Risk is managed through the individual responsibility of each business area, supported by our Corporate Risk Framework, which aims for continuous improvement. With an overarching mandate and commitment by the board, the framework consists of four key areas:

  • Governance;
  • Approach;
  • Process; and
  • Guidance.

The application of the framework involves the regular assessment of the internal and external risk environment by the business. We focus on the factors that could limit or prevent the achievement of our company objectives and involves the prioritised implementation of controls to mitigate exposure and build resilience and sustainability.

The most significant risks and the group's risk profile summary are reported to the executive and the board twice a year. This supports the determination of the nature and extent of those risks we are willing to take in pursuing our objectives in line with good corporate governance practice. In addition, the audit committee regularly reviews the framework's effectiveness, and the group's compliance with it (see Audit Committee), reporting its findings to the board.

Corporate Risk Framework – Governance and reporting structure

Key features and developments over the last year

Key features for 2013/14 relate to the ongoing dominance of regulatory risks and the uncertainty which these continue to pose.

There continues to be two ongoing pieces of material litigation worthy of note but, based on the facts currently known to us and the provisions in our statement of financial position, our directors remain of the opinion that the likelihood of these having a material adverse impact on the group's financial position is remote.

  • In 2009, United Utilities International Limited (UUIL) was served with notice of a 'class action' in Argentina. The action relates to allegations about a US$230 million bond relating to Inversora Electrica de Buenos Aires S.A. (IEBA) that UUIL had a 45 per cent shareholding in (but sold in 2005). IEBA owned an Argentine electricity distribution network. The amount of the claim remains unspecified and UUIL continues to defend the matter vigorously.
  • In March 2010, Manchester Ship Canal Company (MSCC) issued proceedings against United Utilities Water PLC (UUW) alleging that UUW was trespassing as a result of it discharging into the canal. MSCC is seeking damages and other relief. UUW won a 'summary judgment' application regarding a significant element of the claim but an appeal of that judgment was considered by the Supreme Court at the beginning of May. We await the court's decision.

Also notable was the extent of mitigating activity across the business in response to the changing regulatory environment and our commitment to be a leading water and wastewater company and service provider. This included significant progress in customer satisfaction, operational service performance and environmental assessments carried out by the Environment Agency. In addition, there was a step forward following activities tied to our ongoing commitment to a continuous and secure supply of water with a successful inspection of the largest aqueduct in Europe, detecting no urgent structural maintenance required. Ongoing business change and transformation programmes also featured heavily during the year in both the wholesale and business retail businesses preparing for the opening of the English market in 2017. This included the successful acquisition of customers in Scotland which provides not only a source of income for the group, but also a platform to learn and develop expertise. Ongoing innovative initiatives also played a key part in business transformation with a focus on reducing operating cost and the cost to serve.

Looking ahead

Following the price determination, we expect our risk profile to return to one based on operational performance, compliance and delivery risk. The ongoing development of the non-household market, including the extent of competitor activity and customer switching rates, will continue to be a focus as will the uncertainty surrounding the form of upstream competition for water and sewerage services.

Determination of the principal risks

The five principal risks summarised in the following table have been determined by considering our entire risk profile relative to the five principal risk categories contained within our Corporate Risk Framework (Strategic, Financial, Operational, Compliance and Hazard), drawing out key circumstances where there is a potential for material effect. In each case the summary illustrates a list of current issues and uncertainties along with the extent of control/mitigation and the commitment to manage these areas by illustrating the link to our company objectives and the company business plan through relevant performance indicators.

Photograph: Caroline Brameld and Ian Clydesdale, part of our team managing commercial debt.

