Welsh Water is in many ways a company ahead of its time. Politicians and regulators have only recently moved the customer firmly to centre-stage in price and service discussions; only in the past six months have affordability and sharing outperformance with customers become political and regulatory priorities.
Welsh Water has been doing all this since 2001, when it was bought by Glas Cymru on behalf of customers. It has no shareholders, so any gains the company makes are returned to customers and the entire business is managed with bill-payers in mind.
Chris Jones has been chief executive since September, but as one of the architects of the company’s not-for-profit model and finance director since 2001, he can rightly take pride in 13 years of not-for-profit success. At our interview, he chooses modest words. “It’s so far, so good, I’d say.”
Jones goes on to explain ticks have been put against Glas Cymru’s three original ambitions: raising sustainable but cheap finance for investment in the business; winning more customer trust; and motivating staff to want to do a good job because customers, not shareholders, see the benefit.
He has some astonishing figures to back up his claims. Welsh Water’s business plan for 2015-20 has the support of 94 per cent of customers; and in the latest staff survey, 86 per cent said they were proud to work for the company. Jones adds that now he is in the driving seat, one of his key priorities will be giving his staff more tools, capabilities and strategies to deliver for customers.
On the financing side, Welsh Water has consistently been able to access long-term, low-cost bond finance, despite a deep and biting recession. According to Jones: “We’re investing more in the business now than we ever have done, at a cheaper cost than any of the other utility companies. So all those doubts about ‘can a non-shareholder company access the capital markets in good times and bad’ – well after 13 years and through a big recession, I think we can say we’ve ticked that one off.”
While there have been difficult times – the recession in particular, but also some instances of service failure to customers – Jones says the structure put in place in 2001 has stood the test of time. “Have we found any generic, systemic weaknesses in the business model? I can’t really think of any, to be honest. Is there room for improvement? Sure.”
When I last interviewed Jones, some ten years ago, there was a lot of talk about whether other water companies would go down the Glas route. In a simple, black and white way, this hasn’t happened, despite the model’s obvious successes. Why?
“A lot of it comes down to the serendipity of the moment,” says Jones. “You just haven’t had that unique set of circumstances we had in 2000/01. Welsh Water was up for sale and, bizarre to remember it now, but in that age infrastructure assets were massively out of favour – they were trading at a discount to their regulatory capital value… I’m not saying it couldn’t happen now, but it was much easier to buy at a discount. That gave us our initial customer equity in the business.”
That customer equity stood at around 7 per cent, with 93 per cent debt. Over the years, Glas has managed to strengthen its balance sheet and swell customers’ stake to 37 per cent, reducing debt to 63 per cent.
And 13 years on, although Welsh Water remains the only water company with a not-for-profit structure, a few other key ingredients of Glas’s plan have been mimicked. Crucially, long-term, low-cost bond finance is now commonplace. Jones says: “A lot of other people have adopted that – structured finance and so on was new when we did it.”
The concept of sharing profits with customers, widely trumpeted last year by Ofwat chair Jonson Cox, is also old news to the Welsh. Aside from quintupling customers’ equity stake since 2001, Jones says £300 million worth of value has been returned to customers via a number of avenues: “customer dividends” (charging less than regulatory price caps allow); investing in the business over and above what Ofwat has allowed for; and a generous package of help measures for some 56,000 vulnerable customers, at a cost of £6 million a year. “ is intrinsic to our model,” observes Jones. “That’s the beauty of it – all the upside belongs to customers.”
Right now, like every other company in the industry, Welsh Water’s eyes are fixed firmly on the price review. Ofwat’s Risk and Reward guidance, out on Monday, will be of crucial importance, because Glas relies on an investment-grade credit rating to secure its stream of cheap debt. If the allowed cost of capital sinks significantly below the 4.5 per cent the company pitched in its business plan, its credit rating (and hence its cost of finance and stated bill levels) could be jeopardised.
Jones comments: “There’s a trade-off between financial parameters and customer bills in the short run… but if you go too far in the short term in terms of cutting bills and undermine credit ratings in the sector, it becomes more risky, more expensive, to raise capital in the long term. Given the investment needs in the industry, that won’t be in the long-term interests of customers.”
