Since early this year there has been a lot of focus on the “legitimacy challenge” to the water industry: the question of whether or not the privatised profit-driven model of water companies that has been followed since 1989 is currently delivering for consumers. Leading the charge has been Jeremy Corbyn’s Labour, which has long threatened to take the industry back into public ownership. This in turn has prompted a concerted effort by Defra under Michael Gove and the regulator Ofwat to ensure companies maintain the legitimacy of the privatised business model in the eyes of the public.
The prime opportunity for this has been the publication on 3 September of water company business plans for the 2019 price review (PR19) period, which runs from 2020 to 2025. Broadly, they have responded well to the challenge, unveiling a combined investment package of over £50bn, committing to service improvements, and launching new initiatives to meet customer needs.
Almost 50% of all investment over PR19 will be made by just three companies: Thames Water, Anglian Water and Severn Trent. Thames Water has by far the biggest spending programme, proposing a £11.7bn programme. Since it is a highly-geared company (aiming to reduce its debt-to-equity ratio to 76%) it falls foul of Ofwat’s new requirement for companies exceeding 70% gearing to share financial outperformance with customers as well as with investors. This is one of the key planks of the regulator’s policy for reinforcing legitimacy.
Another initiative has been to promote a crackdown on leakage, an issue that resonates deeply with the public. Around 20% of all water in the system is lost to leaky pipes, and while water companies have done well to reduce it to this level, progress has faltered as it is now often cheaper to pump more water than to carry out costly detection and repair. However, with companies failing to meet their leakage targets and the looming spectre of climate change threatening rainfall, this issue is facing a lot of scrutiny from the left. Ofwat has encouraged all companies to commit to at least a 15% leakage reduction target. They have done so, and both Anglian Water and Yorkshire Water have gone above and beyond with 22% and 25% reduction targets respectively.
Companies are seeking to support their customers in other ways. Northumbrian Water is planning a considerable reduction in bills – 12% for water and 14% for sewerage by 2025 – while United Utilities is introducing a CommUnity Share initiative, which will share dividends with customers in the form of bill reductions, more financial assistance for customers, or community grants. Similarly, South West Water has chosen to offer customers the opportunity to take a share in the company through the Watershare+ programme, which will see them receive a dividend just as shareholders do, and able to attend a customer annual general meeting. Both of these programmes are purely voluntary, with neither company exceeding Ofwat’s 70% gearing threshold.
It is now up to the regulator to consider these business plans and decide whether they are suitable. Those companies whose plans it accepts first time will benefit from a higher rate of return on regulated equity, but those that it has to make directions to in order to meet its aspirations will be penalised.
Full coverage of these events is provided in Water Spectrum, our monthly breakdown of the key developments in the water sector. For more information please contact Steven Britton on 01603 542126 or s.britton@cornwall-insight.com.
