Memorandum submitted by Dwr Cymru (Welsh
Water) (Ofwat 12)
EXECUTIVE SUMMARY
— Welsh Water's greatest concern is
the agenda being pursued by Ofwat to "break-up" the
water industry in the name of "competition".— Given
Welsh Water's ownership structure and purpose, the essential nature
of the public service Welsh Water is responsible for, and the
fact that average household incomes are lower in Wales than elsewhere,
affordability is a key consideration in everything Welsh Water
does and plans. — Welsh Water is the only water company
to propose flat bills (in real terms) in the next five year regulatory
period 2010-15. By setting further stretching targets for improvements
in efficiency, Welsh Water can finance an investment programme
of some £1.4 billion over the next five years (ie similar
in size to the current five year investment programme) without
having to increase bills by more than inflation.
— Independent research carried out
by Ofwat showed that Welsh Water was the second highest rated
company in the sector for customer service and satisfaction. We
believe this is partly due to the fact that customers of Welsh
Water—and in particular their representatives in Wales—support
the principle that the water industry and the public service it
provides should be run and owned on behalf of customers.
— Welsh Water is generally content
with the conduct of the PR09 review undertaken by Ofwat. We support
the fundamental approach of placing customers at the heart of
this review and also many of the initiatives included in the Review
process.
— Welsh Water is keen to ensure that
a stable regulatory regime exists and continues into the future,
and is effectively run to ensure stability for our customers,
particularly in the current economic environment.
— We believe the proposed introduction
of competition on the water industry will undermine the public
service nature of the water and sewerage industry, with significant
"cross subsidies" unwound creating large numbers of
"winners and losers". It will also increase the cost
of financing the water industry, for reasons set out below.
SUBMISSION
1. Since 2001 Dwr Cymru Welsh Water ("Welsh
Water") has been owned by Glas Cymru—a "not for
profit" company (it is a "company limited by guarantee").
It is unique amongst UK utility companies in that it has no shareholders
and it reinvests all its financial surpluses for the benefit of
Welsh Water's customers.
2. Welsh Water is in effect owned on behalf of
its customers. Our only purpose is to deliver—efficiently,
reliably and affordably—the essential public service of
safe drinking water and reliable sanitation to the three million
people who rely on Welsh Water, and to look after—as trustees—the
very long term water industry in our region (ie most of Wales
and some adjoining parts of England) for future generations.
3. Glas Cymru (and Welsh Water) is chaired
by Lord Burns and its Articles require that the Board comprises
a majority of non-executive directors (currently, in addition
to the Chairman, there are six non-executive directors and three
executive directors). In place of shareholders, the Board of Glas
Cymru is accountable to currently 72 Members, selected through
an independent process to broadly represent stakeholders of Welsh
Water and otherwise ensure the proper governance of the Company.
The water industry is especially measurable, with water quality,
environmental performance and customer service all capable to
being benchmarked and judged against what other water companies
are able to achieve (ie "comparative competition").
Executive director pay is tied to Welsh Water's performance relative
to the rest of the sector on the measures of performance independently
captured by regulators which cover most of the things that matter
for customers (see attachment 3).
4. Because of its unique ownership structure,
Welsh Water has been able to finance its assets more efficiently
than assumed by Ofwat, and in the absence of shareholders these
efficiency savings belong to Welsh Water's customers. In the seven
years since Glas Cymru secured ownership of Welsh Water, we have
built up financial reserves of some £1 billion or some 25%
of Welsh Water's £3.5 billion "regulatory asset value"
(see attachments 6, 7 and 8). Because of continuing large capital
investment programmes, Welsh Water, like the rest of the water
industry, is cashflow negative. The higher the level of reserves,
the lower the cost of financing this cashflow deficit. Every 1%
saving on the cost of finance is equivalent to a 5% savings on
customer bills. Welsh Water has placed most emphasis on ensuring
that the water industry in Wales is seen as a "safe home"
for long term funding by investors. As a result of its ownership,
purpose, constitution, governance and performance to date, Welsh
Water has been able to achieve long term funding for its capital
investment programme at some of the lowest rates of interest ever
achieved in the water sector. Welsh Water currently has the highest
credit rating in the sector (see attachment 5). One of our biggest
concerns is being able to continue to finance efficiently in the
years ahead, particularly given the current "credit crunch"
and Ofwat's intent on seeing a "break up" of the regulated
water and sewerage industry on the grounds of "competition"
which will increase risk and uncertainty for long term investors—increasing
the cost of finance.