On that basis, Welsh Water will think very carefully before accepting Ofwat’s risk/reward terms, the cornerstone of which was a cost of capital no higher than 3.85 per cent. Jones says: “Ultimately for us, the most important thing is to come out with the best possible plan for customers”.
More broadly, Jones welcomes some of the innovations of PR14 – the Customer Challenge Group process, for example, which demonstrably convinced the company to change its original plans in a number of areas on the back of feedback. But he cautions the baby should not be thrown out with the bathwater.
“The key thing for us is to keep the basic building blocks of UK regulation in place. I remember one of the heads of one of the credit rating agencies saying this is the gold standard for utility regulation in the world… The jury’s out a bit until December. Ofwat is clearly bending over backwards to strike the right balance and innovate to make it work better for customers, but if there’s too much change to the fundamentals, it could rock the long-term support for the sector, which is not in anyone’s interests.”
Meanwhile, in some areas, Wales is increasingly finding its own voice. Not only has the Welsh Government rejected the English government’s plan to allow all businesses to switch water supplier from 2017, it has also set mandatory build standards for new sewers; consulted on regulations that will require landlords to pass on tenants’ details to reduce the current £20 per customer cost of bad debt; and is expected shortly to publish its long-awaited Water Strategy for Wales, which will set out the policy direction on issues including sustainable development, flooding, water resource management, regulation, water efficiency and affordability.
Jones sees this as part of a wider trend of Wales increasingly cutting its own path – a natural result of devolution, and a welcome development in water terms that will enable closer focus on areas that matter. The chief political water issue for Wales at the moment is flooding.
And while Welsh Water has no plans to compete for business customers in England and Scotland, Jones says: “We’re going to act so we can match whatever’s on offer in England. The absolute last thing I want is any business customer coming to me and saying ‘if I was buying this service in England, I’d get this service or this price’.”
With business customer satisfaction at 89 per cent, the company has a strong foundation and is already offering services such as dedicated account management and multi-site billing that competition might flush out. It intends to build on these foundations to 2020 with new online facilities and by benchmarking and matching/beating offers from competitive retailers.
Welsh Water’s 2015-20 business plan, at a glance
• Increases to average bills to be held to 1 per cent below inflation until 2020. This amounts to a real terms cut of 12.5 per cent, and will mean Welsh customers would have benefited from below-inflation bills for a decade.
• Current levels of investment to be maintained at £1.5 billion, with a smooth spend profile over the five years. This will maintain all current service levels and deliver improvements in a number of key areas (see below). Welsh Water’s customer research and Customer Challenge Group were crystal clear that bill-payers did not want investment to be cut even if that meant cheaper bills because they did not want to store up problems for the future.
• An aggressive efficiency programme that will cut 18 per cent from operating costs. This will fund both service improvements (worth £27 per customer) while holding bills below inflation, and the cost of private sewer adoption (£13) – a cost Welsh Water back-tracked from adding onto bills following customer feedback. Jones says delivering these efficiencies will be “much the biggest challenge for us as a business” – particularly because Welsh Water has already reduced its operating costs since 2001 by 2 per cent, compared with increases elsewhere in the industry of between 10 and 35 per cent.
• After ten years of outsourcing operations (2000-10), AMP6 will continue the AMP5 policy of delivering most investment in-house. Jones explains outsourcing was excellent for delivering short-term efficiencies, but going forward further efficiencies will come from longer-term asset investment and smarter operations, which are best delivered by the asset owner.
• Doubling the number of customers (to 100,000) helped by hardship schemes, plus exploring the potential for a customer-subsidised social tariff.
• Service improvements by 2020 to include: leakage down 8 per cent; low pressure down 25 per cent; 10 per cent cut in supply interruptions; 20 per cent cut in the number of properties that suffer sewer flooding; 10 per cent cut in the number of customer contacts over the appearance, taste or odour of water; an increased use of sustainable drainage schemes; and a third fewer pollution incidents from the sewage network.