Privatised Utilities - Water

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Privatised Utilities - Water

Before the rail sell-off in the mid-90s stole the prize, the privatisation of the Water boards in 1989 had proved to be the most unpopular. Water is something without which we really cannot survive, and so the fear of putting profit before public service was greater here that with other privatisations. The ten regional water boards were sold-off as ten private monopolies. The current chairman is Jonson Cox, who took up his position in November 2012.

The formula used by OFWAT was slightly different than that used by the other regulators:

Privatised Utilities - Water

OFWAT allowed the water boards to make price rises that were larger than inflation due to the capital investment that was required to improve the sewage system and the water quality (EU water-quality thresholds had to be met). Inevitably, the price rises that followed made this privatisation the least popular; the general public are not necessarily bothered about improved sewage (improvements that they cannot see) but they all notice increased water bills. Also, profits were large so the companies either paid their shareholders unreasonably large dividends, given the lack of risk, or diversified into other areas. Many of these ventures were unsuccessful - the 'fat cats' were wasting money that could have been used to reduce water bills.

The k value was reduced in 1994 to 1, down from figures as much as five times as high (depending on the region).

Privatised Utilities - Water

The drought in 1995 caused water shortages and the inevitable calls for compensation since the general public were paying a private company to supply water, and they were failing. But could the companies do anything about freak weather conditions? Or was it after all simply poor management for which the private water companies should pay (there were a lot of leaks that had not been mended)? What one also had to remember was that there were actually only 2 drought orders in 1995; in 1984 when the water boards were in government hands there had been 34 drought orders, so one must assume that there had been improvements. There were also complaints due to the fact that while all this was going on the water companies were still announcing huge annual profits! Should the water companies have been allowed to raise prices to fund investment? Couldn't they have borrowed like every other company, especially given the lack of long term risk in the industry?

Privatised Utilities - Water

Unlike gas, telecommunications and electricity, all of which have some form of competition, water still does not. After all, how does Northumbria Water compete with Thames water for customers living in the Thames area? Some efforts are finally being made to introduce some competition (see later).

As with many of the privatised utilities, one of the main problems was that the investments being made involved 50 year time horizons and yet the shareholders expected a 2 to 3 year payback! Also, dividends had to remain high regardless of the company's performance in order to prevent a takeover.

In 1996, there was some talk of introducing competition where possible. Options included a choice on the borders of two regions, water pipes open for all to use, a canal system to link the regions and imported water (from Norway?). There was also a suggestion that metering should be introduced across the country instead of just selected regions.

In July 1999, Byatt announced the long awaited proposed price review that was subsequently confirmed in November and came into force in 2000. He was quite savage, calling for an average cut in bills of 14% and environmental improvements. Some of the companies thought it was too harsh and threatened to go to the Competition Commission. They also suggested that it would be difficult to fund any future investment. And of course, unfeasibly huge job losses were threatened (up to a quarter of those employed). Byatt assumed that the companies would continue to make productivity improvements, but is this possible in an industry that is essentially a pipes business, unaffected by the productivity benefits of the IT industry?

The final announcement in November proved slightly more lenient: bills to fall by 12% rather than 14% on average after pressure from Michael Meacher, the environment minister at the time, who was worried about reduced investment expenditure. The price cuts are still quite severe, though, and many companies announced job cuts and reduced dividend payments. What ever happened to the RPI + x formula? The companies are meant to have the incentive to make efficiency gains and then profit. Does this incentive still exist?

Early in 2000, proposals were announced, finally, for the introduction of competition into the water industry. The key move will be to separate the ownership of local networks from the provision of water supply and sewage treatment, just like in the gas, electricity and rail industries, using a franchise system. Some competition does currently exist. Hartlepool Water supplies Kodak in Harrow in place of Three Valleys.