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Comment Chief executive's view Alan Sutherland, chief executive, Wics A checklist for water reform Alan Sutherland sets out some crucial questions that should (and should not) be addressed in the Water Bill. B y the time you read this, we may finally have had the second reading of the UK government's Water Bill. Politicians of all parties are now looking critically at the water sector. There may be attempts to make social tariffs compulsory, extend metering, bring forward abstraction reform and amend the government's proposals for competition. There may even be suggestions that the industry is hit by a windfall tax or is made to pay more tax. It is important that we look beyond these immediate political debates and take decisions that will benefit customers and the environment in the long term. If we take, for example, the call for a windfall tax; customers would, in the end, pay more because the cost of finance would increase. A similar fate would befall customers if companies have to pay more tax because rules are introduced to limit interest tax relief or limit the capital allowances on investment in improving services. And what about the poor taxpayer if we put off potential investors in the UK's infrastructure? We must rebuild trust in our industry. Jonson Cox has started the ball rolling, demanding greater clarity in company corporate structures and governance. Equally important is Cox's expectation that any excess profits should be shared with customers. A second example is the debate about social tariffs. We should recognise that metering households substantially unwinds significant social cross-subsidies. It can only become progressively more difficult to reintroduce them in the form of social tariffs. This is not to downplay the role metering can play in managing demand. Meters should be introduced when the benefits (including environmental and resilience gains) exceed the costs (including any social impact). Perhaps we should consider whether metering could be combined with maintaining social cross-subsidies? Government seems intent on delegating responsibility for social tariffs to individual companies. As a result the assistance available may depend less on how affordable the bill is and more on where the customer lives. How will this work where different compa- potential new suppliers of water resources. nies supply water and sewerage services? It is unclear how this link could be effective As a minimum, government should set out in delivering greater resilience overall. New clear criteria, to apply nationally, about who entrants would naturally focus on areas should be eligible for social tariffs. where they can reduce customers' bills, Another example where the longer term which will be areas where it is possible to interest must trump short-term expediency supply water for less than the incumbent is the decision not to allow exit from the monopoly's regionally averaged price. retail non-household market. This appears This direct link creates a risk that tariffs a marked contrast to the Office of Fair Trad- end up being de-averaged by default. We ing's report Orderly Exit published in Decem- should be very careful! In Scotland we speber last year, which says trying to cifically ruled out any direct link avoid or prevent exit from a marbetween retailers and upstream ket only increases the likelihood of activities (unless there was an future disorderly exit. Is this a path overall cost saving that could benwe knowingly wish to tread? efit all customers). De-averaging Disallowing exit may have reasmay deliver lower charges for sured investors in the short run, but some, but will result in eye-waterI wonder how many understand that ing increases for others. Our joint most companies will see profits fall analysis, with Oxera and Scottish by up to 5 per cent. Pursuing this Water, confirms that in Scotland option can only increase the cost of "I wonder 50 per cent increases are required capital for some companies in the from two-thirds of non-household longer run – to the detriment of all. how many customers to allow the other There is a way forward here. A rel- understand third to enjoy the benefits of a deatively straightforward amendment that most averaged charge. I will leave you to the Bill could allow controlled companies to ponder what could happen to exit, where companies can only sell smaller businesses in rural areas. will see their customer base to organisations Finally, we must ensure we that hold retail licences (and subject profits fall by do not create perverse incentives to the secretary of state's approval). up to 5 per for wholesale businesses to treat This approach would allow cent?" less favourably retailers that offer economies of scale to be realised, tailored services, including water help ensure a genuinely level playefficiency. In Scotland we have ing field for new entrants, and increase the prevented this by including a specific "no chance that retailers from other sectors detriment" provision to protect the wholemight enter the market. Any other course saler, Scottish Water – again this could be will risk raising expectations only to disap- relatively easily addressed by introducing a point – 2003 all over again. similar clause in the Bill. The Bill also lacks clarity in its apparThe Water Bill is a real opportunity to ent reliance on negotiation between new build on the sector's achievements. Pursuentrants and incumbents. We have been ing palliative, short-term responses may be reassured that the intention is to create regu- superficially attractive but it will not serve us lated access, yet there is no requirement for well. Instead we should think more expanpublished wholesale charges (which would sively and build on strengths. Government go a long way to reassure entrants) and it has an important role to play in setting a isn't clear to me how non-price discrimina- clearly defined policy agenda but the whole tion will be ruled out. industry needs to think carefully about the Perhaps most worryingly, there remains Bill's implications and ensure that a longa potential link between new retailers and term, balanced approach is taken. 6 | 29th November - 5th December 2013 | UTILITY WEEK