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Davyhulme 100 Years Of Wastewater

Pictured: We celebrated 100 years of sewage treatment at Davyhulme this year. The ‘activated sludge’ process began life at our own Davyhulme treatment works back in 1914 and harnessed the power of micro-organisms which meant that waste from millions of people could be treated in a relatively small space.

We provide services to approximately seven million people in the North West of England

The water industry currently invests around £80 million a week in maintaining and improving assets and services

Our industry and market

Every day, over 50 million household and business consumers in England and Wales receive water and wastewater services. These are served by 10 licensed companies which provide both water and wastewater services.

Additionally, there are licensed companies which provide water-only services and tend to be smaller in size. As each company in the water sector operates as a regional monopoly for its services, they are subject to regulation in terms of both price and performance.

The privatisation of the industry over two decades ago has been widely perceived as a success, making a significant contribution to public health. It has led to improvements in the quality of services provided to customers, higher environmental standards and superior quality drinking water at lower estimated costs to customers than if the water sector was still owned by the UK Government. The water industry currently invests around £80 million a week in maintaining and improving assets and services.

Our customers

United Utilities Water holds licences to provide water and wastewater services to a population of approximately seven million people in the North West of England. We provide services to approximately three million households in our region and this generates around two-thirds of our total revenues. We also serve approximately 200,000 businesses, ranging in size from large manufacturing companies to small shops. Our focus over recent years has been on improving customer satisfaction.

For our business customers we have been extending the range of value-added services we offer, including our on-site engineering solutions and water efficiency advice. By offering value for money, as well as the increased range of services, we have been winning customers out of area. More details on how we are winning customers in the Scottish market, which offers attractive margins, can be seen in Direct competition.

Customers will benefit from below increases in average household bills for the decade to 2020

Our households pay just over £1 per day on average for the combined water and wastewater services we provide. Our price determination for 2015–20 means customers will benefit from below inflation increases to average household bills for the decade to 2020. Our objective is to continue to provide our customers with high quality drinking water to meet all their daily needs and environmentally responsible wastewater collection and treatment at a price that represents good value for money.

We are continuing to invest heavily for our customers. During the five-year period to 2015, we delivered a capital investment programme of around £3.8 billion as we continued to improve our asset base, delivering further benefits for customers. Capital investment will continue at high levels in the 2015–20 period and is expected to remain high beyond 2020 as we continue to:

  • upgrade our region’s water and wastewater networks;
  • maintain our ageing assets;
  • deliver a cleaner environment;
  • provide high quality water to our customers; and
  • improve our customers’ experience.

We have a strong focus on effective delivery of our capital programme, a key driver of value, for customers, the environment and shareholders.

 Average household bill*

Avarage Household Bill

* Assumes 3% p.a. RPI inflation from 2016/17 to 2019/20

Our business uses a combination of technology and the natural environment to become part of the water cycle

Our water cycle

We collect water from the environment, clean and distribute it to our customers before collecting it, treating it, and then returning it back to the environment.

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Our natural environment

We plan far into the future to ensure we are prepared for the changing natural environment, most notably the effects of climate change. With severe dry periods becoming increasingly common, we must ensure we continue to have resilient water resources and an infrastructure capable of moving water efficiently around the region.  The potential effect of climate change on our future water resources is included in our 25-year Water Resource Management Plan. We must seek to tackle flooding incidents caused by the intensive bursts of rainfall, which are becoming more frequent due to changing weather patterns, and ensure we are able to meet increased demand on our sewerage network as the regional population is expected to increase. A phased, long-term approach ensures that the necessary work can be delivered whilst not placing too much pressure on customer bills.

