Memorandum submitted by United Utilities
(Ofwat 11)
United Utilities (UU) is the UK's largest listed
water company. UU's regulated business owns and operates the water
and wastewater infrastructure networks in the North West of England,
providing 7 million customers with 2,000 million litres of drinking
water and treating 2,900 million litres of wastewater every day.
UU, through its non-regulated operations, maintains utility assets
(including water, wastewater, electricity and gas networks) on
behalf of others in the UK, Europe and the rest of the world.
UU is a FTSE 100 company, the only one with its headquarters based
in the North West and has an annual turnover of over £2 billion.
1. We welcome the Committee's inquiry and its
interest in the progress of the current price review (PR09). This
submission sets out some of our observations on how the price
review process has worked so far and the improvements that have
been incorporated into the process following earlier price reviews.
2. Overall, we have found the PR09 price
review process to be constructive and we believe that a number
of welcome innovations have been introduced into the process.
3. There are three, in particular, that
we would like to highlight:
(i) A requirement for a 25 year "Strategic
Direction Statement" to set out a long-term vision for a
water company's water and wastewater services.
(ii) The Capex Incentive Scheme, which is designed
to provide a new impetus for accurate forecasting of investment
plans by water companies.
(iii) A greater focus on the use of cost benefit
analysis by water companies in developing their business plans.
4. We have broadly welcomed these changes,
although there are instances where we believe further improvements
could be made. For example, the requirement for a full cost benefit
analysis for schemes that are part of a statutory obligation and
over which we have little or no discretion has, at times, felt
unduly onerous.
5. Furthermore, our draft business plan
submission was some 4,000 pages long in order to meet the regulator's
reporting requirements. We feel shorter submissions in future
reviews would enable water companies and the regulator to better
emphasise the long-term, strategic issues facing the sector.
6. Affordability is a key concern for UU,
especially given the region in which we operate. The North West
has some of the UK's least well off communities with relatively
high levels of social and economic deprivation.
7. Alongside the price review process, we
have committed £25 million over the period of the next price
review to the United Utilities Charitable Trust. This Trust helps
customers in our region who are having difficulty paying their
household bills.
8. The PR09 process has, in part, coincided
with the worsening economic situation beginning with the "credit
crunch" to the confirmation that the UK is in recession.
In light of this, we have remained particularly conscious of the
need to strike the right balance between costs to our customers
and delivering improvements to drinking water quality and the
natural environment.
9. We believe we have conducted more engagement
with our customers, regulators, the Consumer Council for Water
and stakeholders than in any previous price review. We have achieved
this through customer surveys and focus groups, including analysing
surveys of their "willingness to pay", individual and
group meetings, speeches, conferences, our website, the media,
and other means.
10. We welcome the Capex Incentive Scheme
(CIS), however we are also conscious that this is the first time
this scheme will have been used in a water price review. The draft
CIS "baseline" placed all companies above 100% and therefore
liable for penalties under the scheme. We believe the intention
of CIS would be best served by including "baselines"
both above and below 100%, meaning companies would earn rewards
as well as suffer penalties in a more symmetrical way.
ADDITIONAL OBSERVATIONS
ON THE
PR09 PROCESS
Setting our long-term strategic direction
11. We strongly supported the introduction
of the Strategic Direction Statement (SDS), a document which clearly
sets out for each water company their long-term vision over the
next 25 years. This was a welcome innovation as in previous price
reviews water companies only had to submit their plans for the
next five years.
12. It has been a welcome addition to the process
as it is clear that many of the issues the sector is facing are
relevant over a much longer time frame and require delivery mechanisms
that span more than one price review period.
13. The SDS, together with Defra's "Future
Water" strategy document published in 2008, sets out
a clear, strategic and coherent approach for water companies over
the medium to long-term. This has led to a much more rigorous
approach to tackling strategic issues such as climate change,
water resource management and sustainability.
14. Our SDS set out six key principles which
have guided us throughout the price review process. The key objectives
we set ourselves in the SDS were:
(i) demonstrating responsible stewardship of
the water and wastewater networks we operate;
(ii) listening to what our customers and other
stakeholder tell us;
(iii) ensuring our water resources are more sustainable
and resilient;
(iv) following an integrated approach to drainage
to reduce the threat of flooding;
(v) reducing significantly the carbon impact
of our activities; and
(vi) we aim to achieve this without adding to
the burden on household budgets.
15. We began our engagement with stakeholders
at an earlier stage in this price review process and the SDS was
developed as the initial part of that ongoing engagement with
stakeholders.
16. We began our external engagement strategy
for the price review by hosting a conference in Manchester in
September 2007 for our regional stakeholders. Over 70 people attended
this event, with representatives from local authorities, regulators,
the Consumer Council for Water, NGOs, charities and the regional
development agency.
17. We specifically hosted this event to
discuss and develop the emerging themes of the SDS. We have sought
to continue that engagement throughout this process and have been
particularly mindful of the views of our customers in developing
the draft and final business plans.
