Thames Water’s Board, investors and Executive Team have given careful thought to the matters raised by Jonson Cox, in his capacity as Chair of Ofwat, in his recent column. We agree with the direction he is setting and I am pleased to have this opportunity to respond.
Everyone at Thames Water takes our role in supplying London and the Thames Valley with water and wastewater services extremely seriously. We are well aware of our responsibilities to our customers, the environment and the national economy.
During the past ten years, the overall performance of our business has been fundamentally sound. We have supplied our customers with high quality water, consistently receiving the lowest rate of complaints about water quality of all of the major water companies. Our prices have remained amongst the lowest in the country and the £1 billion we have invested each year during the last decade represents one of the highest rates of investment per customer in the sector.
However, not everything has gone well and we are the first to admit that our performance last year fell short of what we – and our customers – expect. For the first time in eleven years, we failed to meet our annual leakage target, by a significant margin, and we incurred a huge fine for pollution events that took place between late 2012 and early 2014.
We make no excuses for those failures. Meeting agreed targets, protecting the environment and complying with the law are fundamental requirements of our business and we expect to be held to account whenever we fail to meet the required standards. The full impact of the pollution fine is borne by our shareholders. The cost of the automatic penalty for failing to meet the leakage target will be returned to our customers through lower bills between 2020 and 2025. We recognise that further financial sanctions may follow as a result of ongoing investigations and the length of time it is likely to take to get our leakage performance back on track against demanding targets. What will be of equal or greater interest to our customers and stakeholders is what we are doing to put things right.
This is an important moment for Thames Water. It will take time to embed the necessary changes and fully address major challenges, but a whole new chapter is opening. Thames Water and its shareholders share a genuinely long term outlook and a commitment to the future of the business. We have brought in a new senior management team, adding new energy and ideas to the existing store of experience and knowledge. These changes lay the foundations for improving operational performance, enhancing customer service and meeting the new challenges ahead.
In his article, Jonson Cox set out five specific points for us to address. I am pleased to say that we are already working in each of these areas.
We recognise the importance of good customer communications. It is a basic requirement that we should be able to engage quickly and effectively with every customer on their own terms, using whatever channel they prefer in the circumstances. While there is still room for improvement, we have recently delivered a step change in our social media capacity, which has been well-received, as have the developments in our online account management. At a more fundamental level we have recognised the need for significant improvements in the customer care, information and billing systems which underpin all our interactions with our customers. Significant investment is under way in this area of our activities.
The suggestion that we should publish an annual audited statement, taking prominence over our financial disclosures and explaining clearly how we have set out to deliver for all our customers seems to us to be a good idea. We will therefore do this, starting with next year’s annual accounts. Our statement will look at both short term and long term issues, including customer service, resilience and the health of our assets. It will describe the aspirations that underpin our decision making, the ways in which we have invested our customers’ money, and the degree to which customers, the environment and investors will each benefit.
Three years ago we first published a document entitled ‘Our Finances Explained’, which has been updated annually. This was an important step towards greater transparency and we are about to complement it with ‘Our Taxes Explained’. In seeking to build on those foundations, we know that many people want to know more about the level of financial returns achieved by the company’s investors. An aspect of particular interest is the the extent to which the returns achieved by different companies in the sector are determined by the financial structures that each has adopted. This is an eminently reasonable question and we will provide the relevant data openly and transparently, including a comparison between the financial flows that have taken place and those that would have been expected under Ofwat’s notional capital structure. In doing this, we will invite others in the sector to work collaboratively with us.
Following recent reforms of governance in the sector, instituted by Jonson Cox and the board of Ofwat, the composition of our Board of Directors has undergone significant change. Fully independent non-executive directors are now in the majority on the board of our regulated entity, Thames Water Utilities. As well as their independence and their ability to hold the company to account, they bring a valuable breadth and depth of experience to our decision making and governance. They each serve for a limited term and in recruiting their successors, in due course, we will continue to seek out individuals with a strong track record of integrity, independence of thought and the ability to represent the interests of our customers. In the meantime, we will carry out an early review of board effectiveness and independence, as requested. On a personal note, I will be standing down as planned, early next year, and a successor is currently being identified.
We recognise that the way in which management remuneration is determined is a matter of considerable and legitimate interest to our customers. We have sought to explain this carefully in the lengthy remuneration section of our annual reports and will continue to work with our Customer Challenge Group to present this information openly and transparently.
As a concluding remark, I just want to confirm that the senior leadership of Thames Water – Board members, investors and members of the Executive Team – accept that our responsibility is to provide the best possible service to all our customers. We have a hugely important job to do in supplying London and the Thames Valley with water and wastewater services that protect public health and are fit for purpose, resilient and good value for money. The fact that we do so as a private sector organisation, under strong regulation, does not change the fundamental requirement of our business, which is to provide an essential public service. It does, however, make it more important that we operate openly and transparently in every respect, to earn and maintain the trust of our customers. That is something we can and will do.