UK: Thames Water makes waves. (3 of 4)

UK: Thames Water makes waves. (3 of 4) - Growing demand - water consumption is rising at about 1% per annum - has driven much of Thames Water's extensive capital programme. It has also fuelled efforts to reduce leakage from a 1988 high of 27% to the curr

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Last Updated: 31 Aug 2010

Growing demand - water consumption is rising at about 1% per annum - has driven much of Thames Water's extensive capital programme. It has also fuelled efforts to reduce leakage from a 1988 high of 27% to the current 19%. But with potential leaks at intervals of five metres along every pipe, the cost of bringing down leakages still further would be enormous. "I'd be in heaven", says Hoffman, "if (as recommended by the National Rivers Authority) it was only 15%."

The improvement of resources includes advances in quality. Under operational science manager Dr Jenny Colbourne, Thames Water is shortly to launch trials of an advanced treatment system which reduces levels of chlorine. This is a question of taste, as distinct from public health. On the latter score, Thames Water not only complies with its statutory obligation to take 54,000 at-the-tap samples a year, but takes an additional 83,000 operational samples in the process of monitoring quality. Safety is not at issue, though the scaremongering tactics of certain filter manufacturers might make you think so.

Environmental considerations have also played their part in determining capital expenditure. Bill Harper, deputy chairman and a rare survivor of the Roy Watts axe, spearheads one of the biggest projects, a £200 million incineration programme prompted by the 1998 ban on using the North Sea as a God-given lavatory.

Privatisation has been the spur for much of this activity, but the other side of the equation is the financial engineering which sustains it. In common with its fellow water companies, Thames has to generate profit within a capped unit price. In fact the current 10-year formula is very generous. It lets the water companies increase prices by a "K" factor over and above the previous November's retail prices index. At Thames Water the "K" is 4.5% and, given current rates of inflation, has meant price rises of 14.2%.

The average household bill now runs at £114 a year; Watts proudly points out that this is the lowest in the industry. But, with increases of a good 50% more than inflation during the next decade, "the water bill", says Philip Chappell, of the Thames Customer Service Committee, "will soon take over from the poll tax".

Much of the income thus generated is intended to offset capital expenditure. Yet costs are so great that Thames moved from a net cash position to net debt of £76 million in the 1990-91 year. Utilities analyst Nigel Hawkins, of Hoare Govett, forecasts gearing levels of 40% by March 1995. Watts is not unduly worried. He reasons that the expenses are, if not exactly one-off, not the kind that get incurred every day. And for a monopoly supplier of a staple there is little doubt about future revenue.

Indeed, so profitable have the water companies proved that the balance between customers' and shareholders' interests has, arguably, been skewed in favour of the latter. Under the present pricing formula projected profits for the water companies are on course to exceed original estimates by well over £500 million when the next review comes in 1995.

Ian Byatt, director general of the Office of Water Services, the industry watchdog, has already set alarm bells ringing with his recent statement that he expects "sensible medium-term profitability - no more than is absolutely necessary". As Management Today went to press he announced publication of his second annual report, in which earlier hints that he would intervene, if this year's results were unanimously high, may well be realised.

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