18. Feedback on the SDS was, on the whole,
positive. The SDS was well received by stakeholders, who agreed
with the challenges we had identified and the strategic direction
we had set ourselves to tackle them.
Developing the Draft Business Plan (DBP)
19. The DBP took the strategic vision in
the SDS and outlined how we proposed to deliver against our long-term
objectives over the next five years. The DBP also reflected many
legacy issues from the geography and history of the North West.
Our region has relatively small rivers draining the major urban
centres in the south, a legacy of pollution from heavy industry,
sewer systems that combine both storm drains and sewage and changes
to the natural environment.
20. The DBP proposed a total investment programme
of more than £4 billion, some £800 million higher than
the PR04 programme. The DBP also set out an indication of the
level of customer bills and the returns our investors would expect
to see over the lifetime of the plan.
21. The plan set out our proposals to invest
in:
(i) Water business with key priorities
including constructing the west-east pipeline link across the
south of the region, protecting our water assets from flooding
risk and enhancing site security, to improve the resilience of
the network. We also proposed to expand the cleaning of the water
network to enhance drinking water quality and improve the taste
and odour of tap water.
(ii) Wastewater business where the priorities
are to invest in upgrading storm overflows significantly reducing
the number of discharges into the environment. We also proposed
to ensure our treatment works can meet the additional demands
of population growth and to halve the number of incidents of flooding
of homes by overloaded sewers.
(iii) Climate change to arrest the growth
of our carbon footprint, improve understanding of surface water
flood risk across the region and build climate change impacts
into our water resource plans.
(iv) Improving standards of service and infrastructure
where we know there are weaknesses as a greater proportion
of our equipment requires more frequent replacement and refurbishment
reflecting the more sophisticated treatment processes we use today.
22. Alongside these investment priorities,
we believe the DBP strikes the right balance between the need
for long-term environmental improvements—particularly to
deal with the issue of climate change—and the affordability
of paying for those improvements in the current economic climate.
23. We recognised the emerging challenge
of the economic situation in the DBP, and we considered the impact
it would have on our customers. We also foresaw there were likely
to be increased costs in energy, chemicals and construction materials.
24. Affordability has remained a key concern
for United Utilities whilst developing the DBP, not least as the
North West has some of the UK's most deprived communities with
relatively high levels of social and economic hardship.
25. The DBP set out our target that, over
the long-term, bills would not rise faster than incomes. We proposed
an increase in bills of 11p per day by 2015 or on average 2.1%
above the rate of inflation from 2010-15. This is around the historical
rate of increase in household incomes, meeting the commitment
we had set ourselves in the SDS.
26. We will also be trialling new tariffs
and promoting water efficiency to help customers reduce their
bills. We would welcome further focus on the impact of affordability
in future price reviews.
Moving Towards the Final Business Plan (FBP)
27. The key challenge we have had to address
since the publication of the DBP is maintaining the affordability
of our PR09 investment plan during this economic downturn. This
price review process started in 2007, before the impact of the
"credit crunch" and scale of the economic downturn had
become apparent.
28. The extent of the economic situation has
become even more apparent since the DBP was published in August
last year. Water companies have had to recognise this changing
economic environment and build it into their plans. This is likely
to have an impact on the overall investment levels, bill increases
and the cost of capital.
29. We believe we have conducted more engagement
with our customers, regulators, the Consumer Council for Water
and stakeholders than in any previous price review. We have achieved
this through customer surveys and focus groups, including analysing
surveys of their "willingness to pay", individual and
group meetings, speeches, conferences, our website, the media,
and other means.
30. Responding to that engagement, we have
continued to look at how we can improve the efficiency of the
investment programme in the FBP in order to deliver even higher
levels of drinking water and environmental improvement whilst
maintaining our SDS objective that, over the long-term, bills
would not rise faster than the historical rate of increase in
household incomes.
31. Alongside the other water companies,
we are due to publish our FBP in April which will give an updated
picture of our investment proposals in light of these challenges.
32. We were mindful, however, of the risk
of compromising long-term environmental objectives by focusing
too exclusively on pressures in the short to medium-term. We believe
there is also a compelling case for maintaining an affordable
investment programme in terms of employment and other economic
benefits to the North West.
33. The price review process is running
alongside a number of other reviews and initiatives including,
the Floods and Water Bill, the implementation of recommendations
in the Pitt Review, the Cave and Walker reviews, the adoption
of private sewers and proposals from Ofwat to increase competition
in the sector.
34. It is not expected that any of these
issues will have been resolved by the time this price review is
concluded at the end of this year. Therefore it is crucial that
subsequent regulatory and legislative changes are properly coordinated
and their implications are understood in the context of the business
plans for 2010-15.
35. Overall, United Utilities has been content
with the process of this price review and has welcomed several
of the new developments designed to improve the process. However,
we also recognise there are several important milestones to meet
during 2009 and the subsequent implementation of the plan in April
2010.
United Utilities
February 2009
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