We can make an important contribution to protecting and enhancing the natural environment by using fewer natural resources

We have a responsibility to return water to the environment safely. Spills from our network can lead to pollution which can damage the natural environment and could lead to loss of reputation and financial penalties, depending on their severity. Our number of serious pollution incidents has decreased over recent years and it is an important area of focus within our 25-year Strategic Direction Statement. The Environment Agency assesses water companies’ performance across a basket of measures including pollution and its overall assessment is included as one of our KPIs with all of the pollution sub-measures also reported within our Corporate Responsibility section on our website.

We can make an important contribution to protecting and enhancing the natural environment by using fewer natural resources. We have been driving down our carbon footprint over the last decade and have plans to halve emissions by 2035, from a 2005/06 starting position. Our greenhouse gas disclosures can be found in the Directors' report: other statutory information. Less than 10 per cent of our waste goes to landfill and our use of recycled products is increasing. We are increasing our renewal energy production with plans to further increase this over the longer term, including wind and solar opportunities. This will provide environmental benefits and add value to shareholders through energy cost savings.

Close Up On Litf

Pictured: As part of a £90 million scheme to improve water quality in the Manchester Ship Canal, we took ownership of ‘Gloria’, a 140 tonne tunnel-boring machine used to dig a 700 metre long tunnel underneath Trafford Park.

Our regulatory environment

Economic regulation


The water industry currently operates within five-year planning cycles known as Asset Management Plan (AMP) periods. Prior to the start of each five-year period, companies submit their business plans which include their projected expenditure in order to enhance and maintain their assets. Following review of these plans, Ofwat sets the prices each company can charge their customers across the period. We have just finished the 2010–15 (AMP5) period and price controls for the 2015–20 (AMP6) period were set in December 2014, when Ofwat published their final determinations.

Ofwat assesses companies’ operational performance across a wide range of measures, including some of our key performance indicators (KPIs) such as service incentive mechanism (SIM), leakage and, from April 2015, outcome delivery incentives (ODIs). Where performance falls short of expectations, Ofwat can take measures, such as enforcement actions or penalties, in order to protect customers’ interests. Operational performance and customer service remain high priorities for us, as they are key contributors in our drive to create value, as explained in more detail in How we create value.

Ofwat Logo

Ofwat (The Water Services Regulation Authority) is the economic regulator of the water and sewerage sectors in England and Wales, responsible for ensuring the companies provide customers with a good-quality, efficient service at a fair price.
www.ofwat.gov.uk

Ofwat review 2015–20

Ofwat introduced a number of important changes for the 2015–20 (AMP6) price review, with the aim of evolving the sector in order to meet future challenges and placing greater focus on customers’ needs.

Moving away from one single price control, there are now four separate price controls:

  • wholesale water, covering the physical supply of water;
  • wholesale wastewater, covering the removal and treatment of wastewater;
  • household retail, covering customer-facing activities (principally customer contact, billing, meter reading andcash collection) for household customers; and
  • non-household retail, covering customer-facing activities for business customers.

Separate retail price controls should provide retail businesses with greater incentives and focus on delivering more efficient service to business customers as competition expands, and also to household customers under a new average cost to serve approach.

This new retail household model allows each water company only to charge its customers an amount based on the average costs of the industry plus any allowed company-specific adjustments, such as our £20 million per annum special allowance to reflect the very high levels of deprivation in the North West (see Our economic environment).

The way companies’ operating and capital costs are assessed has been modified to encourage companies to utilise the most efficient, sustainable solutions under a new ‘totex’ model.

There is also a move to a more outcomes-based approach, with greater emphasis being placed on customer engagement to agree the outcomes.

Environmental and quality regulation

The water and wastewater industry in the UK is subject to substantial domestic and European Union regulation, placing significant statutory obligations on water and wastewater companies with regard to, among other factors, the quality of drinking water supplied, wastewater treatment and the effects of their activities on the natural environment.

