Water bill still on track

Water Minister Richard Benyon confirmed last week that publication of the Governments’ water bill is still on track for December 2011. MPs debated water legislation and flood management in Parliament last week.

The elephant in the room is the rising levels of bad debt in the water industry and increasing concerns over affordability. With the current economic gloom and rising water bills and now the additional cost of transferring private sewers it’s a problem that will only get worse. It is particularly acute in the South West with SWW water having some of the highest water bills but in a relatively poor area.

Changing the structure of the industry and introducing further competition is unlikely to make a significant difference, in deed in the view of this blog restructuring would only make matters worse. Ofwat has just published a report on ‘vertical integration or seperating the companies by discrete function e.g. sales or supply. The conclusion will not come as a surprise to those with long experience in the industry – there is no evidence that either is better.

The water industry needs to focus even more on ensuring it prioritises investment where it will make the biggest difference and delivering schemes as cost effectively as possible. Huge strides have been made on this since privatisation but its clear there is still scope to do better.  Just look at the cost penalty British Water has identified that comes from the 5 year regulatory cycle and loss of experienced people at the end of each AMP period. The forthcoming water white paper is the opportunity to take action and address the elephant in the room.

Adapting to climate change in the water sector

Ofwat’s “adapting to climate change report” is another step forward to ensuring the water industry changes to cope with climate change. It’s a huge challenge for the industry against a backdrop of uncertainty in the science and difficulty in predicting what the impact will be. Will summers really get hotter and dryer as some forecasts suggest – hard to believe given the wet August?

What does seem certain is that there will be more extreme events. The cost implications for the water sector are huge. Just look at the vulnerability of many sewage treatment and water treatment sites to flooding. The big stumbling block is gaining political acceptance for increasing bills to pay for the investment. Certainly in PR09 that was a step too far and now with the more challenging economic climate it is even more difficult.

Ofwat rightly aims to encourage more innovation. Anglian Water’s success so far in meeting its target to half its embodied carbon in the building of new assets shows what can be done when there is a real commitment to act. They are on track to meet the goal and do it within the tight price limits. The passion inherent in the Anglian Water Love Every Drop campaign needs to spread across the industry.

With the dark evenings approaching the books to read are Taleb’s Black Swan (The impact of the highly improbable) and Fooled by Randomness. 

Water sector - August a bad month for investors

August has not been a good month for investors in the water sector. It started with the news that Veolia’s first half results were much worse than expected. Veolia shares are down to about $13.4 from their 2007 peak of $65.65. The London-listed Aqua Resources Fund had to announce its net asset value per share had dropped 8.27% in 6 months.

While no one doubts that demand for water is increasing with the rapid urbanisation of the world, increasing population and threats from climate change. This combined with the rise in environmental regulations and increasing scarcity of water resources will require massive investment. The problem is who pays for the investment?

The current debt crisis means that Western Countries cannot take on ever more debt to fund investment, raising prices is an option for those that charge for water but politically very difficult.  But in many of the countries were the need for investment is highest, there is no history of charging for water.

Introducing water charging is extremely difficult as the Government has found in Northern Ireland. Many countries just don’t have the systems to collect tax let alone establishing water charging when the infrastructure is in a state of disrepair or non-existent. Politically its extremely difficult, not only is it highly unpopular but also it tends to hit the poorest in society hardest, the very people who need clean water and wastewater the most.

Until there is confidence that the funding mechanisms for investment are realistic the water sector is likely to remain an sector with great promise and need but with significant risk for investors. The key is to look at the specifics of each country and to understand the regulatory and political environment in that country. 

Stopping customers using water - a daft idea

Photo source: Thames Water

The article by Thames Water suggesting that ladies should not shave their legs in the shower due to the water in wastes is already starting to backfire if the press comment is anything to go by. Typical reactions are “water companies should sort out their leaks before telling ladies how to shave” or “Thames Water wastes more water in 10 weeks that ladies across the whole of the UK use in shaving their legs in the shower”  

It is inconceivable that Tesco would suggest to its customers they should stop using its supermarket as it was making the shop too busy. Why do water companies think it is acceptable to suggest to their customers they should stop using their product? Customers want water at an affordable price and in the quantities they need. 

