Albion Water's Jerry Bryan sets out an independent supplier's viewpoint of the water industry

Jerry Bryan, managing director of Albion Water, talks to Steve Hobson about his vision of a more sustainable future for the water industry.

The demise of Aquavitae has left Albion Water to soldier on as the main standard bearer in the battle to open up the water market in England Wales to fair and effective competition.

The front line in this battle is its long-running dispute with Welsh Water and regulator Ofwat over Albion's inset appointment to supply the Shotton paper mill in north Wales with non-potable water (Utility Week, 20 October 2006 and www.utilityweek.co.uk).

In 2001, Albion took its complaint about unfair pricing by Welsh Water to Ofwat, but after a three-year investigation the regulator threw out Albion's case, saying the pricing mechanism used by Welsh Water was fair and reasonable. In 2004, feeling strongly that the judgement was wrong in both fact and law, Albion took its case to the Competition Appeal Tribunal (CAT), the body responsible for resolving disputes involving competition law.

*The Wait*

More than four years after the appeal, Albion is still waiting for the final part of the CAT's judgement.

"The first part delivered in December 2006 was on whether there was a margin squeeze, that is whether Welsh Water could have conducted a similar business on the same terms, and the answer to that was clearly no," says Albion Water managing director Jerry Bryan. "From 2006 until recently, Welsh Water tried to appeal that decision. The Court of Appeal rejected that appeal in May this year and the case of illegal margin squeeze is now proven."

The second issue was whether Welsh Water's prices were excessive. "We are still waiting for the judgement to be handed down by the CAT, and after a long period examining the arguments, that judgement is expected fairly soon," says Bryan.

"Welsh Water might then seek to appeal that decision, but given that this will be largely a question of fact for the tribunal we understand that it would be very difficult to take another case to the Court of Appeal, especially after its first appeal had failed completely."

Another case brought by Corus Steel against Welsh Water over excessive pricing has been on hold pending the final outcome of Albion's proceedings.

*Mixed success*

Looking back on the cases that Albion has brought before Ofwat and the CAT, Jerry Bryan has mixed feelings. "Although these cases have been important and very largely successful, they have been a huge but necessary distraction for us, and it is important that we get back to doing what we set out to do in the early days, which is finding different and better ways of providing water services to commercial and domestic customers alike."

Bryan believes that innovation can only flourish in a competitive market, which is why he has pursued the Welsh Water case with such tenacity. Albion Water has not entered the Scottish retail-only competitive market, partly because much of the company's limited resources have been focused on its legal battles and partly because - like Scottish water regulator Alan Sutherland - Bryan sees retail competition as only the first step in opening up the water market.

"We have being saying for 15 years that there is huge scope for innovation," says Bryan. "Others have caught up with that idea and we are now looking at a range of exciting opportunities for doing things differently."

*The Cave Review*

While the Cave Review deliberates the legislative and regulatory changes necessary to get the competitive water supply licensing regime moving in England and Wales, Bryan insists that effective competition is possible under the current regulations governing inset appointments. These allow a new entrant to take on the supply of a new development of any size with the approval of Ofwat or the consent of the incumbent supplier. "Insets are an opportunity for Ofwat to see what the competitive market can deliver at very low risk to the customer," he says. "We are in danger of losing sight of the fact that they are an incredibly effective tool for small-scale manageable innovation."

So Albion continues to focus on gaining further insets rather than entering the water supply licensing regime introduced in December 2005 for business customers that use at least 50 megalitres a year. This, as Bryan predicted, has been a dismal failure, with not a single customer switching supplier. As in Albion's dispute with Welsh Water and Ofwat, a major stumbling block has been the way incumbent water companies are allowed to calculate the cost of water supply and distribution to effectively prevent new entrants making a margin.

"We spent a year, as did many others, helping Ofwat make the water supply licensing regime workable," says Bryan. "We withdrew from that when it became clear that it was never going to be workable because Ofwat was not prepared to accept debate on their interpretation of what the cost principle meant.