RiskPotential impactControl mitigationStrategic relevancePerformance indicators
Strategic Risk1.The regulatory environment
Current issues or areas of uncertainty include:
  • The PR14 price determination will reflect a lower assumed weighted average cost of capital (WACC) and may reflect lower cost allowances than incorporated in our proposed business plan. Regulatory penalties relating to the current regulatory period are also possible
  • Market reform (see 2 below)
  • Compliance with regulations (see 4 below)
Our proposed business plans are subject to final determination from Ofwat which may reflect a different view of the appropriate scope and /or cost of delivering customer benefits. Longer-term and less frequent changes to the mechanism may also cause increased costs of administration and also reduce income and margin. The water and wastewater sectors in England and Wales have benefitted from a stable and transparent regulatory regime based on a regulatory capital value. The evolution of regulation in the sector may involve incremental changes to this model, more variations in returns and, consequently, changes to the risk and return profile of companies operating in the sector.Our business plan has been prepared based on extensive research and consultation from a wide range of stakeholders including customers, environmental and quality regulators and others in order to ensure that it is both affordable and sustainable, meets statutory and legal obligations, strikes an appropriate balance between the needs of customers and the environment, whilst still being financeable by investors.
We engage in relevant government and regulatory consultations and initiatives which may affect the future strategic decisions made about policy and regulation in the sectors where we operate. In addition, we proactively consider all the opportunities and threats associated with any potential change, exploiting opportunities and mitigating risks where appropriate.
Lowest Sustainable Cost
  • Revenue
  • Underlying operating profit
  • Underlying profit after taxation
  • Gearing: net debt to RCV
  • Financing outperformance
  • Opex outperformance
  • Capex outperformance
2. Competition in the market
Current issues or areas of uncertainty include:
  • Market reform including competition in the non-household retail sector
  • Competitor positioning in the market
  • Upstream reform
  • Compliance with regulations (see 4 below)
The opening of the market for retail services to non-household customers in England generates both opportunities to gain market share and scale and risks of losing market share and margin erosion. Longer term, upstream competition has the potential to generate issues relating to underutilisation or stranding of assets, although there is much uncertainty surrounding the development of upstream competition.We look to retain existing and acquire new customers by striving to meet their needs more effectively. We monitor competitor activity and target a reduction in operating costs. We continue to engage with government and regulators on the shape of future competition and are actively engaged in the Open Water programme.Best Service to Customers
  • Satisfied customers
  • Revenue
  • Margin
  • Operating costs
Financial Risk3. The economy
Current issues or areas of uncertainty include:
  • Stability of the world economy
  • Speed of economic recovery
  • Stability of financial institutions
  • Socio-economic deprivation in the North West
  • Welfare Reform and the impact on domestic bad debt
Adverse market conditions can impact the group's profitability and financial condition in a number of ways. These range from price rises for goods and services affecting profit and cash flow to the availability and /or cost of funding and hedging. It may also lead to increased customer bad debt with the North West suffering a higher level of socio-economic deprivation than any other region of the UK. Differentials to predicted financial instrument yields can also affect the economic return on the RCV and on our pension schemes with a requirement for the group to make additional contributions. In extreme but remote cases adverse conditions can affect our debt obligations and credit rating and the ability of our financial counterparties to meet their debt obligations to us.Refinancing is long-term with staggered maturity dates to minimise the effect of short-term downturns. Counterparty credit, exposure and settlement limits exist to reduce any potential future impacts. These are based on a number of factors, including the credit rating and the size of the asset base of the individual counterparty. The group also employs hedging strategies to stabilise market fluctuation for inflation, interest rates and commodities (notably energy prices). Sensitivity analysis is carried out as part of the business planning process, influencing the various financial limits employed. Continuous monitoring of the markets takes place including equity movements.
Within our operations, contract and category management covers supplier price and price volatility of goods and services and the effect of the economy on our customers is monitored. We adopt best practice collection techniques including the segmentation of customers based on their credit risk profile.
Lowest Sustainable Cost
  • Financing outperformance
  • Gearing: net debt to RCV
  • Pension scheme funding
  • Value at Risk (VaR)
  • Cash collection
  • Bad debt
Compliance Risk4.Failure to comply with applicable law or regulations
Current issues or areas of uncertainty include:
  • Ongoing legal, economic, environmental and regulatory requirements associated with operating in a highly regulated business
