Whether it is treating and delivering drinking water for our customers, or returning treated wastewater to rivers and the sea, the natural environment is fundamental to our business. We continue to invest in the protection and, where appropriate, enhancement of the natural environment of the North West. This in turn brings economic benefits such as underpinning the region's tourist industry.
Preparing for climate change
We plan far into the future to ensure we are prepared for the changing natural environment, most notably the risks and opportunities presented by climate change. With severe dry periods becoming increasingly common, we must ensure we continue to have resilient water resources and an infrastructure capable of moving water efficiently around the region. At other times, we must tackle flooding incidents caused by the intensive bursts of rainfall which are becoming more frequent due to changing weather patterns. The potential effect of climate change on our future water resources is included in our 25-year Water Resource Management Plan.
Preparing for a changing population
Additionally, we must ensure we are able to meet increased demand on our sewerage network as the regional population is expected to increase. A phased, long-term approach ensures that the necessary work can be delivered without placing too much pressure on customer bills.
Returning water safely to nature
We have a responsibility to return water to the environment safely. Spills from our network can lead to pollution which, depending on their severity, can damage the natural environment and potentially lead to loss of reputation and financial penalties. We have had one of our best years in relation to serious pollution incidents, and it remains an important area of focus. The Environment Agency assesses water companies' performance across a basket of measures, including pollution, and its overall assessment is included as one of our KPIs. All of the pollution sub-measures are reported within our Corporate Responsibility pages on our website at: corporate.unitedutilities.com/cr-environment
Reducing our environmental impact
We can make an important contribution to protecting and enhancing the natural environment by using fewer natural resources. We have been driving down our carbon footprint over the last decade (22 per cent fall in CO2 emissions since 2005/06) and have plans to reduce it further. Less than 6 per cent of our waste goes to landfill and our use of recycled products is increasing. We plan to substantially increase our renewable energy production from 2015 to 2020 with the main contributor being solar opportunities. This will provide environmental benefits and add value to shareholders through energy cost savings.
Our road to resilience
We face resilience challenges across our business in systems, finance and skills, as well as in customer and stakeholder expectations for a reliable, wholesome water supply and good environmental management. Resilience is not a new issue for us. However, delivering the level of resilience now expected by customers, in light of pressures from a changing climate, growing population, ageing infrastructure and market competition, may lead to some significant redirection of investment, particularly in ensuring the ongoing resilience of key population centres like Manchester and Liverpool.
We have been at the forefront of managing record-breaking extremes of weather over the last few years. This has actively tested our resilience and our response and recovery capabilities. Given the scale of the flood events in December 2015, the fact that relatively few customers suffered interruptions to their water supply highlights an underlying level of resilience. But there is still room for improvement. The Lancashire water quality incident we experienced during 2015 tested our ability to respond to such a large scale event, and regrettably, it had a significant impact on a large number of customers over a prolonged period.
We learnt a great deal from our experiences and have already made significant progress in enhancing our resilience. We are following a risk-based approach to better understand our overall risk and prioritise actions to reduce it further. Our methodology is aligned with both the UK Water Industry Research Ltd (UKWIR) document 'Resilience Planning: Good Practice Guide' and the Cabinet Office guidance 'Keeping the Country Running: Natural Hazards and Infrastructure' which advocates consideration of the 4Rs to address system resilience risks:
- redundancy – backup installation or spare capacity to allow continuity of service;
- resistance – providing strength or protection to resist a hazard impacting;
- reliability – design systems to continue operating under a broad range of conditions; and
- response and recovery – plan to ensure a fast, effective response to disruptive events.
Redundancy and resistance are generally seen as being the most effective at removing risk but tend to be at the highest cost. A risk-based approach allows all mitigating actions to be assessed on a like-for-like basis. Every intervention cost can be compared to the risk benefit ensuring that interventions can be prioritised and tested for value for money. Other activities underway include:
- understanding our customers' needs and providing them with a better service during events;
- investing in our assets to reduce the likelihood of a large scale disruption to service;
- training our people and reinforcing the importance of delivering a resilient service; and
- testing and enhancing our contingency planning capability.
