Expert analysis for a changing water industry
July /August 2022 issue
This website includes excerpts from the latest edition of THE WATER REPORT.
Full coverage is available only in the print and digital editions of the magazine. SUBSCRIBE HERE
PUBLISHED BY
KEW PLACE
Soaring green investment v customers in the red: the price review problem
Off watch
The running theme underpinning Cox’s chairmanship has been trust: he has prodded companies to do the right thing for customers, delved into the uncharted territory of corporate governance to get boards to behave more responsibly, and – publicly on stage and page – called out legitimacy shortcomings. He explains he has consistently endeavoured to
bring the water industry back to a core public service focus, while ensuring it remains an attractive proposition for investors. ”
This agenda was set early on, influenced by the context in which he took on the role. “I came in with a sort of pre-taste of the situation that we are in now,” he recalls. PR09 had
been “extremely beneficial” for companies, as he knew firsthand from his Anglian experience. Dividends were in the mid-teens, and inflation was high at 15% cumulative over 2010-12, simultaneously pushing up bills and inflating shareholder value.
Five companies – Anglian, Thames, Yorkshire, Southern and Northumbrian – had moved from publicly listed to privately owned – “and all of that had behavioural consequences for the sector which I thought were profound and hadn’t been explored”.
The public lost trust in 2013 in energy firms, and Cox was keen water would not go the same way. To boot, Ofwat’s prior attempts to change company licences had culminated in the Section 13 standoff – or, as Cox puts it, "a complete breakdown between sector and its investors and the regulator."
As he leaves Ofwat after a decade, Jonson Cox talks about his trust, governance and financial resilience agendas, and regrets not knowing more about river health sooner.
I fully hold my hands up and say: if I had known the data on rivers was as bad as we now know, part of my environmental theme would have been river health.” Jonson Cox
PR24: squaring a circle
Ofwat’s draft methodology is asking companies to deliver greener, better services for today and tomorrow for an affordable price. Not unexpected, but quite the challenge.
On 7 July, Ofwat published its methodology for PR24, now open to consultation until 7 September. Running to 147 pages in the main document, plus 13 appendices and supporting documents, the complexity of PR19 seems little eased.
Perhaps that’s not surprising in the current environment: the regulator has the unenviable job of identifying a methodology that seeks to balance unprecedented challenges on both the environment and customers’ pockets, at a time of rising and changing customer expectations.
It has clearly tried to grapple with this upfront in identifying four overarching ambitions for PR24, which dovetail with the challenges in hand:
• Increasing focus on the long term;
• delivering greater environmental and social value;
• reflecting a clearer understanding of customers and communities; and
• driving improvements through efficiency and innovation. senior director of company performance and price reviews, and PR24 lead, Aileen Armstrong, emphasises the importance of this framing for PR24.
The framework is really about setting that challenge to water companies to deliver better, more efficient
service at a price that remains affordable.”
“There are growing concerns about environmental impact, water quality, use of storm overflows, abstraction rates. And also the sector needs to make a bigger step towards meeting net zero.
But there are pressures on people’s finances. So in the PR24 draft methodology, setting the framework is really about setting that challenge to water companies to deliver better, more efficient service at a price that remains affordable.”
She says that from Ofwat’s perspective, the four ambitions are not ranked by importance, but interdependent: “I think they are overlapping. It helps to have four ambitions but they do overlap…you do have to think about this range of issues. I wouldn’t prioritise.”
Energy costs: a
juggle with threats and opportunities
Water companies are suffering as energy prices continue to rise, despite an armoury of strategies to manage the situation. But high prices also offer an opportunity for those companies that are investing in renewables.
Energy has always been a major cost for water utilities – both in direct payment and, more recently, in indirect costs such as accounting for carbon emissions. Dramatic price rises and huge price volatility in recent months has redoubled that cost – but it has also created opportunities for water companies to take a greener, more active approach.
Price pressure
The cost is obvious: even before winter spikes, Thames Water had seen its power bill rise by £16m in the six months to the end September 2021, up from £63m over the period in 2020. And the medium term trajectory for power prices continues to be upwards.
Industrial buyers, like water companies, contract for power months or even years ahead, to try to lock in advantageous prices, but that also represents a risk: in a rising market, buying far ahead comes with a risk that prices will fall unexpectedly, leaving the buyer overpaying.
In it for the long haul
It’s a difficult task, but BRG’s Colm Gibson advises water companies to put their shoulder to the wheel on delivering against Ofwat’s new Long-Term Delivery Strategy guidance.
The UK water sector is inherently long-term in nature, with a significant proportion of assets being over 100 years old, and in some cases (such as the "New River" opened in 1613 to supply London with drinking water) significant assets are over 400 years old.
Despite this, it is only recently, with its publication of the Final guidance on long-term delivery strategies (LTDS) that Ofwat has mandated comprehensive long-term scenario modelling as a key input to its price control setting process. The new requirement to have Ofwat scrutinise such a comprehensive scenario modelling exercise provides both new opportunities and new challenges for companies at PR24.
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Bentley: "Continued support will
be necessary."
Sharing is caring
Shareholders stump up a multi-billion pound package to support Thames’ turnaround.
Thames Water’s shareholders offered tangible proof of their responsible owner credentials at the end of last month in committing to inject £1.5bn of new equity into the business, and to an extra £2bn of expenditure to fund performance improvements before the end of the current regulatory period.
“We’re also aware that none of the programme can be delivered without significant capital investment. With this new, substantial equity
investment programme, our shareholders are both underpinning the investment vital for our improvement and also expressing their confidence in the long-term outlook for Thames Water. We warmly welcome their continued support.”
