Tony Wray: Open the floodgates: set Britain's water free

The Business Interview: Deregulation is the answer to the water industry's challenges, Severn Trent's chief executive tells Sarah Arnott

Tony Wray is an unusual FTSE 100 chief executive. Not only does the boss of Severn Trent come down to the reception himself to pick me up, but we then talk in an anonymous meeting room because, like all his staff, Mr Wray has no office of his own. "I did have one once, but only for three weeks," he says. "It was the first time I got to be manager, at East Midlands Gas, and I hated it because I couldn't see what was going on."

Mr Wray's hands-on approach is in full effect in his efforts to reinvent the once-ailing water and waste giant. We meet at the spanking new £60m Severn Trent Centre in Coventry, which opened its doors last autumn. It is a paean to modern working practices, with 1,200 identical workstations for its 1,700 hotdesking staff and state-of-the-art IT to support them. It is also one of the most energy-efficient buildings in Europe, with its own biomass boiler and photovoltaic roof panels. For Mr Wray the building is emblematic of the changes he is working in the business he has run for the last five years. "This place embodies what Severn Trent is about," he enthuses. "It's all openness, teamwork, high standards and low charges."

It has been a tempestuous time to reinvent the company. Three short years ago, Severn Trent was fined £36m for a combination of appalling customer service and false reporting of leaks in the years before the current executive team took over. Mr Wray's response was a major overhaul: slimming down the property portfolio to pay for the new HQ, redesigning company processes and centralising staff, while simultaneously facing catastrophic floods in Gloucestershire and a five-year regulatory price review.

"The last few years have been phenomenal," Mr Wray says. "How many companies can say they've consistently improved performance and along the way dealt with reputational issues, major emergencies, company restructuring, and so on?"

But the Severn Trent boss is not simply trying to reinvent his own company. The dust is finally settling after Ofwat's 2010-15 price settlement. And as attention turns to the next round, it's time to recreate the whole industry. "We're already in a place where there is suboptimal resource planning and capital investment," he says. "Now's the time to face it."

Water is a surprisingly complex business. It is the most visceral of the utilities, and has massive capital investment requirements alongside no less than three sets of regulation – economic, environmental and public health. In the face of new challenges, the industry needs major deregulation, according to Mr Wray.

Part of the problem is simple economics. Ofwat's price review holds water bills broadly flat for the next five years. But to fund the £20bn of investment needed over the next 20 years, prices will have to rise by nearly 30 per cent, according to Mr Wray's estimates. And even then, the sector will still rely heavily on capital from investors. The trouble is both the direct squeeze on prices and the knock-on effect on investor returns, which threatens to drive them away altogether. Meanwhile the companies' ability to improve their efficiency is limited by the structure of the industry.

The regulatory system needs big changes, says Mr Wray. "Have the last 20 years been wasted? Absolutely not. The mission then was to take the disparate activities of the water authorities and get everything up to standard," he explains. "But the question is whether the next 20 years is same as the last, and the answer is that it is fundamentally not."

Investment cannot be allowed to stall. Just look at Northern Ireland, where 40,000 irate householders were left without water over Christmas because of pipes burst by the sudden cold snap. "Northern Ireland has had nothing like the 20 years of capital spending that we've had, and look what happened," Mr Wray says. "The lesson is that now is not the time to pull out investment." Such extreme weather is the game-changing challenge facing the industry. Even at Severn Trent, the bill for the December snow will run into the millions – what with the cost of extra call centre operatives, of finding and fixing record levels of burst mains, of working around the clock to protect machinery from freezing. And climate change is not just a question of financial cost, but also of optimising an increasingly scarce national resource.

"We're beyond the point of whether you believe in climate change or not – the reality is we're experiencing more extremes and we have to find ways to cope," Mr Wray says.

Which brings us back to deregulation. Mr Wray admits in part he joined the water industry – after stints in gas, electricity and telecoms – because it was ripe for the massive structural overhaul he has seen elsewhere. The experiences have certainly informed a clear idea of what needs to be done. The length of the price review period should be increased, to give investors a longer-term view, he ways. Merger and acquisition rules must also be slackened, to allow for much-needed consolidation. Where there are now 22 water companies, there should be less than 10. Most importantly, suppliers should be encouraged to trade water between them, rather than clinging onto self-sufficient monopolies within fixed regional boundaries.

"At the moment, given the choice between sourcing low-cost water elsewhere or building a new reservoir, you build the reservoir," Mr Wray says. "That way it goes on your 'regulated asset base' and you get to put your prices up and get a regulated rate of return on it. It's a solution, but it's not sustainable."

The changes he proposes are radical, but they are slowly gaining traction. With a string of reviews under way, and a Government White Paper due in the summer, Mr Wray is hopeful of progress. But he also believes he has the inevitability of economics on his side. "Something has to give," he says. "It will be as big a change as privatisation, but it is the only way for investment to be affordable."

Meanwhile, the perpetual revolution at Severn Trent continues. The foundations are being dug for an operations centre in Shrewsbury built entirely out of recycled materials. Basic customer service scores are now consistently high, so the priority is shifting to making customers feel cared for as well as solving their problems. And while Mr Wray is coy about an acquisition spree in a newly-deregulated industry, he admits that getting the company in shape will let it take whatever opportunities might arise.

The reinvention of Severn Trent is only just beginning.

On the waterfront: CV

* 2005 to date: Executive director and then chief executive of Severn Trent plc, which supplies 1,900 million litres of water per day and deals with 2,500 million more litres of waste.

* Immediately before joining Severn Trent, Mr Wray was director of networks at the Irish telecoms giant Eircom.

* His previous career includes stints at National Grid Transco, BG Transco and British Gas.

* What keeps him awake at night? "Risk: the weather, the economy, the capital markets, regulatory reform," he says.

* Mr Wray is married with two grown-up daughters.