Expert analysis of the UK water sector
September 2024
Issue 107
This website includes excerpts from the latest edition of THE WATER REPORT.
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Thinking big
Anglian Water has recruited major infrastructure specialist, Mark Thurston, as chief executive to lead its super-sized AMP8 programme. He shares his early views on the opportunities and challenges ahead.
Thurston: "In learning mode".
By Mark Thurston’s own admission, his first eight weeks at Anglian Water – five shadowing predecessor Peter Simpson and three as group chief executive – have been “a baptism of fire”. He took the reins on 5 August, slap bang in the middle of the company grappling with its PR24 Draft Determination and shortly after it received a disappointing two-star Environmental Performance Assessment rating. And of course at a time when the sector as a whole is in the crosshairs of public opinion and new government policy. Unsurprisingly, he is, he says, “in learning mode”.
Yet his experience and expertise suggest this won’t be one-way traffic; that he has a lot to teach as well as to learn. Over more than 30 years, Thurston has held leadership roles for major infrastructure projects including the Olympics, Crossrail and most recently, as the longest serving chief executive of rail mega-project High Speed Two. He is au fait with complex stakeholder engagement, high profile regulatory and governmental interfaces, and complex supply chain relationships – including having played a key role in the growth of engineering business CH2M.
Climate changed
The need to future-proof water services is a familiar challenge from England, but a more constructive environment is a welcome change for Alex Plant as he passes a year as Scottish Water chief.
It is just over a year since Alex Plant swapped running regulation and strategy at Anglian Water for running Scottish Water as its chief executive. It’s been an eventful 15 months to say the least.
Aside from the predictable changes accompanying moving job and home, Plant has had to grapple with: Scottish Water infrastructure being battered by extreme weather, including high temperatures, heavy rainfall and winter storms; a staff strike linked to the design of a new pay and grading structure; taking a decision to raise bills substantially; and the departure of a number of giants of the sector, including Jon Rathjen (Scottish government), Alan Sutherland (WICS) and Sue Petch (Drinking Water Quality Regulator). There have, Plant shares, been difficulties and “tough moments”.
Regarding the regulatory landscape upheaval, Plant says the individuals will be missed “but the system can manage the loss”. He continues: “The institutional structures are solid. The model in Scotland is brilliant: Scottish Water is publicly owned but commercially run and independently regulated. All three of those pillars have been critical to what I think has been a huge success for Scottish Water since it was formed in 2002.”
I suppose I hadn't realised until I moved that the situation
in England had become so adversarial.”
Course correction
In its draft methodology for SR27, the Scottish water regulator looks to keep the strengths PR21, but return to greater role clarity and accountability.
Since last Christmas, the Water Industry Commission for Scotland (WICS) has been in the glare of public scrutiny after a number of organisational and governance issues were unearthed by audit. Reviews into the matters and WICS’ response are ongoing, under the new leadership of interim chief executive David Satti. But all the while, WICS has been getting on with the day job.
Last month, it published its draft methodology for the next price review, SR27. For all the criticism, the organisation’s competence to regulate Scottish Water has been little challenged; its track record of thoughtful, innovative and bold regulation standing it in good stead.
We've started to see the benefits of
having a more flexible regulatory framework that can accommodate changes.” David Satti
The methodology sets out how WICS intends to regulate Scottish Water between 2027 and 2033. It preserves many of the central tenets of SR21 (2021-27).
The focus on long-term investment requirements to replace an ageing asset base and ready water services for an altered climate remains firm. As does the Ethical Business Practice and Regulation approach, which pursues open, honest dialogue between regulator and regulated.
From light touch to heavy handed?
We asked the TWR Expert Forum about “activist regulation,” “special measures” and the path to the PR24 final determinations.
In recent months, Ofwat has trumpeted a shift away from “light-touch regulation” towards “activist regulation” – which loosely seems to mean being more proactive, interventionist and hands-on in the face of what it perceives as underperformance from sections of the water industry and the public’s appetite for a tougher stance.
Its July PR24 Draft Determinations contained a number of mechanisms specifically indicative of this approach, including the Turnaround Oversight Regime, more gated access to funding, and a suggestion that dividends could be restricted for companies with gearing above 70%. They come on top of what the industry sees as a punishing overall settlement.
