Michael Roberts City Conference 2018 Speech
Operating in the public interest to me means operating to the highest standards and constantly aspiring to do better in the face of legitimate challenge.
Doing nothing is not a viable option. Thankfully, I do not believe that doing nothing accurately captures the current mood of water companies. In fact, companies are already working with others to reinforce how we operate in the public interest, through our actions and words.
This is no easy task and the job is far from done. But I want to set out why there is good reason to believe that companies – working with customers, regulators, governments and stakeholders – can meet that challenge. I could do so by referring to our strong track record over nearly 30 years, delivering service and productivity improvements built on sustained investment, independent regulation and growing customer engagement.
However, I’m not going to dwell on the past: partly because I don’t think I need to with this audience – but mainly because there is actually so much in play now, and to come, which should inspire confidence in our sector’s commitment to work in the public interest. At one level, it can be seen in things such as Anglian Water’s BiTC award as Responsible Business of the Year 2017. Or United Utilities regular naming over many years in the FTSE4Good Index. Or Northumbrian Water being named for the sixth year running as the only water company on the Ethisphere Institute’s World’s Most Ethical Companies List. Or for that matter the support provided since 2015 – well before the current political debate - by four companies, including the water-only companies Affinity and South East Water, for the Energy and Water Public Interest Network led by the think-tank Sustainability First.
More specifically, there are four areas which I would like to focus on which I think further help to show the extent to which companies are striving to work in the public interest – and which I think are the sorts of areas by which their commitment can truly be judged. Let me start with one of the areas of particular interest currently – the financial arrangements adopted by water companies, as referred to in Michael Gove’s recent letter to Jonson Cox.
I think Jonson’s update to the Secretary of State due by early April is a real opportunity to establish where there really are issues to address, where there is progress and where there is more to be done. Companies and investors need Government and regulator to be clear in their assessment of the problems. Importantly, where solutions are seen as necessary, they should not undermine the predictability which has been a successful feature of the regulatory regime in England and Wales. But the sector itself also needs to be on the front foot, and I think there are reasonable grounds for optimism on that. Take the totemic issue of Cayman Islands offshore financial arrangements, legitimately set up in the past to raise funds, but not used to secure a tax advantage.
All the relevant companies (supported by Water UK) are looking at their arrangements – and three of them (Yorkshire Water, Thames Water and Anglian Water) have publicly pledged to remove them from their structures as soon as they can.
On leverage, not all companies are highly-geared – but a number of those which are, have started to change that, and Yorkshire Water for one has said it is going further with an aim to reduce gearing to 70% by 2020. As for securitisation, a good starting point might be to consider Moody’s recent view that securitisation can support financial resilience – or indeed Ofwat’s own previous statement that customers of securitised companies do not pay more than conventionally financed companies. On the final two perceived concerns flagged in the Secretary of State’s letter – dividends and executive pay – again, the forthcoming update from Jonson should be a good opportunity to establish some facts.
Whatever the update concludes on these points, I suspect at the very least there is an important job to be done by all concerned to explain fairly and more clearly the approaches adopted by water companies. Setting those facts in full context will be especially important – in the case of dividends, for example, by looking at them over a period of time and how they relate to relevant issues such as customers’bills, company performance and levels of investment. Let me move on to a second live aspect of the water sector which I think demonstrates companies, and the regulatory regime within which they operate, both working in the public interest.
It relates to what is being done over this price control period up to 2020 and what the public can expect to come in the five years after that. The current water company plans for England and Wales will: save the equivalent of the water used daily by all the homes in Birmingham, Manchester and Leeds; deliver financial support to an extra one million people who need it; and provide cleaner water at more than 50 beaches.
And over the same period, average household bills – which, following a rise in the early post-privatisation years, are roughly at the same level today in real terms as they were in the mid-1990s –will have fallen 5% in real terms by 2020. Looking ahead to the next control period, through PR19 Ofwat has set the industry a very tough challenge on the cost of capital – a record low for any regulated utility – together with high expectations for further improvements in service in key areas, such as leakage.
PR14 saw the start of companies having to stand by their operational performance with financial consequences that drive improvement. The concept of rewarding or penalising companies, not just in financing but where performance genuinely impacts customers, will play an even bigger part in PR19 – collectively moving the whole industry to be more customer-focused than before. Success will depend heavily on how well companies innovate.
There is good evidence of innovation today across the sector, whether technical (such as South West Water’s £60 million state-of-the-art Mayflower water treatment works) or more broadly (such as Wessex’s EnTrade market platform to reduce nitrate pollution). All these efforts will need to be sustained and enhanced in the next price control period and the public will rightly expect Ofwat to challenge companies hard. I’m looking forward to the panel discussion in the afternoon on whether the PR19 package of risk and return feels right.
