Utility Week

8 | 28TH SEPTEMBER - 4TH OCTOBER 2018 | UTILITY WEEK Interview 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 financ- ing of the assets. All of the other parts of it – the opera- tion 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 cus- tomer 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 innova- tion 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, renationalisa- tion, 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 affordabil- ity. Wessex was the first company to introduce social tar- iffs, when it launched its "Assist" tariff in 2007. Skellett says the tariff came up against opposition from the Con- sumer 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 expendi- ture. But for some, it's a really sizeable part. "We've got 35,000 customers already on social tar- iffs, 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), intro- duced 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. As well as performing well in customer service league tables, Wessex remains industry-leading for environmen- tal 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 aer 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 inves- tors 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 for- tunate 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 men- tioned 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 prob- ably 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 busi- ness 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 meas- ures – not just in the water industry, but across the wider industry. That's what we've focused on." "We've got 35,000 customers already on social tariffs, and we're aiming to double that over the next five-year period" Wessex Water Supply area: part of southwest England Employees: 2,370 Customers: 2.8 million Revenue (2017/18): £541 million Profit aer tax (2017/18): £123 million Proposed investment for 2020-25: £1.4 billion SIM score (2017/18): 87

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