Investing for our customers

Capital investment

2010-2015

£3.5bn

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Photograph: John Butcher, regional water supplies manager.

Our industry and market

Every day, over 50 million household and business consumers in England and Wales receive water and wastewater services. There are currently 10 licensed companies which provide both water and wastewater services to consumers in their respective regions.

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

Our household customers pay just over

£1

per day for the services we provide

We serve approximately

200,000

businesses in the North West

Investing to reduce sewer flooding

Flooding of homes and gardens with sewage is one of the most serious incidents that our customers can experience. Across the 2010-15 period, we will spend over £200 million to halve the number of properties that are affected. However, we do recognise that our performance at that point will still need to improve further. Therefore, over the next five years to 2019/20, we will continue to invest, spending almost £160 million to reduce flooding of homes by around 40 per cent.

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 down 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 also 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 the business insight.

Our households pay just over £1 per day on average for the combined water and wastewater services we provide. Our business plan for the 2015–20 period also means that customers would 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 to customers that represents good value for money.

We are continuing to invest heavily for our customers. During the five-year period to 2015, we have a capital investment programme of over £3.5 billion as we continue to improve our asset base, delivering further benefits for customers.

Capital investment is expected to be around this level again for the 2015–20 period and 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.

Our water cycle

Our business uses a combination of technology and the natural environment to become part of the water cycle. We collect water from the environment, purify and distribute it to our customers before collecting it, treating it, and then returning it back to the environment.

Read more in Performance

Read more at corporate.unitedutilities.com

Our regulatory environment

Economic regulation

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

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 capital expenditure costs to enhance and maintain their network and operating costs to maintain or improve their services. Following review of these plans, Ofwat sets the prices each company can charge their customers across the period. Price limits for the current 2010–15 (AMP5) period were set in November 2009, when Ofwat published their Final Determination.

Ofwat assesses companies' performance across a wide range of measures, including some of our key performance indicators such as Service Incentive Mechanism (SIM), Serviceability and Leakage (see Operational KPIs). Where performance falls short of expectations, Ofwat can take actions, such as enforcement actions or fines, in order to protect customers' interests.

Our current price limits (published in November 2009)

UUW's profile of price limits for the current five-year period 1 April 2010 to 31 March 2015 is set out below:

Year2010/112011/122012/132013/142014/15
K factor*-4.3%-0.2%+0.6%+1.0%+1.2%**
* Added to annual RPI inflation to determine average price change.
** We are applying a one-off special discount so that, on average, customer bills will rise by no more than RPI inflation for 2014/15.

Ofwat review 2015–20

Ofwat is introducing 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 will be 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 and cash 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 proposed retail household model allows water companies only to charge its customers an amount based on the average costs of the industry plus any allowed company-specific adjustments.

  • The way companies' operating and capital costs are assessed is being modified to encourage companies to utilise the most efficient, sustainable solutions under a new 'totex' model.
  • There is a move to a more outcomes-based approach, with greater emphasis being placed on customer engagement to agree the outcomes.

We submitted our business plan to Ofwat on 2 December 2013 and the key features of this plan are set out in Our business plan 2015-20.

Ofwat provided an initial view on our plan through its pre qualification decisions publication in March 2014 and subsequently shared detailed feedback with the company, which we are currently assessing. In line with our expectations and consistent with the company specific adjustments we highlighted when we submitted our initial business plan in December, two key areas we are focusing on are wastewater total expenditure (totex) and retail average cost to serve. Ofwat's initial view on wastewater totex indicated a £1.1 billion difference, compared with our business plan submission. In our submission, we asked for around £1 billion of wastewater totex to be given specific consideration. We are in detailed dialogue with Ofwat to understand this difference and provide any further evidence required to support our submission. We are also revising our outcome delivery incentives to include more symmetrical reward/penalty mechanisms. In addition, we are focusing on a number of adjustments relating to the 2010-15 period. These adjustments include a range of economic, performance and scope differences, compared with the assumptions made at the 2009 price review.

The next steps in the price review process are shown in Our business plan 2015-20.

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, amongst other factors, the quality of drinking water supplied, wastewater treatment and the effects of their activities on the natural environment.

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, see Operational KPIs

www.gov.uk/government/ organisations/ environment-agency

The Drinking Water Inspectorate is responsible for ensuring compliance with the drinking water quality regulations. www.dwi.gov.uk

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.uk

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.uk

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/defra

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 2010–15 regulatory contract. We also face risks in relation to potential future changes in legislation or regulation, particularly with regard to the 2015–20 price review period. See Principal risks and uncertainties for more details in respect of these risks.

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 committing to partnering with others who also have a role to play, such as the Environment Agency and Local Authorities and local interest groups.