Defra is the UK Government department responsible for water policy and regulations in England and Wales; it also sets drinking water quality and environmental standards (many based on European law) which water companies must meet. www.gov.uk/defraDefra Logo
The Environment Agency controls how much water can be drawn from the environment and the quality of water returned to rivers and the sea. The EA produces an assessment of water and wastewater companies’ annual performance, and we include this as one of our KPIs. www.gov.uk/government/organisations/environment-agencyEnvironment Agency Logo
The Drinking Water Inspectorate is responsible for ensuring compliance with the drinking water quality regulations. www.dwi.gov.ukDrinking Water Inspectorate Logo
The Consumer Council for Water represents customers’ interests relating to price, service and value for money. It also investigates customer complaints about water quality. www.ccwater.org.ukConsumer Council For Water Logo
WATRS – an independent service designed to adjudicate disputes that have not been resolved through the water company’s customer service teams or by referring the matter to the Consumer Council for Water. www.watrs.orgWatrs Logo
Natural England is responsible for the protection of designated sites for nature conservation, e.g. Sites of Specific Scientific Interest. Companies are required to manage these sites and to protect and enhance biodiversity. www.naturalengland.org.ukNatural England Logo

We aim to maintain and enhance wide-ranging relationships with key people within all of these regulatory bodies to help shape balanced investment programmes which address the needs of all of our stakeholders and contribute to our ability to create value.

Regulatory risks

Given the complex legal and regulatory environment within which we operate, there is a range of risks to which we are exposed. Risks can be in the form of possible non-compliance with existing laws or regulations or failure to meet the terms of our current 2015–20 regulatory contract. We also face risks in relation to potential future changes in legislation or regulation. See Principal risks and uncertainties for more details.

Impact of environmental legislation

European Union environmental legislation will require us and other UK water companies to incur additional capital investment to ensure compliance with more stringent standards. We do, however, recognise that in our region we cannot achieve this alone and we are partnering with others who also have a role to play, such as the Environment Agency, local authorities and other interest groups such as the North West Rivers Trusts.

The revised Bathing Water Directive, effective from 2015, sets higher standards for bathing waters. Under the previous standards North West beaches achieved over 90 per cent bathing water compliance. The new standards are likely to prove very challenging to meet. As one of many contributors to bathing water and shellfish quality we have planned investment of over £200 million across 2015–20 to achieve our ‘Contribution to Bathing Waters Improved’ performance commitment to help ensure compliance with the higher standards. We will work in partnership with other organisations to ensure investment is as efficient as possible.

The Water Framework Directive sets an objective that European member states should achieve ‘good’ status for all surface water beyond 2027. Considerable capital investment is required to meet this, which we are spreading over 12 years, balancing the needs of current and future customers. Our 2015-20 plan includes around £400 million of investment to achieve our ‘Contribution to Rivers Improved’ performance commitment, which includes schemes relating to a number of environmental drivers within the Water Framework Directive as well as other environmental legislation.

The Habitats Directive requires member states to maintain biodiversity by protecting natural habitats and certain wild species. For example, one of the key drivers for our planned Thirlmere pipeline project is to help protect England’s largest species of freshwater mussels in West Cumbria. See Business Insight for more detail.

Preston Tunnel Under Construction Retouched

Pictured: Construction on our £160 million Preston tunnel project, helping to enhance the city’s sewer system and prevent storm water spilling back into watercourses. The 3.5km tunnel can hold 40 million litres of water during heavy rainfall.

Our competitive environment

Comparative competition

Our main competitors to benchmark our performance against are the other nine water and wastewater companies (WaSCs) across England and Wales. We are the second largest WaSC based on the size of our asset base, as measured by Regulatory Capital Value (RCV). We, along with these other nine companies, comprise the vast majority of the total water and wastewater sector, as depicted on the pie chart here.

Although their relative sizes are generally far smaller than the water and wastewater companies, the remaining water-only companies are important competitors as their relative performances are also included in Ofwat’s published comparative information.

We have a strong drive on improving both absolute and relative performance as we aim to deliver good service to our customers, thereby helping to build a platform for us to create value.