When we have just had a very wet August and when water leakage is still running at about 25%, the argument to stop using water will not wash.  Water companies keep stressing they are businesses that need to make a return to reward their shareholders, they also need to recognise that businesses are only successful if they satisfy customer needs.

Commission to investigate Thames Tunnel

Photo source: Hammersmith and Fulham Borough Council Lord Selbourne and Councillors at Commission launch

 An independent commission is to study the case for the massive Thames Tunnel. The tunnel is Thames Water’s preferred solution to reduce sewer discharges into the Thames and avoid EU fines. But it is hitting increasing opposition from local residents, councils and MPs.

The commission will be led by Lord Selbourne. He said: ”The key question is whether this multi – billion pound scheme is the best solution for making the Thames cleaner or whether there are sensible alternatives that are cheaper, greener and less disruptive”. Thames Water’s Chief Executive, Martin Baggs, recently revealed that the sewer’s initial £3.6 billion price tag  - initially costing customers £65 per year for life – was based on 2008 figures and ‘will inevitably increase’. 

The concern has to be that the Water Companies have a strong incentive to favour capital intensive rather than operating cost schemes. One of the reasons for this is that any new capital expenditure increases the Regulated Capital Value of the business and therefore increases returns to shareholders. This is one of the main reasons why investors like Mcquarie bank are able to achieve returns of nearly 12% for their shareholders. Ofwat is looking at the capital cost, operating cost balance and in the view of this blog needs to take action to redress the balance. 

Ofwat review backs slimmer regulation

Photo source: Thames Water - Beckton, Europe's largest treatment works

Defra has published David Gray’s review of Ofwat. The main conclusion is that the regulatory review process has worked well and that there is no need for major change. It does suggest that a lighter, less prescriptive approach is needed back by much clearer guidance from Government on the objectives.

The review has recognised the highly negative impact on the industry of the current 5 year roller coaster of investment and all the unnecessary costs this imposes on the supply chain.  The reviews recommendation to reduce the burden of reporting is to be welcomed.   

The concern is that the current regulatory process encourages capital intensive, end of pipe solutions and does not adequately address the need for the industry to become more sustainable and adapt to the challenges of climate change and population growth. Gray does recognize that currently there is an incentive for water companies to increase their regulatory capital valve and hence return to shareholders and suggests that there needs to be a review by Ofwat of the current rewards and penalties and framework of incentives. There is increasing concern in the industry that some current shareholders are only there for the short term gains – as evidenced by the bid for Northumbrian Water and that some water companies are selling key assets like buildings and then leasing them back – the model that ultimately led to the downfall of Southern Cross.

The industry has some massive challenges – especially the unprecedented growth in population and the uncertainty of climate change. Innovation and sustainable solutions like reuse of water and management of catchments must become the norm – it is disappointing that Gray has not taken this on board. Lets hope that Richard Benyon in the forthcoming water white paper rises to the challenge.    

Private sewer transfer goes ahead

Changes being introduced today (1^st July) by Defra mean that from October responsibility for private sewers will transfer to the water companies. This change has been a long time happening and will remove the uncertainty and risk from householders. For water companies it means a doubling in the length of sewers for which they are responsible and also a massive increase in workload.

The change may have unexpected consequences for the water companies. The condition and repair history of the sewers being transferred is not known. Currently repair work has been done on a short term fix basis with no incentive to solve the underlying long term issues. This is where the real benefit to society lies. Hopefully wasteful repeat visits to repair reoccurring blockages will become a thing of the past. Finding and justifying long term solutions wont be easy given the complete lack of knowledge of the private sewer system and the lack of historic records. There may be significant opportunity for the water companies to reduce repair costs but until a repair history is established this may be hard to justify.

There will certainly be a huge increase the number of calls with customers. Managing this well will be crucial if water companies are not to see their Service Incentive ratings plummet. As yet no one knows what the cost of all this will be. it is likely that some water companies will push for an interim determination and that may bring fresh problems.