Other “activist” moves from Ofwat include extending its wastewater compliance enforcement activity to all wastewater companies, and signalling intervention on a dividend paid by the Thames Water board under its new dividend policy licence powers.
Meanwhile, the government will be giving additional powers to the regulator under the Special Measures Bill to hold companies and executives to greater account.
Significant but opaque
Over two-thirds of THE WATER REPORT Expert Forum perceived the shift towards activist regulation as significant. Half thought this was a negative step, a quarter neither positive or negative, and just under a fifth that it should be viewed positively.
Many commented that it was hard to evaluate the potential impact, as there is no clarity on what “activist regulation” actually means.
The only way is up
Global Water Intelligence has just bought THE WATER REPORT. Christopher Gasson explains why.
The regulated water market in the UK looks as if it has been surrounded by a lynch mob. The politicians are talking about jailing chief executives. The regulator is demanding a dramatic improvement in service without approving all the funding necessary to deliver it, and the public are baying for blood. Such is the outrage now that the scale of sewage releases into the river system has become clear. So why is Global Water Intelligence choosing this moment to buy the most important publication covering the UK water industry, THE WATER REPORT?
It is a case of buying on the sound of cannons. I feel confident enough about the future of the UK
water industry to call this the bottom of the market. The recovery starts now. I can see a path to a
financially successful, politically popular, technologically innovative, and environmentally sustainable
set of private water companies in England and Wales.
I can see a path to a financially successful, politically popular, technologically innovative, and environmentally sustainable set of private water companies in England and Wales.”
My neighbour Toronto
Rubbing shoulders with the global water community makes it clear the UK sector is a world away from the failure depicted in the public narrative. Karma Loveday offers some reflections from the International Water Association Congress in Toronto.
Those of you with youngsters around may be familiar with the Julia Donaldson picture book, A squash and a squeeze. It tells the story of a woman who complains to a wise man that her house is too small and is advised to bring in her farm animals, one by one. Eventually she is advised to let them all out again, and the house suddenly seems huge;
it’s the same size as when she started, but without accommodating a cow, some sheep and goats, a couple of pigs and a flock of chickens, it feels pretty palatial. The moral of the story is that everything is relative.
Spending a week in August at the International Water Association’s World Water Congress in Toronto could have a similar effect on the beleaguered UK water professional. It did for me.
The public discourse about water here has become grindingly depressing. The news is basically of fines, failures, sewage dumps, greed and rip-offs. A casual observer could be forgiven for thinking we have the worst water set-up in the world. However, mingling with a few thousand water professionals for a week puts a very different spin on things.
A casual observer could be forgiven for thinking we have the worst water set-up
in the world. However, mingling with a few thousand water professionals for a week puts a very different spin on things.”
Grand designs
This month, Affinity Water and partners are consulting on the Grand Union Canal Transfer – a plan to shift water down the country and revitalise canal heritage.
The notion of moving water from where it is plentiful to where it is needed has long been held up as a common sense solution to security of supply risks. But outside of a few transfers across water company boundaries, this currently happens little.
Now, however, the pressures are such that a major scheme to shift water from Birmingham to Luton could be operational in less than a decade. Affinity Water, Severn Trent
and the Canal & River Trust are exploring a project to use the existing canal network for the purpose. This would enable water companies in the south and east to cut the amount they currently abstract from precious chalk stream habitats, while serving growing populations as the climate changes.
Water Resources South East has selected the Grand Union Canal (GUC) Transfer as a priority for the region. That’s partly because of the regional water supply choreography.
Not only would the new supply enable Affinity to reduce its chalk abstractions, but if sufficient water could be moved, it would further enable Affinity to relinquish an existing transfer from Anglian’s Grafham Water, freeing that up for Cambridge Water instead, which also faces chalk reduction pressures. Clare Carlaw, Affinity’s head of engagement, explains: “Historically, the GUC scheme was 50Ml a day, but we always knew it could go to about 110. We’ve now brought that forward to support Cambridge Water.”
Spring: forward
Chief of innovation champion, Spring, Carly Perry, outlines ways it will help the water sector rise to AMP8 challenges.
It is perfectly clear that PR24 will bring both challenges and opportunities for the water sector. The rapid expansion of the capital
programme paired with high levels of scrutiny and tight budgets
will necessitate cost efficiency, innovation, new ways of working
and greater collaboration.
