Utility Week

Interview term support for the sector, which is not in set of circumstances we had in 2000/01. Welsh "[Gainshare] is intrinsic anyone's interests." Water was up for sale and, bizarre to rememMeanwhile, in some areas, Wales is to our model. That's the ber it now, but in that age infrastructure assets voice. only were massively out of favour – they were tradbeauty of it – all the upside increasingly finding its ownrejected Not Enghas the Welsh Government the ing at a discount to their regulatory capital belongs to customers" lish government's plan to allow all busivalue… I'm not saying it couldn't happen now, nesses to switch water supplier from 2017, but it was much easier to buy at a discount. it has also set mandatory build standards for new sewThat gave us our initial customer equity in the business." ers; consulted on regulations that will require landlords That customer equity stood at around 7 per cent, with to pass on tenants' details to reduce the current £20 per 93 per cent debt. Over the years, Glas has managed to customer cost of bad debt; and is expected shortly to strengthen its balance sheet and swell customers' stake publish its long-awaited Water Strategy for Wales, which to 37 per cent, reducing debt to 63 per cent. will set out the policy direction on issues including susAnd 13 years on, although Welsh Water remains the tainable development, flooding, water resource manageonly water company with a not-for-profit structure, a ment, regulation, water efficiency and affordability. few other key ingredients of Glas's plan have been mimJones sees this as part of a wider trend of Wales icked. Crucially, long-term, low-cost bond finance is now increasingly cutting its own path – a natural result commonplace. Jones says: "A lot of other people have of devolution, and a welcome development in water adopted that – structured finance and so on was new terms that will enable closer focus on areas that matter. when we did it." The chief political water issue for Wales at the moment The concept of sharing profits with customers, widely is flooding. trumpeted last year by Ofwat chair Jonson Cox, is also And while Welsh Water has no plans to compete for old news to the Welsh. Aside from quintupling custombusiness customers in England and Scotland, Jones says: ers' equity stake since 2001, Jones says £300 million "We're going to act so we can match whatever's on offer worth of value has been returned to customers via a in England. The absolute last thing I want is any businumber of avenues: "customer dividends" (charging less ness customer coming to me and saying 'if I was buying than regulatory price caps allow); investing in the busithis service in England, I'd get this service or this price'." ness over and above what Ofwat has allowed for; and a With business customer satisfaction at 89 per cent, generous package of help measures for some 56,000 vulthe company has a strong foundation and is already nerable customers, at a cost of £6 million a year. "[Gainoffering services such as dedicated account management share] is intrinsic to our model," observes Jones. "That's and multi-site billing that competition might flush out. It the beauty of it – all the upside belongs to customers." intends to build on these foundations to 2020 with new Right now, like every other company in the industry, online facilities and by benchmarking and matching/ Welsh Water's eyes are fixed firmly on the price review. beating offers from competitive retailers. 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 Welsh Water's 2015-20 business plan, at a glance of cheap debt. If the allowed cost of capital sinks significantly below the 4.5 per cent the company pitched in • Increases to average bills to be held to 1 per cent below inflation until 2020. its business plan, its credit rating (and hence its cost of This amounts to a real terms cut of 12.5 per cent, and will mean Welsh cusfinance and stated bill levels) could be jeopardised. tomers would have benefited from below-inflation bills for a decade. Jones comments: "There's a trade-off between finan• Current levels of investment to be maintained at £1.5 billion, with a smooth cial parameters [cost of capital and others] and customer spend profile over the five years. This will maintain all current service levels bills in the short run… but if you go too far in the short and deliver improvements in a number of key areas (see below). Welsh Waterm in terms of cutting bills and undermine credit ratter's customer research and Customer Challenge Group were crystal clear ings in the sector, it becomes more risky, more expensive, that bill-payers did not want investment to be cut even if that meant cheaper to raise capital in the long term. Given the investment bills because they did not want to store up problems for the future. needs in the industry, that won't be in the long-term • An aggressive efficiency programme that will cut 18 per cent from operatinterests of customers." ing costs. This will fund both service improvements (worth £27 per customer) On that basis, Welsh Water will think very carefully while holding bills below inflation, and the cost of private sewer adoption before accepting Ofwat's risk/reward terms, the corner(£13) – a cost Welsh Water back-tracked from adding onto bills following cusstone of which was a cost of capital no higher than 3.85 tomer feedback. Jones says delivering these efficiencies will be "much the per cent. Jones says: "Ultimately for us, the most imporbiggest challenge for us as a business" – particularly because Welsh Water tant thing is to come out with the best possible plan for has already reduced its operating costs since 2001 by 2 per cent, compared customers". with increases elsewhere in the industry of between 10 and 35 per cent. More broadly, Jones welcomes some of the innova• After ten years of outsourcing operations (2000-10), AMP6 will continue tions of PR14 – the Customer Challenge Group process, the AMP5 policy of delivering most investment in-house. Jones explains for example, which demonstrably convinced the comoutsourcing was excellent for delivering short-term efficiencies, but going pany to change its original plans in a number of areas on forward further efficiencies will come from longer-term asset investment the back of feedback. But he cautions the baby should and smarter operations, which are best delivered by the asset owner. not be thrown out with the bathwater. • Doubling the number of customers (to 100,000) helped by hardship "The key thing for us is to keep the basic building schemes, plus exploring the potential for a customer-subsidised social tariff. blocks of UK regulation in place. I remember one of the • Service improvements by 2020 to include: leakage down 8 per cent; low heads of one of the credit rating agencies saying this is pressure down 25 per cent; 10 per cent cut in supply interruptions; 20 per the gold standard for utility regulation in the world… The cent cut in the number of properties that suffer sewer flooding; 10 per cent jury's out a bit until December. Ofwat is clearly bending cut in the number of customer contacts over the appearance, taste or odour over backwards to strike the right balance and innovate of water; an increased use of sustainable drainage schemes; and a third to make it work better for customers, but if there's too fewer pollution incidents from the sewage network. much change to the fundamentals, it could rock the long10 | 31st January - 6th February 2014 | utILIty WeeK

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