Through the rest of this 2015-20 regulatory period, and into the next, we will continue to develop our understanding of the risks and take further action to control them where appropriate, including:
- as part of our responsible approach to resilience, and based on outperformance we have earned to date, we aim to make around £100 million available for additional investment across this regulatory period to deliver significant resilience benefits;
- gaining insight from our inspection of the Haweswater Aqueduct about the resilience of supplies, to a growing population in Manchester, and determining what needs to be done to ensure the supply is secure now and remains so in the future;
- developing a resilience measure that will help customers understand the level they currently experience so that we can have a more informed conversation about how much they value resilience of service compared to other risks; and
- enhancing our response and recovery plans, for the most significant risks, to ensure that, should the worst happen, we can recover service as quickly as possible.
Our experience in this regulatory period will deliver a more secure and reliable service to customers in the future. There are other trends that we need to manage to deliver long-term resilience:
- population growth – the number of households we supply is expected to grow from 3 million now to 3.6 million by 2040;
- ageing demographic – as people live longer, there will be a higher proportion of older customers. These changing demographics will affect our services – from our core water and wastewater services to support services such as customer liaison;
- evolving technology – there will be technological advances and changes in the way in which we communicate with one another. We will adapt our customer services to meet the demands and expectations of our customers; and
- climate change – as the UK climate continues to change, with severe dry periods becoming increasingly common, we must ensure we continue to have resilient water resources and an infrastructure capable of moving water efficiently around the region. We must seek to tackle flooding incidents caused by the intensive bursts of rainfall, which are becoming more frequent due to changing weather patterns.
In order to maintain a reliable, high quality water and wastewater service for our customers in the future, we have to anticipate those changes and core issues that are likely to impact on our activities and balance them against our customers' priorities.
Political and regulatory environment
Over a long time frame the political and regulatory environment can change significantly. In the 28 years since the UK water industry was privatised, we have seen substantial tightening of laws and regulations. While to some extent changes to the regulatory environment are outside of our direct control, maintaining good relationships is important to enable positive participation in regulatory discussions. By positively engaging, and using our industry knowledge, we can help influence future policy with the aim of achieving the best outcome for our customers, shareholders and other stakeholders.
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 expenditure to enhance and maintain their assets. Following review of these plans, Ofwat sets the prices each company can charge their customers across the period. This report covers the second year of the 2015-20 (AMP6) period.
Ofwat introduced a number of important changes for the 2015-20 period, 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 are now four separate price controls:
- wholesale water – covering the physical supply of water;
- wholesale wastewater – covering the removal and treatment of wastewater;
- domestic 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 a more efficient service to non-household customers, as competition expands, and to household customers under an industry average cost to serve approach.
The way companies' operating and capital costs are assessed has been modified to encourage them to utilise the most efficient, sustainable solutions under a totex model that looks at capex and opex together and treats them equivalently. Where companies out/underperform their totex allowance, this gain/pain is shared between investors and customers, ensuring both receive the impact.
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 good-quality, efficient service at a fair price.
Read more online at: ofwat.gov.uk
In a move to a more outcomes-based approach, there was greater emphasis placed on customer engagement to set the outcomes. Companies' performance is now measured through a range of outcome delivery incentives (ODIs) covering a wide range of measures assessing operational and environmental performance, with associated rewards or penalties.
Ofwat's service incentive mechanism (SIM) assessment is continuing to be used as a measure of customer satisfaction. This will reward companies who perform well on customer service, or penalise companies who perform badly, relative to other water companies.
Each year all water companies are required to publish an annual performance report, the first of which was published in July 2016 and can be found on our website, where our report for this financial year will also be made available: corporate.unitedutilities.com/annualperformancereport
From 1 April 2017, the 2014 Water Act opened retail competition to all non-household customers, including sewerage as well as water services. We are well positioned following our experiences in the competitive Scottish market and our JV with Severn Trent, combining our respective non-household retail businesses under Water Plus.
Following a request from Government, Ofwat assessed the potential costs and benefits of extending retail competition to household customers, and recently reported back to Government.
The Water Act paves the way for the future introduction of competition for certain parts of the wholesale, or upstream, business. Ofwat proposed, in its Water 2020 consultation document in 2015, to open up competition in the areas of water resources and sludge treatment from 2020.
We are fully engaged with regards to market reform, being always mindful of the potential impact on our customers and the value implications for our shareholders.
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 regards to, among other factors, the quality of drinking water supplied, wastewater treatment and the effects of their activities on the natural environment.
Defra is the UK Government department responsible for water policy and regulations in England and Wales; it sets drinking water quality and environmental standards (many based on European law) which water companies must meet.
Read more at: gov.uk/defra
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.
Read more at: gov.uk/government/organisations/environment-agency
The Drinking Water Inspectorate is responsible for ensuring compliance with the drinking water quality regulations.
Read more at: dwi.gov.uk
Natural England is responsible for the protection of designated sites for nature conservation, for example Sites of Special Scientific Interest. Companies are required to manage these sites and to protect and enhance biodiversity.
Read more at: naturalengland.org.uk
The Consumer Council for Water (CCW) represents customers' interests relating to price, service and value for money. It investigates customer complaints. Customers who remain dissatisfied can refer their complaint to be adjudicated by an independent service, WATRS (see below).
Read more at: ccwater.org.uk
WATRS is an independent service designed to adjudicate disputes that have not been resolved through the water company's customer service teams or by referring the matter to the Consumer Council for Water.
Read more at: watrs.org
The other water companies in England and Wales are naturally our main competitors and we benchmark our performance on a comparative basis. Away from the water sector, in line with our vision to be the best UK water and wastewater company, we 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.
We create value for our stakeholders principally by agreeing and then delivering, or outperforming, our regulatory contract. The way we use our key resources, manage our internal environment and interact with our ever-evolving external environment, influenced by our long-term strategic approach, helps to achieve value creation. This facilitates the delivery of outcomes for our customers, employees, the environment and communities, alongside ensuring investors receive an appropriate return. This is represented in the Business Model diagram, with the subsequent pages of this report mapping to its colour-coded sections.
Read more about our Our competitive advantage
Our key performance indicators for 2015-20 measure our progress against some of the most important value drivers for the business, feeding through from our strategic themes to deliver the best service to customers, at the lowest sustainable cost, in a responsible manner.
Read more about our KPIs
Systems Thinking lies at the heart of our day-to-day decision-making, from approving our capital expenditure programmes to agreeing our supply-chain partners. Whilst the financial impact is a key driver in decision-making, this is always set in the context of the impact on customers, shareholders, the environment, employees, communities and other stakeholders. For many years, we have included corporate responsibility factors as strategic considerations, supported by our corporate responsibility committee which is chaired by one of our non-executive directors.
Read more about our Governance
Changes in the economy, such as inflation, interest rates or unemployment levels, can influence our ability to create value. While they are outside of our direct control, we can mitigate some of the potential adverse impacts associated with market movements, such as on inflation and interest rates, through our hedging strategies.
In recent years, unemployment in the North West has generally been higher than the national average. However, over the last year this unemployment rate has improved faster than, and is now broadly in line with, the national average. A report from the Department for Communities and Local Government, published during 2015/16, reaffirmed that the North West has the most deprived regions in England, with three of the top five local authority districts with the highest proportion of 'highly deprived' neighbourhoods (categorised as the most deprived 10 per cent). Even as the North West's economy recovers, it is unlikely to have a significant impact on deprivation, which is the principal driver of our higher than average costs to serve for our household customers. This is currently recognised by Ofwat through a special allowance for deprivation of £20 million per annum over the 2015-20 period.
Bad debt remains a risk to which we are exposed, particularly with the continuing tightening of real disposable incomes and the impact of recent welfare reforms likely to intensify. Whilst our debt management processes have been externally benchmarked as efficient and effective, we continue to refine and enhance them whilst also helping customers back into making regular payments through the use of manageable payment plans.
Market rate movements
Interest rates have remained below the long-term trend and we have benefited from this as we drew down, or raised, over £600 million of new debt in 2016/17. Comparatively low interest rates have also been beneficial to our future cost of debt as we continue with our interest rate hedging strategy.
RPI inflation has risen since the UK voted to leave the European Union, increasing to 3.1 per cent at March 2017, following on from lower inflation over the last couple of years. However, RPI inflation remains on the low side versus levels seen in the last 10 years. The prices we charge our customers (and therefore revenues), as well as our asset base, are linked to RPI inflation, so lower RPI has meant slightly lower growth on these measures.
However, we 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 this is 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 linked to inflation, which provides an additional economic offset against our asset base. Overall, we are currently more inflation-hedged than the other listed water and wastewater companies so we are better protected in a low inflation environment.
United Utilities' total forecast contribution to the regional economy, over 2015-20, is estimated at £9 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 make purchases from their suppliers and when people, whose jobs are supported by United Utilities, spend their personal incomes.
We see some significant societal trends that we plan to address in our long-term strategy.
We anticipate an increase in the North West's population of around 600,000 by 2040 (more than the population of a large city such as Liverpool). We are planning to ensure our services, and supporting infrastructure, meet the needs of this growing population, which will include a higher proportion of older people. The North West remains the most socially and economically deprived region in England and so we can anticipate continued hardship for a number of communities and difficulties for some customers in paying their bills. We will remain committed to supporting these customers through a suite of payment assistance schemes and by looking at new ways to help, like the introduction of our social tariff in 2015, supporting older customers. We are also adapting to the increasing use of social media and digital technology by our stakeholders.
Investing in local communities
The communities in which we operate are of great importance to our business – they are where our customers and employees live and work. We continue to invest in our local communities both financially and through employee volunteering. We recognise the effect that our operations can have on the community and invest in programmes that support affected areas or help tackle current social issues.
Pictured: Our new mobile app allows customers to pay their bill and give a meter reading via their smartphone.
Advances in technology can be used to help deliver improvements in the quality or cost of our service. Embracing innovation, using modern technology or techniques, is at the heart of how we do business. Our Systems Thinking approach across the wholesale business is a key example of this.
We have been utilising technology within our energy self-generation. For example, our Davyhulme sludge recycling centre employs a ground-breaking configuration of thermal hydrolysis to maximise energy generation from sludge and won an Annual Institute of Chemical Engineers award for innovation in 2013/14. Then in 2015/16 we built Europe's largest floating solar array system on our reservoir in Godley, Greater Manchester.
Technological advances give rise to greater risks as well as presenting opportunities. Cyber-crime has been on the increase in recent years and, as the holder of customer information, is a threat we take very seriously.
Changing customer behaviours
We must be mindful of our customers' ever increasing use of technology. We have recognised the increasing power of social media as communication channels for customers, and we recently invested in a new digital external communications capability and a number of website improvements.
Delivering our digital strategy
Four years ago we began a journey to improve our core IT provision and develop the deep foundations necessary for a relevant and efficient digital water and wastewater business.
During 2016/17, non-household competition provided an opportunity to demonstrate and leverage our investment in digital foundations and our capability with data. We delivered a business-to-business digital integration platform which connects United Utilities wholesale systems to the market operator of England's non-household water market (MOSL) and market participants. Our data analytics investments delivered high data completeness scores for market entry and continue to support our market activities. This enabled United Utilities to enter 'Shadow Operations' with live transactions in October 2016 and successfully complete full market opening in April 2017.
In addition, we are driving forward a digital strategy which has seen us deliver new handheld smartphone devices and applications to employees across job functions to provide data at the point of need and to establish the foundation for future rapid delivery of digital apps. This improvement is already changing the way we think about data and processes and enabling new innovation and improvements which were previously too complex or costly to implement.
As part of our market readiness systems, we use simple robotic process automation (RPA) techniques to improve the efficiency of case creation by automating high frequency tasks triggered by market transactions. This early use of RPA has taught us some useful lessons and helped inform our next steps in the practical use of software robotics and automation. We will use this learning to drive greater efficiency, quality and optimisation of our back office process.
To continue the improvement of our customer experience, we are investing in digital channels for our household retail customers including a new internet site, automated speech recognition and a customer mobile app.
We continuously track developments in technology, which could help our digital journey, and are investing in innovation to make sure we develop and exploit new technologies to maximum benefit. Specifically, we are investing in concept work around the use of Internet of Things (IoT) sensors and data analytics to enhance situational awareness and available data more dynamically with increased cost efficiency. We believe the use of this technology will unlock new automated and predictive ways of working and allow us to deliver better outcomes for all of our stakeholders.