Managing director of UK water innovation centre of excellence, Spring, Carly Perry, is confident that her organisation can help the sector to step up to the plate. “The sector is under more pressure than it ever has been,” she says. “It feels like we say that every year, but the pressure does keep getting higher and higher.
With AMP8 at the moment, we’re looking at £88bn of investment and that means the need for efficiency is higher to keep the cost down for customers. Spring is for the benefit of both water companies and suppliers and the value proposition behind Spring is all around bringing efficiency, whether that's allowing innovation teams to refocus efforts on other things, building collaborative trials that then
Perry: "The sector is under more pressure than it has ever been."
reduce spend internally or providing a faster path from idea to impact. It’s now year two of resourced operations from us and I think the value case for Spring is getting stronger.”
will keep you on top of the threats and opportunities emerging from retail and upstream competition.
It's the eye on the competition.
Retailers told to reduce customer credit accrual
Ofwat is consulting until 16 September on plans to bolster business customer protections concerning accrued credit balances held by retailers.
The regulator has reviewed progress since introducing protections in 2022 into the Customer Protection Code of Practice (CPCoP), but found mixed results:
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credit balances in ‘live’ customer accounts have decreased by £15m since March 2022 to £115m in March 2024; and
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credit balances in ‘closed’ customer accounts have increased by £13m, from £114m in historical credit when the protection was introduced in March 2022, to £127m in March 2024. Ofwat said it expected retailers to try to refund historical credit even though this was accrued before the changes were introduced.
Ofwat noted there were some legitimate reasons for closed accounts to hold credit, including retailers not retaining customer bank account details; low engagement from customers – for instance in not providing their details or cashing cheques, making it hard to provide refunds once accounts are closed; and in the case of multi-sites, credit being netted off against debit on other accounts.
Ofwat to review credit arrangements in light of wholesaler financial resilience risk
Ofwat plans to review wholesaler / retailer credit arrangements – including the extent to which the allocation of risk between the parties in the business retail market remains appropriate – in light of increased wholesaler financial fragility and the current economic environment.
It announced the review as it opened a consultation on its provisional decision to reject a code change proposed by Castle Water which sought to protect retailers and their customers from financial problems at wholesalers.
Castle Water challenges “unacceptable flaws” in settlement arrangements
Settlement arrangements in the non-household market are not fit for purpose, according to Castle Water’s chief executive John Reynolds.
In an open letter to Ofwat, MOSL, the Strategic Panel and CCW, Reynolds identified “three major unacceptable flaws” including having to wait up to eight months to return incorrect charges to business customers.
Reynolds said this was unacceptable and out of kilter with the modern systems used in sectors like banking where balances can be calculated multiple times per day. Reynolds welcomed the Strategic Panel’s Roadmap to a flourishing market for targeting smart settlement but called for it to be prioritised and accelerated.
Power firm applies for a self-supply licence
Electricity generator, InterGen, has applied for a water self-supply licence.
The firm owns and operates three combined-cycle gas-fired power stations in England, delivering the equivalent of some 5% of the country’s peak generation demand. One plant, the Rocksavage power station near Runcorn in Cheshire, is water-cooled and requires significant volumes of non-potable water.
CONTENTS September 2024 full contents of the magazine
INTERVIEW Mark Thurston, Anglian Water.
REPORT Water UK responds to the Draft Determinations.
TWR EXPERT FORUM ‘Activist regulation’ and the new policy framework.
REPORT Thames compensates for ratings downgrade.
REPORT Moody’s verdict on the PR24 Draft Determinations.
ANALYSIS Wastewater fines.
COMMENT Why buy THE WATER REPORT?
NEWS REVIEW A second Water Bill is coming.
FEATURE IWA Congress, Toronto.
INTERVIEW Alex Plant, Scottish Water.
REPORT SR27 draft methodology.
INDUSTRY COMMENT Leadership must master trust.
INTERVIEW Carly Perry, Spring.
FEATURE Grand Union Canal Transfer.
NEWS REVIEW RAPID opens its doors to more projects.
INDUSTRY COMMENT Neurodiverse customer needs.
NEWS REVIEW Customer credit accrual action.
INDUSTRY COMMENT Wave on complaints.
NEWS REVIEW Managing wholesaler financial risk.
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