She was also explicit that continued support will be necessary, emphasising that Thames’ turnaround remains a multi-AMP project.
The investment “increases my confidence in delivery” and enables the team to “move further on a number of fronts simultaneously”. But, she cautioned, that there remains a mountain to climb: “The size of the challenge ahead is substantial.”
Under a bushel
An Israel-based firm has, for a decade, helped tackle public health and water resource issues armed with data from the sewer. The UK has too. But are wastewater companies here missing a trick by not making more of their contribution?
Recent media reports of findings of polio virus in samples taken from a London wastewater treatment plant focused largely on the alarm angle. The headline was that one of most feared of childhood infections – one from which the UK had been declared free by the World Health Organisation in 2003 – could be back among us. But there was another story: that UK water companies routinely monitor for polio and other public health threats.
Public awareness that the industry provided such a valuable service was low. But because it does, the exact source of the polio finding could be tracked down before it turned into an outbreak. Only days before this news broke, The Water Report was talking to an Israel-based company, Kando, that has specialised for more than ten years
n providing analytical services to wastewater treatment facilities in its home country as well as others. Kando chief executive, Ari Goldfarb, is acutely aware of, not just the low profile of the public health work of the UK wastewater industry, but also the potential value that work has for a sector that doesn’t enjoy much in the way of appreciative comment.
On that ticket he urged the UK water sector to raise the public’s awareness of its contribution to health through wastewater monitoring. It was, he said, “a great, great, great opportunity for the water company to improve its status – an issue all over the world not just the UK.”
keep on top of the threats and opportunities in retail and upstream.
It's the eye on the competition.
Get voting rights right
In response to proposed changes to membership voting rights, Neil Pendle argues self-suppliers are an asset to the market and their voice must not be diluted.
Self-supply is a retail water market success story. From Greene King entering on day one in 2017, there are now a further 15 self-supply retailers who collectively outperform the wider market and are delivering on water efficiency. There is no doubt that self-supply has changed the dynamic of the market for the better, but its expansion has also changed the make-up of the MOSL membership.
Head of legal at MOSL, Andrew Johnson, presented to the June Self-Supply User
Forum and expressed concern that the market’s voting structure is no longer fair and proportionate, given self-suppliers – who each have a vote as MOSL members – collectively therefore have a lot of market influence. MOSL is proposing to amend its Articles of Association to address perceived voting imbalances.
The current preferred proposal is that membership classes would be divided into wholesalers, retailers, self-suppliers and NAVs, and that each class of membership
would have a fixed percentage of the vote. MOSL would also like to reduce the number of votes to reach quorum from
75% to 50%.
Metering: who should do what?
PA has presented an all-on-the-table report for MOSL, setting out a dozen options for roles and responsibilities for business metering.
Hot on the heels of the report MOSL commissioned on behalf of the Strategic Panel’s Metering Committee on enhanced metering technology in the business market, MOSL last month published a second report under the banner of its ongoing Strategic Metering Review. This one, from PA Consulting, considered the options and merits of potential changes to current roles and responsibilities relating to non-household (NHH) meters.
Setting the big picture scene at the launch webinar, MOSL CIO John Davies pointed out data is at the heart of improving the market, and metering at the heart of data.
Highlighting PR24, the Retail Exit Code Review, incoming Environment Act targets and other
metering roles and responsibilities piece specifically, he asked delegates to reflect on the fact that “we are where we are today, but where do we want to be?”
We are where we are today, but where do we want to be?”
Multi-tasking
Multiple processes were successfully launched in the latest bilaterals release, improving the market for customers and simultaneously providing learnings for future change programmes.
The Bilaterals Transactions Programme has passed another major milestone: a successful multi-process release at the end of May, which trading parties and customers are now benefiting from.
Four processes went live in the bilaterals hub under phase 3 of the programme on 31 May, each with a retailer and wholesaler-initiated version: meter repair or replace, customer complaints, customer enquiries and trade effluent enquiries.
The release also provided new functionality, including the ability for trading parties to decide whether to connect to the hub via the web portal or system-to-system integration for each process, enabling deferrals for non-business days and improving the quality of performance reports.
John Gilbert, MOSL’s head of planning, calls the successful launch of phase 3 “a significant milestone for the programme”. He reports: “A huge amount of testing,
planning and learning went into this release by MOSL and trading parties” and it paid off – one week on from the switch-on, there had only been one defect, and that was resolved very quickly.
Following extensive work to scrutinise potential blockers, test connectivity and demonstrate hub interfacing, all trading parties were ready on time, and provided assurance to that effect ahead
of the day.
The Retailer Wholesaler Group backs a water efficiency levy for business customers, after research reveals at least £22m/year of funding is needed to drive water use down.
The Retailer Wholesaler Group’s Water Efficiency Subgroup (WEG) has issued its recommendations for changes to the regulatory framework to bolster water efficiency in the business market, following the findings of a research report commissioned from Economic Insight.
The group largely endorsed Economic Insight’s conclusion that a water efficiency levy (which would be applied to customer bills in the same way as environmental levies in the energy sector) is the most attractive option, “in that it would act not only to directly raise the funding [estimated at £22m-£35m a year] but have the secondary impact of directly raising customer awareness by virtue of its application on bills, something not
Levy needed to drive water efficiency
You need a pound: businesses may have to dig into their pockets to access water efficiency.
achieved by more traditional methods”.
The group said this resource could be accessible to wholesalers, retailers, customers and third party intermediaries.
It noted that a more detailed mechanism for the imposition, control and distribution of this funding will be required.
Pendle: "Self-supply has changed the dynamic of the market."
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Thompson: "personalised service" to members.
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