  • Market reform (see 2 above)
  • Material litigation (see Principle risks and uncertainties)
In addition to general UK and international laws, our activities are subject to significant additional obligations. In the context of changes in the regulatory environment there is a risk that we fail to adopt policies/processes to ensure compliance with emerging requirements. It is also difficult to predict the impact of future changes to laws or regulations or the introduction of new law or regulations that affect us and, from time to time, interpretation of existing laws or regulations may also change or the approach to enforcement may become more rigorous. We could face a range of impacts from this. These include financial payments, penalties (of up to ten per cent of relevant regulated turnover), the imposition of an enforcement order requiring additional capital/operating expenditure or compensation following litigation. It could also lead to high levels of scrutiny by regulators, enforcement agencies or authorities with associated increase in operational costs. In more extreme but remote circumstances, impacts could ultimately include licence revocation or the appointment of a special administrator.The group has robust processes in place to identify risks to its compliance with legal and regulatory obligations and seeks to take appropriate action to ensure compliance. This includes continually monitoring legislative and regulatory developments, the training of employees in new developments and the participation in consultations to influence their outcome, either directly or through industry trade associations for wider issues. Funding for any additional compliance costs in the regulated business is sought as part of the price determination process. The group also robustly defends litigation where appropriate and seeks to minimise its exposure by establishing provision and seeking recovery wherever possible.Responsible Manner
  • Environmental Agency performance assessment
  • Accident frequency rates
  • Near miss
  • Dow Jones sustainability
  • Regulatory reporting process
  • Company risk and compliance statement
Operational and Hazard Risk5. Operational and Hazardous Events
Current issues or areas of uncertainty include:
  • Future abstraction licencing
  • Supply demand balance in West Cumbria
  • Weather conditions
  • Population growth
  • Investment requirements in wastewater infrastructure
  • Excavation, tunnelling and construction work
Caused by both internal and external factors, operational impacts can range from performance related issues, such as leakage or discharge consent breaches to service related issues such as operational/asset failures and the effect on quality, supply or flooding. In exceptional and extremely remote circumstances which may include human error or malicious intervention, the impact could be more significant ranging from environmental damage, economic and social disruption to loss of life.
Depending on the circumstances the company could be exposed to increased regulatory scrutiny, regulatory penalties and/or additional operating or capital expenditure. In the more extreme situations the group could also be fined for breaches of statutory obligations, be held liable to third parties and sustain reputational damage.
Controls and mitigation relate to our core business processes, focusing on preventing negative impacts in order to support high levels of customer service and operation in a reasonable manner. Forecasting and monitoring is a fundamental element of our operational activity, with robust quality assurance procedures, risk assessments and rigorous sampling /testing regimes in place. Ongoing network maintenance and capital programmes aim to enhance standards and integration across the water and wastewater networks for both service and resilience. We also undertake major education programmes in both water usage and appropriate disposal into the sewer network in an attempt to minimise operational issues. In support of this, physical and technological security measures to protect the operational capability from malicious or accidental activity and governance and inspection regimes exist for key infrastructure assets (including aqueducts, dams, reservoirs and treatment works). We have also developed a strong health and safety and environmental culture throughout the organisation supported by health and safety management (HSMS) and environmental management systems (EMS) which are certified to OHSAS18001 and ISO14001 respectively.
Recognising that events can materialise, we operate long-standing responsive controls. These include well tested and appropriately resourced incident response, business continuity, disaster recovery and escalation procedures which continue to be refined. We also maintain insurance cover in relation to losses and liabilities likely to be associated with significant risks, although potential liabilities arising from catastrophic events could exceed the maximum level of cover that can be obtained cost-effectively. The licence of the regulated business also contains a 'shipwreck' clause that, if applicable, may offer a degree of recourse to Ofwat/customers (by way of an interim determination) in the event of a catastrophic incident.
Best Service to Customers
  • Service Incentive Mechanism (SIM)
  • Serviceability
  • Mean zonal compliance
  • Supply demand index
  • Leakage target
  • Time cost quality index
  • Opex, Capex and Financing outperformance
  • Environmental Agency performance assessment
  • Pollution incidents
  • Sewage treatment works compliance
  • Accident frequency rates
  • Near miss