5. As well as building up reserves to reduce
the long term cost of financing its assets and continuing investment
programme, Welsh Water has distributed to date around a quarter
of its annual financing efficiency savings to customers in the
form of a growing annual "customer dividend". This year
(2009-10) the "customer dividend" is £22 per customer
which will bring the total of "customer dividends" paid
in recent years by Welsh Water to over £150 million. As a
result of the growing customer dividend, Welsh Water's average
household bill is falling relative to the rest of the sector (see
attachment 2). Given our ownership structure and purpose, the
essential nature of the public service Welsh Water is responsible
for, and the fact that average household incomes are lower in
Wales than elsewhere, affordability is a key consideration in
everything Welsh Water does and plans. The "customer dividend"
is flat so as to favour customers on low incomes. And when combined
with other recently introduced tariffs to help customers on low
incomes the "customer dividend" can reduce the water
and sewerage bill for some of our least well off customers by
more than 10%.
6. Welsh Water is the only water company
to propose flat bills (in real terms) in the next five year regulatory
period 2010-15. By setting further stretching targets for improvements
in efficiency (see attachment 4), Welsh Water can finance an investment
programme of some £1.4 billion over the next five years (ie
similar in size to the current five year investment programme)
without having to increase bills by more than inflation. Independent
customer research carried out by Ofwat and others showed a high
level of support for this plan—it showed that 93% of customers
were happy with the plan, its priorities and cost (see attachment
10).
7. The same research showed that 79% customers
believed that Welsh Water provides good value for money and indeed
overall Welsh Water was the second highest rated company in the
sector for customer service and satisfaction (see attachment 10).
In part, we believe, this is due to the fact that customers of
Welsh Water—and in particular their representatives in Wales—support
the principle that the water industry and the public service it
provides should be run and owned on behalf of customers (see attachment
1).
8. Delivering such a large investment programme
in the next five years while keeping bills flat in real terms
will be challenging and is still subject to a number of major
risks, including requirements by the Environment Agency to invest
further substantial sums to achieve further environmental improvements,
the prospect of a 50% increase in local taxes (ie rates), and
the impact of the current severe economic downturn on our revenues
and the cost of finance to fund the capital investment programme.
9. Welsh Water is generally content with
the conduct of the PR09 review undertaken by Ofwat. For the reasons
set out above, we obviously support the fundamental approach of
placing customers at the heart of this review and also many of
the initiatives included in the Review process. We believe the
emphasis on high standards on drinking water quality is vital
to reinforce the trust of our customers and ensure that the high
standards of service are maintained. We also welcome the increased
importance placed on both social considerations. The early indication
as to what capital investment programme would be supported by
Ofwat in its final determination has been an important and very
worthwhile development allowing companies to plan with more certainty
and reduce the disruptive and inefficient "feast-famine"
profiles of capital investment expenditure that has characterised
previous regulatory price reviews (we will invest over £330
million in the coming financial year).
10. Welsh Water's plan has been carefully
developed with the aid of the company's Strategic Investment Planning
System, which will enable us to operate a five-year rolling business
plan and include a full cost benefit analysis of the programme.
Our priorities are based on customer views obtained through extensive
customer research and also through stakeholder discussion chaired
by the Welsh Assembly Government.
11. We are keen to ensure that a stable
regulatory regime exists and continues into the future. Such a
regime must be effectively run to ensure that our customers know
where they stand in terms of bills and payment, particularly in
the current economic environment. Stability is essential for our
customers, and is also vital to ensure ongoing investment is maintained.
12. A key feature of Glas Cymru is to de-risk
the water industry in Wales so that long term investors continue
to provide funds to Welsh Water with confidence. In 2001, £1.9
billion was raised in bonds to enable Glas Cymru to acquire Welsh
Water. Since then, a further £1.3 billion has been raised.
As indicated above, the key to keeping customer bills affordable
while large capital investment programmes to maintain and improve
the industry's network of long term assets (Welsh Water employs
assets with a replacement value in today's money of £19 billion)
is to ensure the water industry is seen by investors as low risk
and a "safe home" for long term funds. We believe that
the arrangements we have put in place in Wales with the support
of the Welsh Assembly Government in particular (thereby reducing
"political and regulatory risk" for investors) demonstrate
what can be achieved with this emphasis.
13. Our biggest concern is the agenda being
pursued by Ofwat to "break-up" the water industry in
the name of "competition". We believe this will undermine
the public service nature of the water and sewerage industry,
with significant "cross subsidies" unwound creating
large numbers of "winners and losers". It will also
increase the cost of financing the water industry, its biggest
single cost (the cost of financing investment carried out since
privatisation now represents over 30% of the average bill) and
where every 1% increase adds 5% to bills. Comparative competition
and competition "for the market" (eg Welsh Water currently
outsources to "best in class" companies over 80% of
its operating and capital costs—see attachment 4) continue
to deliver real benefits without undermining the public service
nature of our industry and without the risk of undermining investor
confidence.
Dwr Cymru (Welsh Water)
February 2009
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