"Water supply licensing is also limited to the retail part of the value chain, and while I have great admiration for good retailers, Albion has never wanted to be just a retailer. We do not see innovation as primarily sending out bills more effectively - the key challenges are upstream of that."

*A Sustainable Future*

While still keeping his cards close to his chest, Bryan talks in broad terms about his vision for a more sustainable water industry and how it needs to change if it is to solve the problem of rising population in the South East of England while resources become more unpredictable due to climate change.

"We need to effectively reinvent community-scale systems," he says. "One of the great attractions of the inset appointment is that it allows you to do pretty much anything - if you can satisfy the regulatory demands, not just of Ofwat but of the Environment Agency and the Drinking Water Inspectorate." Bryan says these are challenges that Albion relishes.

"Reinventing" water systems involves more local capture and use of rainwater, regarding it a valuable resource rather than a problem to be disposed of, and possibly reusing treated wastewater, though Bryan readily acknowledges that, given the choice, the public will not accept using wastewater as a direct feedstock for drinking water.

*BedZed*

One of the first developments in the UK that set out to realise this goal was BedZED, a low carbon housing development in Beddington, south London. This was designed by Albion for an average per capita consumption of 105 litres a day, compared with the UK average of 140 to 150 litres a day, and used treated wastewater for toilet flushing and irrigation.

"It was a huge leap at the time and sowed the seeds for a truly innovative and more sustainable model for water services," says Bryan. "We need to start to unravel the old arguments for economies of scale. Since 1974 the industry has been driven by a vision of economies of scale which has seen the closure of lots of community-based small works in favour of regional centres."

While this high capital cost, low marginal operating cost model has been "fantastic for regulatory asset values and water company profits", Bryan argues that these large structures and associated high energy consumption have been a disaster in terms of sustainability.

"Only now is Ofwat starting to impose the discipline of whole-life costing and carbon accounting on water companies and they are having to look at the implications of embedded carbon and long pipelines," he says.

"It would be a help if we can show we can reduce the scale of these operations without losing economic benefits."

In the longer term, bringing water, wastewater and household waste treatment together with energy production in a local multi-utility plant undoubtedly has attractions, and raises the possibility of near zero-carbon developments.

"It is a very complex business trying to create community infrastructure that is to a large extent self-sufficient," says Bryan.

"It is gratifying that an increasing number of developers are starting to wake up to this, so the future is particularly encouraging."

Bryan acknowledges that under the current regime, insets only apply to new housing developments, and if significant progress is to be made in reducing total water consumption the existing housing stock needs to be addressed urgently.

"That is something that Albion will grow into but this is a very difficult problem," says Bryan.

"Greenfield sites are easier for the development of these technologies and I would then hope to translate that knowledge back into the retrofitting of the existing housing stock.

"Unless the incumbents wake up and voluntarily invest in their existing customers, helping existing customers would then require some changes to the legislative or regulatory framework to open up the domestic market to competition.

"But before politicians declare open season on domestic customers, it is entirely understandable that they need to have confidence that this will deliver real results.

"And we are not talking about a penny or two off the bill - it is about fundamental changes in the way water services are provided. We can't carry on as we are, using bigger pipes, more pumping and building reservoirs to meet unsustainable demand."

*Another fine mess*

The Shotton paper mill case is one of the few in which the CAT found in favour of a complainant, reversing the decision of a regulator.

Albion Water was awarded a substantial sum in costs for successfully fighting this action and the CAT granted interim relief, forcing Welsh Water to reduce its prices to give Albion a small margin on its contract with Shotton, while the case was before the court.

Welsh Water is also estimated to have spent over £4 million on legal fees, while Ofwat's legal costs are put at about £2 million.

The CAT's observations strongly pointed to poor and inaccurate reporting by Welsh Water but no fine has been imposed on Welsh Water by Ofwat.

Ofwat has recently fined a number of water companies for misreporting, suggesting some inconsistency on the part of Ofwat, a view perhaps reinforced by the tribunal's observation in its 2007 judgment that "there is force in Albion's submission that this case involved a small company contending against the regulatory authority working in apparent close collaboration with an incumbent monopoly supplier...".

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