Good morning ladies and gentlemen, it is great to have the chance to address this Water UK 17th annual City Conference.
A lot has happened since last year’s event -the tumultuous political events on both sides of the Atlantic, and the near-daily re-interpretations of the prospects for our national economy. When we met 12 months ago, the conference buzz was about two things.
One was the Bazalgette vision for the industry set out by the then Minister Rory Stewart: the other was the approach to indexation in future price controls. Now, in March 2017, uncertainty feels like the order of the day. And that matters in a sector where greater uncertainty has the potential to feed through into higher financing costs and pressure on customers’ bills.And yet, of course there is continuity.
The direction of regulatory travel is well articulated, as Cathryn Ross set out in a speech last October and since.More fundamentally, what customers want is still the same as before. Top-quality water. Affordable bills. Great customer service. A cleaner environment. And all delivered by well-run, responsible businesses.The principles which are key to our sector’s continued success are also unchanged –such as putting the customer at the heart of all we do; working for the long-term; focusing on value for money, not just price; and embracing the opportunities from greater competition –where there is strong evidence that this would clearly improve customers’ overall experience.But some things are different.
But having said all of that, things are different.
The most obvious change is the imminent opening of the non-household retail market. Companies have restructured, new entrants have arrived and we are in the final three weeks of preparation before opening the market to over one million business customers.
The combined effort of companies, MOSL, Ofwat, Defra and CCWater to get to this point in a compressed timescale has been remarkable. Just how big a change this represents is the focus of the next session in today’s conference.Less clear at this stage is whether or when there will be a move to extend competition to households.
The absence of a formal Government response to the Ofwat review, and CC Water’s lukewarm reaction to the potential level of savings, all point to a pause at the very least.No bad thing, though, if that allows time for the new market to bed down and for any lessons to be learnt.
The second obvious change is Brexit. Leaving the EU may be less of an existential challenge for us than it is for others, but it does bring potential downside and upside.
Take, for example, the prospect that new EIB funding to UK water companies may not be available after Brexit. Should that come to pass, the additional cost of raising debt from other sources could amount annually to tens of millions of pounds over the course of the next AMP.
On the other hand, greater domestic control over green legislation and public funding for agriculture offers a big chance to re-shape these two key elements of the business environment for water companies.
The prize is greater scope for water companies to work with others in delivering continued high standards of water and environmental quality more cost-effectively. The challenge is whether collectively with Government we have the will and the bandwidth to seize that chance. The likelihood is that EU environmental legislation will be rolled over into UK law as part of the Great Repeal Bill –no straightforward task in itself -and will be one of a myriad of potential areas for post-Brexit change which could overwhelm policymakers.
And while the debate has begun on what should replace the Common Agricultural Policy, there will be many competing calls for what the future arrangements should look like. But if we get it right, we can develop a holistic approach based on smarter, more outcome-based environmental legislation;agriculture funding that is more focused on buying public goods such as good water quality; and encouragement for a catchment-based approach to managing water resources where appropriate. A third topic where things have moved on is resilience.
For example, the sector has now completed its ground-breaking analysis of the long-term outlook for water resources in England and Wales. The risks posed by climate change and population growth are present and growing, but through demand-side and supply-side measures we can mitigate those risks at modest cost.
The action now moves to the preparation by companies of their Water Resource Management Plans. On the waste water side, the sector has been progressing with the 21st Century Drainage Programme, which will provide the tools by which companies plan for the future and in time provide us with more visibility of the scale of challenge involved on this side of operations.
What remains less clear at this stage is the extent to which all of us –companies, investors, regulators, government, customers –have moved closer to agreeing how best to square the circle between resilience and affordability.
The optimist in me feels that the debate has genuinely moved on, so that it is less about “whether” we should be investing where necessary in resilience –and more about “how” best we do that. But the hard yards now to be run to PR19 will no doubt prove how well placed is my optimism.And this brings me to the last topic where there has been movement, at the very least in emphasis –that of affordability.
Again, the issue is not a new priority for the sector. What is new is the political expectation created by a new government which has explicitly talked about creating a Britain that works for everyone.Water and sewerage bills may be less prone to the major swings seen in other areas of household spending. But the prospect in unpredictable economic times of the “JAMs” coming under greater financial pressure will merely sharpen the level of expectation about responding to their needs.
The debate to be had is how far we try and address such challenges by continued focus on average bills –and how far we do so by targeting support on those who most need help.
Again, I am sure that debate will continue to run over the next two years. So what? Despite the level of unpredictability which the UK is experiencing and the change which the sector is going through, one thing strikes me. And that is how confidently we are getting on with things.
We still provide some of the best water quality in the world.
Customer satisfaction and value for money scores are good. And companies are on track to deliver improvements on customers’ priorities. Innovation is alive and well. Companies are using digital technology to revolutionise not just their asset management but customer service delivery. And innovation extends to areas beyond the technical.
Companies have recently commissioned thought-provoking reports by PwC and KPMG on future scenarios and models for the sector. Simon Cocks from Affinity will share some of this in the afternoon session. Nor should we under-estimate the way in which companies have embraced the arrival of non-household retail competition -from the instrumental initiative to set up MOSLin 2014,to the £200m and more which they have invested to help set up and promote the new market.
And on affordability, virtually all companies now have social tariffs in place and we are working hard with Government on further opportunities to target help better. Of course, we cannot be complacent and we constantly need to be on our mettle.
The need to innovate across all areas of the value chain will remain paramount. I leave you with two final brief thoughts on what else would help us stay on top of our game.One is the need to ensure that the positive things we do and our contribution to the wider economy are well understood by the public and politicians.
If we don’t, the risk is that our needs will get overlooked –or worse, compromised. That’s something I hope we will be doing more of in the months and years ahead. The other is predictable and joined-up policy,as far as that is possible in an unpredictable world. As part of that, being clear about the outcomes we are trying to achieve and the priorities for action maybe obvious: but it’s certainly something that investors have stressed in discussion with Government officials.
That is why the forthcoming SPSs and 25 Year Plans are really important, and why we are looking forward to engaging in the consultations which will follow.
I hope you have found these comments helpful as a scene-setter for the following sessions. Thank you for your attention and enjoy the rest of the day.