United Utilities warns of hosepipe bans

Photo source: Thames Water

With excellent timing Ofwat have just released an informative report summarising the position on water leakage reduction. Only last week United Utilities formally applied for a drought order and news of impending hosepipe bans is bound to raise the pressure to reduce water leakage.

Thames Water in conjunction with Swindon Council have launched an imaginative water saving scheme aimed at encouraging customers to reduce usage. They are even offering free visits for an engineer to survey customer’s homes and install water saving devices.  But will this really reduce water usage? So far just 41 people have signed up to the Swindon initiative hardly enough to transform usage.

When the payback period for installing a water butt can be measured in years, economic incentives alone, in the view of this blog wont change consumption. Many customers wont accept water saving ideas that impact on their personal freedom and consumer experience. Will the current strategy of installing more meters really reduce water usage to the best in class in Europe?

In some European countries the building regulations stipulate that new houses must collect and store rainwater for use in grey water applications. Measures like this have little or no impact on consumer’s experience and alongside work to encourage consumers to use water wisely could help to make a real difference.      

Mixed news for Bristol Water on Competition Commission ruling

Photo source: Bristol Water

Bristol Water will be disappointed by the Competition Commission (CC) provisional ruling. They failed to convince the Competition Commission that Bristol Water needs a much higher tarriff than Ofwat allowed in last November’s Final determination.

The CC ruled that Bristol Water should be allowed to increase bills by 2.3 % (after inflation) up to 2014/15. This is higher than Ofwat’s original determination of 1.7% but much less than the 6% that Bristol Water sought.

Bristol Water was the only water company to appeal to the CC. While the CC did agree that Bristol Water should be allowed some additional money to replace water mains and reduce leakage it rejected the other major projects that Bristol Water had proposed. Worse, it also reduced the cost of capital allowed from the 5.5% proposed by Ofwat to 5% (Bristol Water sought an unrealistic 6.7%). This is not surprising given the lower cost of capital agreed for other utilities by Ofgem.

The blog highlighted the risk that the cost of capital might be reduced in its article back in January.  This ruling, if confirmed, will certainly deter future appeals. Water companies are in a privileged position compared to most companies in being monopolies with their income totally protected. The water companies need to focus on delivery and not get distracted.

OFT probes ownership of water companies

Photo source: Paul Hipwell

The Office of Fair Trading has announced a stock-take of ownership and control across economic infrastructure including water. Its aims are sensible to:

• Map ownership and control of the infrastructure
• Assess how ownership affects outcomes for consumers

In the water sector there has been major change in the ownership structure since privatisation. Generally the investment by infrastructure funds such as J P Morgan or the Canadian Pension Investment Board has brought stable long term ownership to the sector and should be welcomed.

From a consumers viewpoint there are two main concerns. Firstly the various covenants associated with the debt provision do restrict the freedom of the regulator to dramatically change the regulatory structure of the sector making the introduction of the recommendations in the Cave review very difficult to achieve in practice. Secondly, its clear the water sector has been highly attractive to investors and that the stable returns of around 11% for negligible risk are excellent. The question is: are customers having to pay too high a price?        

SME's luke warm towards competition in water sector

Photo source: HM Government

In a report published today and commissioned by CCWater  SME’s are luke warm towards the benefit of competition in the water sector. The main reason for switching would, not surprisingly, be financial considerations. However savings would need to be over 10% to persuade over 50% to switch.

General awareness in SME’s about water competition is very low and most are satisfied with their current supplier. The Cave review made a number of recommendations about how competition could be developed in ten water industry, including the suggestion that the threshold at which business users are able to switch supplier should be reduced from 50ML to 5 ML a year.

The appetite for competition appears to have diminished significantly. The new Government in their Programme for Government have said:  “We will examine the conclusions of the Cave and Walker Reviews, and reform the water industry to ensure more efficient use of water and the protection of poorer households”. That combined with all the negative comment on the benefits of competition in the electricity sector has taken away the incentive to change. The water sector should stop worrying about competition and instead focus on delivering the best possible service at the lowest cost.

Veolia Water buys United Utilities principal non-regulated water interests

Photo source: Paul Hipwell

United Utilities has today announced it has agreed to sell its principal non-regulated water interests in the UK and Europe to Veolia Water plc for £174.2 million. In Europe Veolia is acquiring a 58% stake in Sofiyska Voda that supplies 1.3m residents of Sofia in Bulgaria with drinking water. It has also acquired stakes in the water supplier for Tallin in Estonia and the city of Biesko Biala in Poland.  This strengthens Veolia’s position in central Europe, a key market for the company.

In the UK, Veolia is acquiring from United stakes in three PFI contracts in Scotland (Tay, Moray and Highland wastewater treatment plants) as well as the contract to manage the building of the huge new Brighton wastewater plant for Southern Water. In addition it is buying UU’s stake in the 2010-15 capital delivery contract with Southern Water.

The move makes Veolia the leading player in the non-regulated water sector in the UK as well as strengthening its position in central Europe. It marks an important milestone for United Utilities as it nears the conclusion of its strategy to sell off non-core business. There are now only two water companies left with significant activity in the non regulated sector, Pennon and Severn Trent. 

Water companies look at how future challenges should be meet

Photo source: Paul Hipwell

The Water industry has rightly got in early with publishing its views on how the water industry should respond to changing economic and environmental circumstances. Water UK has published a joint industry response called Meeting Future Challenges, a blue print for policy action. It calls for: “a measured pace for improvements that ensures, overall, that prices are affordable”.

Its timing is good as the new coalition Government also announces its  

Programme for Government which contains clear commitments on the environment especially: “We will examine the conclusions of the Cave and Walker Reviews, and reform the water industry to ensure more efficient use of water and the protection of poorer households”

Getting the balance right between investing in improving water quality and ensuring that customers can afford the bills is a huge challenge for the industry. Perhaps the best example is the Thames Tideway project which while transforming the quality of the Thames comes at a huge price, estimated at about £50 per household for Londoners.

It is essential that the water industry attracts the best people and most creative minds to find solutions to these conundrums. It also needs an environment where innovation is encouraged. On all these fronts the water industry has a long way to go.

UK water utilities robust financial results

Photo courtesy Thames Water

Investors are seeing how their investment in the UK water utilities fared in the year ended 31 March 2010. Despite the recession and the worst winter weather for thirty years most are showing a strong and robust performance rewarding investors.

Anglian Water performed particularly strongly with underlying operating profit rising by an impressive 6.2 % to £463 million on increased turnover of £1100 million also up 6 %. Pennon’s results were even more impressive driven by a strong performance in the group’s waste division, Viridor. Operating profit at Viridor rose by 15%, against a more typical for the sector rise of 2.6% at Pennon’s South West Water division. On the back of Viridor’s strong performance and robust outlook (they are preferred bidder on two major waste contracts in Oxfordshire and Exeter) Pennon’s management are committed to real annual dividend growth of 4% from 2010/11 until at least 2014/15.

AMP5 will undoubtedly be challenging with the UK water utilities committed to ongoing massive investment (e.g £2 billion at Anglian Water for tough challenges of climate change and population growth). But equally its apparent why the water sector continues to be very attractive to investors especially pension and infrastructure funds looking for secure and attractive returns for very low risk.