Bristol Water says it has to invest more in its ageing infrastructure if it’s to keep the water flowing. Ofwat says it can’t. Christian Annesley met Alan Parsons, the company’s managing director, to get to the bottom of a very public disagreement.
If you work in the UK’s ultra-regulated water industry, why would you pick a fight with the regulator? It’s a question that Alan Parsons has thought long and hard about over the past few years, but he says in end it came down to this: he had no choice.
Parsons is managing director of Bristol Water, which supplies water to Bristol and some of the surrounding areas. These days it’s owned by the Spanish utility Aguas de Barcelona, but is run independently of its parent company, to which it pays a chunky dividend each year.
Parsons has been in charge of operations at Bristol Water since 2007. However, this year he says he’s put his normal working life on hold and spent nearly all his time and energy on the company’s efforts to appeal the cap that Ofwat has placed on its price rises. Ofwat initially decided that the price Bristol Water charges its customers could increase by no more than 1.7 per cent a year after inflation, but Bristol Water says only annual increases of 6 per cent above inflation for five years will enable it to make the investments in needs in its creaking infrastructure.
“The regulatory system is designed in five-year chunks,” says Parsons, “and we are arguing about 2010 to 2015. It matters because the system is slowly crushing us. And we are spending millions on this appeal – at least a fifth of our profits this year – because there is so much at stake.
“It boils down to this: we are running on a threadbare system producing food quality water through century-old pipes. And we are doing it at a cost to our customers equivalent to a pint of beer a week.”
Investment in water infrastructure is not surprisingly a seriously long-term game. These are companies that look at things in 25-year blocks typically, given that it can take 20 years to build a reservoir and pipes will usually last for 100 years or so.
But Parsons says Bristol Water is replacing its pipes at a rate that needs them to last for 300 years. “The asset base is deteriorating, it’s a simple as that. But we can’t let it because the water has to keep flowing.” The numbers are pretty simple. At the moment Bristol water charges its customers £157 a year and wants to increase this to £202 over five years. On top of that customers also have to pay Wessex Water for dealing with their sewage: that’s another £200.
At the other end of the spectrum, the investment numbers that are in dispute are altogether bigger, but just as easy to follow. Bristol Water wants to invest £319m in the five years to March 2015, whereas Ofwat’s ruling would it allow it to spend £244m over the period.
But aren’t there other savings to be made elsewhere by the company that it could plough back into pipes and reservoirs? Parsons insists not. “Privatisation of the water industry has largely worked. We have been taking out cost over 20 years already. The scope for efficiencies now is much more limited.”
He says Bristol Water has already been stretching its assets for years, but at some point that has to stop.
“The big issue is resilence and security of the supply. Reputationally and emotionally that is the big issue. And the floods in Gloucestershire in 2007 were a warning. There was no mains supply for two weeks after those floods and we almost lost our treatment works because an electricity substation nearly went out. That would have meant an evacuation of North Bristol,” he says.
“The thing is, we are a bit like air traffic control: we have an obligation to deliver. There will be rare catastrophic events, sure, but we need as far as possible to be able to respond to them. The infrastructure needs to be flexible enough to cope.”
One aspect that Parsons bemoans is that the boom of the noughties wasn’t a trigger for the industry to make the big infrastructure investments for the long term.
“There is political pressure to keep costs low, and I understand that. But there is nothing built into the system to enable the step-change in investment the industry needs. Ofwat sits in its ivory tower and works on the basis of comparative analysis to arrive at the averages it uses to set prices.
“What it doesn’t do is come and see the infrastructure we have to work with. It has no local knowledge, so we end up squabbling about price rises and percentage increases rather than about the fundamentals.”
Parsons says he’s not dismissive of people’s personal finances when it comes to this. He understands that it seems strange to be arguing for such big increases in the current economic climate, but he says most customers support what the company is doing and it’s too big an issue to ignore.
“I suppose this is our line in the sand. You can only go on for so long muddling through. It needs another approach,” he says. “We are a small player in the context of the UK, perhaps, but the issues we are facing are real and similar to those others are facing in other parts of the country. We don’t like picking arguments. But we picked this one because we think Ofwat is wrong. This is not about dividends to our parent company, it really isn’t. It’s about how the industry works. And it’s about the mechanisms that are used to make these pricing decisions. Something has to change.”
Also in: July 2010
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