More generally, though, the outcome of PR19 itself will be critical to wider debate about the future of the sector. If ever there was a test of how far the industry model works in the public interest, it will be in the ambition of the business plans which companies are due to submit in September. The third area I want to focus on is that of resilience of supply. Here again, I think there are excellent examples of companies serving the public well by coming forward with ideas on how to tackle some really big challenges.
Take, for example, Severn Trent’s £300 million scheme due to be in operation at the end of 2019 to enhance the resilience of water supply to Birmingham, by providing a second supply into Britain’s second largest city. Or take the sector’s response to the impact in South East England of two successive drier-than-average recharge seasons, which have posed significant risk to public water supply in parts of the areas served by two companies. WASCs and WOCs have come together, working well with the Environment Agency, Defra and other key players to identify what needs to be done to mitigate the risks. While the recent wetter weather may have eased some of the pressure, co-ordinated action continues – and companies supported by Water UK will be developing their thinking about what sort of contingency plans might be needed in the event of multi-year drier-than-average weather conditions.
Looking longer-term, companies are working together in the South East and East of England (in the latter case in particular, involving a wider set of stakeholders and economic sectors) to develop more joined-up water resource planning for their regions. And nationally - following the sector’s ground-breaking research on long-term water resource planning published in 2016 – with prompting by Defra Ministers, we are working to improve the planning framework and tools by which the sector plans for the long-term delivery of improved wastewater services. Still on the theme of resilience, I would also point to the engagement which the sector is having with the National Infrastructure Commission ahead of its first national infrastructure assessment.
This is another important way in which the industry is contributing to the public good, by informing the wider debate about the infrastructure which the country needs to promote sustainable economic growth. I’m delighted that John Armitt will be speaking later today to share his perspective on what the work of the Commission means for our sector. The final area I want to touch on is the work of our sector to contribute to the Government’s laudable aim to leave the environment in a better state than they found it. Water, and the role of water companies, occupies an important place in the Government’s recently-published 25 Year Environment Plan. We are passionate about building on our current work as environmental stewards – think, for example, of the good work being done around the country on catchment management – and there are two examples which I think bring that to life.
Many of you may have heard about the first – the Refill initiative which we announced in January. Building on the pioneering work in particular of Bristol Water working with the organisation City to Sea, the initiative aims to help cut plastic bottle use by tens of millions each year.
The aim is for water companies to join forces with the existing Refill campaign to create a national network of refill stations where people can top up their reusable water bottles for free. Companies have committed to draw up actions plans by September, with the aim of having a network of tens of thousands of Refill points in place by 2021.
The second example is our commitment as a sector to make a reality of the 25 Year Plan’s aim to set an ambitious target for efficient use of water. Individual companies have already shown leadership – Southern Water’s Target 100 project aims to help customers reduce daily usage from an average today of 130 litres per person a day to 100 litres a day by 2040. We look forward to continuing our engagement with Defra in agreeing the right way to express the target, and to working with Government to ensure that the full range of policies are available which will be needed to achieve an ambitious target. In conclusion, then, let me sum up as follows.
Companies take their responsibility to operate in the public interest very seriously.
They also recognise that there are times when sometimes they fall short of the high standards which rightly they are expected to meet, and that they can never be complacent. But to those of our critics who conclude the answer is therefore root and branch reform of the industry model in England, I say the following. First, let us be clear as to the problems which need to be addressed.
Water companies have delivered major service improvements since the 1990s, and today they command high levels of trust among the public. Beware, too, the risk of basing sweeping criticisms of the sector as a whole on the shortcomings of some or on a partial reading of the evidence. Second, do not under-estimate the capacity of the companies and the regulatory framework within which they operate to address the genuine issues of concern where they exist.
By talking about a number of areas where I think companies are positively working in the publicinterest, hopefully I have given a flavour of the energy which companies are able to bring to tackling the challenges facing our sector. And to the companies and their investors here today, let us seize the various opportunities open to us to exercise our responsibility in acting in the public interest.
Individually, through the work being done now by companies to prepare their next business plans for submission in September. Collectively, for example, through the industry work on resilience of supply, or potentially on other areas.
The Refill initiative has been a great example of how companies can come together to do the right thing and we are thinking about what the next opportunities might be. And constructively with, for example, Ofwat to establish what needs to be done on concerns raised about financing issues or with Government to deliver on its 25 Year Environment Plan ambitions.