The completed acquisition of Group Plc by UK Water (2011) Limited

An consultation paper

Consumer Council for Water Response December 2011 Introduction

1. The Consumer Council for Water (CCWater) is the statutory consumer organisation representing water and sewerage consumers in England and . CCWater has four regional committees in England and a committee for Wales. This response reflects our collective view on the regulatory issues and changes to Northumbrian Water Limited (NWL) Appointment arising from the change of ownership of its parent company Northumbrian Water Group plc (NWG). It is also based on detailed knowledge of the water company at a regional level through the CCWater’s Northern Committee, including knowledge of other changes in ownership.

Maintaining service

2. CCWater’s overriding priority is to ensure that NWL’s customers experience no deterioration in service levels as a result of this change of ownership. In addition we expect NWL to maintain its stated focus on improving customer service and satisfaction levels with particular emphasis on getting things right first time, every time. This was recently evidenced by a further reduction in already low complaint numbers. We therefore welcome NWL’s statement that, board level changes apart, it is very much ‘business as usual’ for everyone there as it continues towards its vision of being the best in the industry. We will, of course, monitor this on behalf of consumers and raise any relevant issues.

3. UK Water Group does not have experience of directly operating a water and sewerage services company in the UK, their involvement in the UK water sector having been confined to the much smaller water-only Cambridge Water. Nevertheless, it has already publicly recognised NWL’s excellent reputation in the UK water sector, and the skills and experience of existing management and employees. It acknowledged the critical role they will play in ensuring the company’s continuing success and has committed to safeguarding pension entitlements and employment rights. We welcome this, together with UK Water Group’s stated intention to be a long term investor.

4. The intention to retain four of the previous seven Non-Executive Directors and the four existing Executive Directors is a further welcome indication of the ‘business as usual’ approach by the new owners.

Licence Conditions

5. The proposed amendment to Condition P of the Licence is accepted as a strengthening of protection for any future change in ownership. We recognise that this will not alter the current provision which already ensures the owners of the company will provide undertakings which protect customers and give NWL independence from the rest of the group.

6. We understand UK Water Group’s view that the Li Ka Shing Foundation, as a minority shareholder, should not be required to provide a Condition P undertaking and that it does not have sufficient control or material influence to be able to do so. We do, however, value the participation of the Foundation on the company’s Board, investing 20% of NWL’s profits in the Foundation to support health and education projects. This is consistent with NWL’s active participation in a wide ranging corporate social responsibility programme. We hope that, in time, eligible initiatives in the North East and in Essex and Suffolk will benefit from the Foundation’s support.

7. We welcome the confirmation that NWL already has the majority of standard financial ring fencing appointment conditions in place, and we support the two proposed modifications to further strengthen the protection for customers. We trust Ofwat to ensure that the ring fencing conditions are adequate and appropriate to protect consumers.

Increased gearing

8. We have some concerns about UK Water Group placing £232m of unsecured debt onto NWL’s balance sheet, thus raising the company’s gearing from 56% to 62%. We acknowledge that the increased gearing level is below the upper bound of Ofwat’s projections for “a sustainable level of gearing to ensure companies remain comfortably within the investment grade category” of credit ratings1. Nevertheless, higher gearing levels increase the burden of risk on equity investors and customers. We therefore look to Ofwat to monitor closely UK Water Group’s financial policies and activities to ensure that NWL’s customers are not exposed to unnecessary risk.

Balancing shareholder and customer interests

9. NWL was a leader in the industry in seeking greater balance between shareholder and customer interests during the last price review. As a result of outperformance it declined to take up its K factor in the last two years of the previous pricing period, ensuring that any increase for customers was limited to RPI. This was a key factor in the company being named Utility Company of the Year, and demonstrated recognition of issues of affordability in a region where there is high social and economic deprivation. It is hoped that the new owners will feel able to give similar regard to balancing investor, employee, shareholder and consumer interests.

Enquiries

Enquiries about this response and requests for further information should be addressed to:

Barbara Leech Policy Manager Consumer Council for Water Northern First Floor, Old Hall, Mowden Hall, Staindrop Road, Darlington DL3 9BG.

Tel: 01325 464222

Email: [email protected]

1(2009) Ofwat: Future water and sewerage charges 2010-15: final determinations, page 131.