The UK Water Industry - A brief overview
The UK is a key geographical area in which to operate, not only because
of its historical influence world-wide in water treatment but because
it is currently in the middle of a prolonged growth phase. Capital investment
in England and Wales is currently running at £3.4 billion per year.
Companies' operatinmg profits are £2.6 billion in 2005-06 up 17%
compared with 2004-05. In Scotland investment is also growing although
lagging several years behind England and Wales. The Scottish Executive
have now agreed the Quality & Standards III (Q&S III) programme
which will l be the third post-devolution investment programme for the
water industry in Scotland . It follows major investment of £1.8
billion for the previous period.Over the period 2006-10 total investment
is estimated at £2.15 billion.
The UK is at the forefront of the water industry worldwide. With privatised
water companies in England, a mutual in Wales, a nationalised industry
in Scotland and a government department in Northern Ireland - there
is no better proving ground for different ideas about utility provision
than Britain's water industry.
The supply of water and waste water in England and Wales was privatised
in 1989. Ten companies were formed that supply both water and waste
water. In addition there are 13 water only companies. The water and
waste water companies are responsible for the abstraction, treatment
and supply of water and the collection, treatment and return of the
waste water to the aquatic environment.
The industry is highly regulated. The Water Services Regulation Authority
(Ofwat) is the economic regulator of the water and sewerage industry
in England and Wales. Ofwat's role is to seek value for consumers. Before
1 April 2006 their functions rested with the Director General of Water
Services. The framework for the changeover was outlined in the Water
Act 2003. It provides a similar structure to other economic regulators.
Ofwat is responsible for making sure that the water industry in England
and Wales provides customers with a good quality and efficient service
at a fair price. The Ofwat Board includes the Chairman, a Chief Executive
(takes up post on 9 October 2006), two executive and four non-executive
directors. The Board is responsible for deciding how Ofwat carry's out
their functions and effectively meet their statutory requirements. There
is a majority of non-executive members.
Ofwat makes its decisions independently of the Government, but works
closely with:
- the Secretary of State for Environment, Food and Rural Affairs and
the Welsh Assembly Government;
- the Consumer Council for Water (CCWater), which is an independent
organisation that represents customers' interests and deals with your
complaints;
the Drinking Water Inspectorate, which sets standards for the quality
of drinking water;
-
the Environment Agency, which regulates and enforces water abstraction
consents and quality standards in inland, estuarial and coastal waters;
and
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Natural England and the Countryside Council for Wales, on environmental
issues.
Ofwat do this by:
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Setting limits on what companies can charge you;
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ensuring companies are able to carry out their responsibilities under
the Water Industry Act 1991 as updated by section 39 of the Water Act
2003;
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protecting the standard of service you receive;
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encouraging companies to be more efficient;
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meeting the principles of sustainable development; and
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helping to encourage competition where appropriate.
The approach in Scotland is different. There is only one water company
- Scottish Water - still state owned. Performance is regulated via the
Scottish Executive and the Water Commissioner.
The water and waste water quality standards that the water companies must meet are
regulated by the Environment Agency. This regulatory body was formed in April 1996 as
a "one stop shop" for environmental regulation. The functions of the National Rivers
Authority, Her Majesty's Inspectorate of Pollution and the waste regulation
responsibilities of the local authorities were all incorporated into this new body. As well as
a duty to protect and improve the quality of rivers, estuaries and coastal waters, it is
responsible for managing water resources and protecting people and property from
flooding.
Investment activity is driven by EU legislation such as the Urban
Waste Water Directive and Bathing Water Directive. Water charges
have more than doubled since 1989 and this combined with considerable
adverse publicity over issues like water shortages means that the industry
is under constant pressure to improve.
Three events have combined to act as a catalyst for structural change in the water industry.
- The first was the Competition Act and the successful introduction of competition into the gas and electricity markets.
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The second event was the tough AMP3 settlement. This has reduced the
income of the water companies, made investors nervous about future prospects
and focussed attention on the cost of capital. This has encouraged sophisticated
financial management schemes to securitise the debts to emerged such
as that at AWG plc.
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The third event is the continuing globalisation and corporate restructuring.
The result of the above developments is that the water companies are undergoing
considerable structural change. The formation of asset operators has
emerged as evidenced by the Glas takeover of Welsh Water. New players
have entered the market such as YTL - owners of Wessex Water. However
the wheel is starting to turn full circle with the return of Northumbrian
Water to the equity markets after 7 years ownership by Suez. This is
combined with the realization that a massive capital programme with
tight deadlines has to be delivered and the starting gun has already
gone.
Take overs in the industry continue with the recent sale of Thames
Water by RWE to Macquarie led Kemble Water a good example.
These changes are creating major opportunities for suppliers to the water industry. The winners will be
those companies that carefully segment their approach, focus on the needs of their
customers and offer real value for money.
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