Away from the water sector, in line with our vision to be a leading North West service provider, we also benchmark our customer service performance against other leading service providers in our region. In addition, as a publicly listed FTSE 100 company, the other UK and worldwide listed utilities are competitors from an investment perspective.

Direct competition

Currently only very large business customers are allowed to choose their water supplier. Under this arrangement, the new water supplier would buy water directly from the regional water company and be allowed to use its network for this water supply. Although very few users have switched supplier in England, the 2014 Water Act aims to open up future retail competition to all business customers, including sewerage as well as water services from 2017.

We have been building our capability to ensure we are in a strong position as the competitive business retail market evolves and are very active in this expanding market. After attaining a Scottish water supply licence in 2012, we quickly grew and are one of the most successful new entrants in Scotland. We have continued our expansion in 2014/15 and have now won over 200 customers, covering over 2,800 sites and representing future annual revenue of c£15 million. We remain a leading new entrant, although our selective bidding for business at attractive margins means we are not solely focusing on growing market share. We also continue to offer and develop our range of value-added services, such as leak detection and repair, waste digestion and wastewater system optimisation.

The Water Act also paves the way for the future introduction of competition for certain parts of the wholesale, or upstream, business (for example the input of raw or treated water into a water company’s network or the removal of wastewater for treatment), although any such reforms are not expected until 2020 at the earliest. We are fully engaged with regards to market reform, being always mindful of the potential impact on our customers and the value implications for our shareholders.

Our economic environment

Although many economic factors are outside of the direct control of the group, we do, where appropriate, aim to manage the associated risks and opportunities, for the benefit of our customers and shareholders.

Whilst the North West unemployment rate has followed the national trend downwards, at 5.7 per cent for the quarter ending March 2015, it remains above the UK average of 5.5 per cent.

United Utilities’ total contribution to the regional economy over 2010–15 was estimated at £7 billion

A report, ‘Department for Communities and Local Government, Indices of Deprivation 2010’, published in March 2011, highlighted that the North West had more of the most deprived areas in England than any other region. Even as the North West economy recovers it is unlikely to have a significant impact on deprivation, which is the principal driver of our higher than average costs to serve our household customers. This is currently recognised by Ofwat through a special allowance for deprivation of £20 million per annum over the 2015–20 period.

Bad debts remain a risk to which we are exposed, particularly with the continuing tightening of real disposable incomes and the impact of recent welfare reforms likely to intensify. Whilst our debt management processes have been externally benchmarked as efficient and effective, we will continue to refine and enhance them whilst also helping customers back into making regular payment through use of manageable payment plans.

Interest rates have remained below the long-term trend and we have benefited from this as we have made further drawdowns on our £500 million loan signed in 2013/14 and £100 million of new debt raised in 2014/15. Comparatively low interest rates have also been beneficial to our future cost of debt as we continue with our interest rate hedging strategy.

Water Sector Rvc

RPI inflation has declined recently, impacted by the significant fall in oil prices over the winter, and was 0.9 per cent at March 2015. The prices we charge our customers (and therefore revenues), as well as our asset base, are linked to RPI inflation, so lower RPI will mean slightly lower growth on these measures. However, we also have a large quantity of index-linked debt which means our finance costs decrease as inflation falls, providing a partial economic offset to revenue (although this is not a perfect hedge as changes to revenue and index-linked finance costs are based on differing lagged measures of inflation).Our pension liabilities are linked to inflation, which provides an additional economic offset against our asset base. Overall, we are currently more inflation-hedged than the other listed water and wastewater companies so we are better protected in a low inflation environment.

United Utilities’ total contribution to the regional economy over 2010–15 was estimated at £7 billion. Direct economic contributions from our activities include the purchase of goods and services and providing extensive employment. There is also an indirect economic contribution, for example when our suppliers, in turn, make purchases from their suppliers and when people whose jobs are supported by United Utilities spend their personal incomes.