First fallout from Final Determination

Photo: Thames Water Beckton STW

Thames Water has announced that its Chief Executive Officer David Owens is to stand down after only three years at the top. The news, coming just four days after the Final Determination was announced combined with the fact that Mr Owens does not apparently have a job to go to suggests there is a link. Thames Water was hit hard in the final determination with Ofwat’s decision to allow prices rises of just 3% on average compared to 17% in Thames Water’s Final Business Plan (FBP).

The gap between the FBP and Ofwat’s view is even larger for some of the water only companies. Bristol Water had asked for price rises of 29% and were granted 7% while Sutton and East Surrey had asked for 27% and got 1% . Some such as United Utilities have actually got a decline in prices over the five year period of 3%.

This mismatch between ask and actuals is not healthy. It does imply that the water companies failed to understand the political reality in which they operate. At a time of recession a price increase of over 25% was never likely to be realistic. It also implies that either the water companies misread Ofwat or that they failed to present a well argued case. Its vital for the health of the water industry that the evident gap between the water companies and Ofwat is closed. Expect more fall out at the top of the water companies in the coming weeks.

Bathing Water quality improves

Photo: Defra

The quality of English and Welsh bathing waters improved in 2009. Results just published by Defra show that 98.6 per cent of beaches meet the mandatory standard up by 2% from last year. The pass rate at the more stringent EC guideline standard was over 10% better at 82.2%.

The improvement was partially the result of the average rainfall in 2009, which contrasted with exceptionally wet weather in 2008, which caused pollution from run off and more frequent use of combined sewer overflows.

Ofwat has allowed £220m of expenditure in the Final Determination to improve sewage works and unsatisfactory overflows affecting bathing beaches. However recent experience on the Flyde Coast has shown that tackling bathing water quality isn’t a simple issue partly due to all the various diffuse sources of pollution.

While the improvement in bathing water quality is welcomed, looking forward bathing waters are likely to become an even more emotive issue over the next couple of years. New standards, that set even more ambitious targets, come into force in 2015. Before that, in 2012, Councils are required to display much more visible and informative signage at bathing beaches. That fact, combined with more people holidaying in the UK, is likely to increase the pressure to improve and ensure bathing water quality remains a high profile area. 

Ofwat final determination due Thursday

Photo: courtesy Northumbrian Water

The expectation in the industry is that Ofwat’s final determination will be only slightly more generous than the draft determination. Ofwat will reveal the outcome on Thursday (26^th  November). Analysts are pessimistic about the impact on water companies suggesting that Northumbrian Water, Severn Trent, United Utilities., Pennon and Thames Water may have to raise capital to cope with the fall in revenue. In a surprising statement Northumbrian Water Group in their half year results issued today indicated that they felt they would be able to maintain their dividend policy of 3% p.a. real growth and have funding secured for the next two years.

The blog is concerned that the uncertainty is having a very negative impact on the supply chain. It wasn’t long ago that the industry was struggling to find the quality of people needed to handle the investment programme. There has always been a dip in demand through the regulatory review period but usually suppliers have been able to move staff to other more buoyant sectors. This time around with the regulatory review period coinciding in Scotland and England and Wales as well as the recession the situation is much more serious. 

Looking forward it is clear that the level of capital investment in AMP5 will be similar or maybe slightly higher than AMP4. In addition Ofwat is suggesting that the water companies need to spend an additional £400m on new flood defences and in light of the Cumbria floods this number will probably increase.  The concern is that the supplier base will have been so decimated by the current lack of work that the people will not be there to cope with the upturn when it comes. The supplier base needs some certainty if it is to pull through.