realistic programme for policy change. It holds out the prospect of PR14 producing a healthier return than ever for customers, investors and the environment. But we need to get on with it. Companies have a good record of working in partnership with all interests and look forward to cooperating to bring about the necessary policy reforms.
A version of this comment was published in Utility Week, 18 June.
