17/10/2011

Valuing water


Water is a precious resource. Its importance is universally recognised. Over recent decades, it has become an increasingly prominent issue. We face a number of new challenges, including a changing and unpredictable climate, population growth in water scarce areas and affordability issues.
“These challenges mean that we have to look carefully at how we use water. We need to value it and manage it responsibly. The problem is that we do not actually have a value for water. The price that customers pay reflects what has been done to get the water to the tap, but not the value of the resource itself. So, we must start valuing water, using a range of tools to reveal that value, including regulation and water trading” This quote from the Ofwat Valuing Water report misses the point. Water only has a value when it is available at the point of use. The water in Lake Windermere has no value. Its only because there is an water main running all the way down to Manchester that it is then valuable to the people of Manchester. It is of precisely no value to people in London as it would be prohibitively expensive to transport it to London from the Lake District. Ofwat need to recognize that the value is not in the water but in the assets used to store, treat and purify the water. The real question is how can these assets be used more effectively? 

The other implicit assumption behind the Ofwat report is that competition is a good thing. Ofwat  show the electricity and gas markets as ones to aspire to. Yet only today the Energy Secretary has called in the big six energy companies as its clear to everyone that the energy market is not working.

Ofwat should forget about competition and focus instead on ensuring there is a regulatory system that is not biased towards capital solutions and one that encourages and rewards innovation. 

07/10/2011

Capex bias in the water and sewage sector

Ofwat’s report on Capex bias is an important contribution to the debate. This is a vital issue for three main reasons.
  •  The water industry will continue to need massive investment £22bn over AMP5; the financial structure must ensure that this investment can be funded.
  •  Water bills are continuing to rise and with the squeeze on household incomes it is even more important that everything is done to minimise costs.
  •  Everyone agrees the water sector needs a lot more innovation. It faces some huge challenges from climate change and rising population and if these are to be solved at a cost customers can afford then new innovative solutions will be needed.  Capex bias limits the options open and is a major constraint on innovation.

Ofwat’s paper makes clear there is a capex bias as this quote illustrates: “When we consulted on SuDS, a number of (water) companies considered that the existing regulatory framework incentivises capex rather than opex solutions. So, they thought that they have incentives to build sewers, rather than investigate alternative approaches”.

The bias is even more starkly illustrated by the Abington reservoir inquiry. The Inspector concluded that Thames Water had not adequately investigated the alternative solutions such as demand management. Instead it had favored the highest capital cost solution. The current debate over the Thames Tideway Tunnel is raising this issue up the political agenda.

The water companies can not be criticized for working to ensure the best return for their shareholders. It is the regulatory framework that must change. This is an issue that has been around since privatization 25 years ago. It is time to stop talking and take action. The responsibility clearly lies with the Government and Ofwat. Decisive action is needed from the Ofwat “future price limits project” supported by the water white paper when it is published at the end of this year.    

04/10/2011

Private sewer transfer is completed


October 1st marked the transfer of responsibility for private sewers from householders to water companies. It’s a huge shift that may have unforeseen consequences. For the water companies the increase in responsibility is massive, it adds over 200 000 kilometres of sewers to their network and worse the condition and maintenance history of most of these sewers is not known.

It will certainly increase water bills, initial estimate suggest that costs for the water companies could increase by £200 million and it is likely some will apply for an interim determination. It is certain that household insurance bills will not decrease even though insurance companies will no longer be liable for the cost.

There will be a huge increase in the number of calls to water companies. This could have a significant impact on their SIM ranking. The arrangements for handling the increased workload vary with each water company, some are using their tier 1 contractors to mange the process. Certainly the transfer is to be welcomed and once the new arrangements have settled down it should lead to proactive approach to sewer management rather than the wasteful just fix it mentality that previously existed.