Risks and resources
Regulatory risk
The key risk for the business is the outcome of the PR09 (periodic review of prices), the process by which Ofwat sets limits on the prices which NWL can charge customers for the five years from 1 April 2010. