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. 

Continuing investment in Scotland

Photo: Scottish Water

The Water Industry Commission has today published its Final Determination for Scottish Water. It challenges Scottish Water to improve its efficiency further and deliver all of the charging and revised investment objectives of the Scottish Government.

Over the five-year period 010-2015 charges will rise by 5% below the rate of inflation. Householders will enjoy a price freeze in the first and probably second year depending on actual inflation. Capital investment will be £2.53 bn an increase of £150m over the draft determination.

The outcome has been welcomed by Scottish Water and underwrites continuing massive investment with the consequent opportunities for suppliers. It bodes well for future prospects.

Ofwat softer stance in Final Determination

The squeeze on prices and investment announced today by Ofwat is a lot softer than feared. The Final Determination reduces prices by £3, after original plans to lower rates by £14. It also allows higher capital investment of £22.1 bn, £1.3 billion more than originally proposed.

It has been generally well received by investors with share prices rising on the news. Additional capital expenditure has been allowed on sewer flooding, another £250m. The stance on the Capital Incentive Scheme (CIS) is now more realistic. The CIS ratios have been reduced and a number are now below 100.

The key now will be to understand the detail of the Final Determination. However it is good news that Ofwat has listened to concerns and the publication today finally brings some certainty to the industry.  

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.

Cockermouth hit by floods again

Photograph BBC news

It is clear from the breaking news that the floods in Cockermouth have been extremely severe. Environment Secretary Hilary Benn claims they are a one in a thousand year event. Yet only in 2005 the town was also hit by severe flooding and £38m million spent improving flood defenses.

What is undoubted is that the flooding will increase public pressure for further expenditure on flood defense. Its ironic that in October the Cockermouth flood defense team met to approve new expenditure but because of EA funding constraints the work was not scheduled til next June.

The debate about whether the flooding is a really a 1 in a 1000 event or given climate change something much more frequent is highly important. Its easy for politicians to make these statements but once the immediate crisis subsides careful thought and consideration must be given to whether these floods represent a new reality for the UK. 

RWE exits American Water

Image courtesy of American Water

RWE has announced it has sold its remaining 23.6% stake in American Water for $21.63 a share. It was only six years ago that American Water paid $8.6 billion to buy the business at a very high 2.7 times book value. The share sale values American Water at only $3.4 billion meaning that RWE has made a hefty loss on the deal.

The sale marks the end of an era. It was in 2000 that RWE bought Thames Water to create its fourth core segment and make RWE the third largest water utility operator in the world. The acquistion of American Water followed in 2002. Only three years later it decided to start pulling out of water and go back to its core energy business due to its frustration with the slow growth prospects and capital intensive nature of the water industry. RWE did mange to sell Thames Water to Macquarie Bank in 2005 for a profit but overall the diversion into water has been an expensive exercise.

It is surprising how many companies down the years have thought creating a water business by acquisition was a sure fire bet. The ones who have been successful tend to be those who have been patient, willing to grow their business organically and build it on a clear competitive edge. Dow Water and Process Solutions is a good example.