  • The revised Bathing Water Directive, effective from 2015, sets higher standards for bathing waters. Under the current standards North West beaches achieve 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 quality we have included investment in our AMP6 business plan 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 and we are spreading this investment over the next three regulatory periods, balancing the needs of current and future customers.
  • The Habitats Directive requires member states to maintain biodiversity by protecting natural habitats and certain wild species. To protect England's largest population of fresh water mussels in West Cumbria, in future we will have to extract less water, raising long-term supply and demand balance issues for the local population. To address this we are proposing work over AMP6 to connect our West Cumbrian supply network to our main integrated supply zone, which has surplus capacity. This proposed project is subject to the outcome of an independent Planning Inspectorate decision.

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 on the right.

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

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

United Utilities is now the

2nd

largest water retailer in Scotland

Water sector RCV

title value
United Utilities 12
Other nine water and wastewater companies 82
Total RCV for all water only companies 6

Water supply competition was opened up in December 2005, when very large business customers (those with an annual consumption of over 50 megalitres per year at each site) were 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 their network for this water supply.

In December 2011, this market was opened up further, with the threshold being reduced to five megalitres a year. To date very few customers have switched supplier in England and Wales.

Looking ahead, under the new Water Act, introduced in May 2014, the water supply threshold will be reduced further to zero for non-household customers and also be expanded to include sewerage as well as water services, with a target date of 2017 at the earliest. This will effectively open up retail competition for all business customers. The UK Government has not expressed any intention to expand competition to include household customers.

We are exploiting the opportunity presented by the expansion of retail competition for business customers. Despite only obtaining a licence to trade in Scotland, a market that already offers full business retail competition, as recently as October 2012, we have quickly become the second largest water retailer there, behind only the incumbent provider. As well as winning new business, this is also helping us to learn about what we need to offer to win out of area customers and this is important in the run-up to the English market opening in 2017.

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 upstream reforms are not expected until 2020 at the earliest.

 

Business Insight

Winning business
in scotland

We were granted a Scottish licence in October 2012, following a successful application. Since then, we have focused on developing a range of value-added services and improving levels of customer satisfaction, combined with competitive pricing, in order to win business customers.

Working in partnership with customers, we can help them to save money by providing water efficiency advice and through consumption monitoring. Our on-site surveys can identify unnecessary waste across a range of areas including the production process, plumbing systems and heating networks. Smart metering enables customers to monitor their water usage by providing regular, detailed consumption data. This can demonstrate unusual or unexpected water consumption which can help identify leaks on their premises or changes in practices on-site.

We tailor our services to the needs of each customer. For example, we offer flexible billing options, so customers can choose the frequency and timing of bills and we also offer consolidated billing options for multi-site customers.

In addition, we offer and are continuing to develop a broad range of value-added services for business customers. These include waste to energy consultancy, engineering advice on the design, build and operation of on-site treatment plants and advice on rainwater harvesting and greywater recycling.

Our strategy in Scotland is working and we have already won customers covering around 2,000 sites; including some well-known nationals. We are now the second largest water retailer in Scotland as well as having a healthy pipeline of potential new deals. Competing in the Scottish market is also helping to build our knowledge ahead of the full opening of the English business market in 2017.

The economic environment

UK gross domestic product has picked up over the last year as developed world economies look finally to recover from the 2008/09 global financial crisis, although UK output has still not recovered to its 2008 level.

The North West of England continues to face a particularly tough economic environment. The North West unemployment rate has not recovered as quickly as the national rate and remains well above the national average, at 7.7 per cent for the quarter ending March 2014, compared to 6.8 per cent nationally. 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.

Commercial volumes have shown a downward trend over recent years, impacted by the tough economic climate, and although volumes stabilised across 2013/14 it is too early to conclude that this is part of a sustained recovery. Bad debt remains a risk to which we are exposed, although Ofwat currently recognises this through a special factor allowance. Debt management continues to be a significant area of focus for us as we seek to use best practice in the recovery of debt and in helping customers back into making regular payment through use of manageable payment plans.

Whilst interest rates have increased somewhat during the year, they still remain below the long-term trend and our recently agreed £500 million loan should benefit from this as we draw it down. Comparatively low interest rates have also been beneficial to our future cost of debt as we continue with our interest rate hedging strategy.

Photograph: Wastewater customer technicians Andy Bromley (left) and Terry Keenan.

United Utilities' contribution to the regional economy over 2010–2015 is estimated at

£7bn

RPI inflation has fallen away from the very high levels seen over 2011 and 2012 (around five per cent), ending 2013/14 at 2.5 per cent). 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 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 also linked to inflation, which also provides an additional economic offset against our asset base.

United Utilities' total contribution to the regional economy over 2010-15 is 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.