Utility Week

Utility Week 18th October 2013

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Page 15 of 31

Policy & Regulation Market view Divide and conquer Chris Phillips says the Water Bill and PR14 won't foster real innovation in the market and that companies should be split up to meet future challenges and excel on the world stage. A stated aim of the recently published is an ideologically driven mirage. ExperiWater Bill is to stimulate innovation ences in the energy sector have shown that it in the UK water sector. The industry is highly unlikely to result in any significant has traditionally been slow to embrace new developments. A challenge to many investment initiaideas and new technologies. The Water Bill, alongside Ofwat's 2014 tives is the lack of a realistic internal value price review (PR14), contains some elements of water. As UK utilities manage the entire of progress on the innovation front. The water production line, from source to tap, moves towards total expenditure, or totex, they often only consider the marginal costs and an outcomes-based approach are sensi- of producing water in any business case. ble and should stimulate some level of new That places an artificially low value on the business impact of many innovations. thinking. Separating water companies into wholeUnfortunately, they do not go far enough. In most part the Water Bill is disappoint- sale and retail divisions would, however, ing and will do little to encourage any stimulate significant levels of innovation to acceleration in innovation. There remain the benefit of customers and shareholders. fundamental structural barriers to innova- It would also improve environmental perfortion that could and should be addressed. A mance and encourage a more realistic price far more radical structural transformation and value for water. It would be the engine of the water industry and its regulation is for innovation because each retail distriburequired if UK utilities are to meet rapidly tor would be required to weigh up the cost of emerging risks associated with providing investment alongside the real value of water conserved. clean water. The UK currently practices "micro- The role of the regulator would then be regulation", where individual investment to ensure that the customer was protected, programmes are reviewed and approved by and that the price and service delivered to Ofwat for funding. This creates inertia, locks the customer were fair. It would be able to set in specific investment programmes over five the pricing and service level requirements years and constrains flexibility to introduce from the wholesaler to ensure prices are not inflated at this stage. Regulation could innovation in a shorter cycle time. The setting of leakage targets is an excel- then focus on the boundaries between the lent example. Ambitious initial targets stim- wholesaler and retailer, and also between ulated a wave of innovation in the industry. the retailer and customer. Beyond that there But over the past ten years leakage targets could be deregulation. There should be no have remained essentially flat, based on the micro-regulation of individual investments incorrect assumption that the sustainable and projects. By separating retail and wholesale, and economic level of leakage has remained the same. That lack of ambition in setting leak- regulating only at the boundaries, we could age targets has eliminated almost all the create the freedom and commercial incenpressure on utilities to find more effective tives to drive continuous innovation. This structure would lock in the commerways of reducing leakage. The Water Bill includes tentative moves cial incentive for the retailer to continuously towards structural change focused on intro- improve their operations (while maintaining ducing more competition into the industry. their service levels), since that would maxBut using competition as a mechanism to imise profits and returns to shareholders. This approach avoids force-fitting a comstimulate innovation in the water industry 16 | 18th - 24th October 2013 | UTILITY WEEK petitive market on to the industry and would free retailers to make their service delivery as cost effective as possible in whatever way they saw fit. It would also help create the conditions in which the UK could lead the world in smart water technologies and services. The water industry represents a strategically important economic growth opportunity for UK plc. It is an exciting global market that UK utilities and their supply chains are well placed to take advantage of. The need to manage water provision more effectively and efficiently around the world is being driven by climate change, urbanisation and population growth pressures. Water scarcity is being forced up the global risk agenda. Traditional approaches to network management will simply not be efficient enough to meet future demand for water. Despite a conservative approach over the past few years, the UK water industry retains a strong reputation for best practices in water network management. The radical restructuring outlined in this article would also help create the conditions in which the UK could lead the world in smart water technologies and services. It is no coincidence that many of the pioneering leakage-related technologies now in use around the world were developed and first adopted in the UK. The setting of leakage targets in 1990s created many of the tools and techniques that much of the rest of the world has now taken on board. The UK's water utilities and the supply chain that supports them have the potential to lead the world market for smart water networks. We need to be bold and unleash that potential. Real innovation in the UK would benefit utility customers and their shareholders, as well as the environment, and encourage high technology, export-driven economic growth in new, cleaner water technologies. Chris Phillips is a director at i20 Water

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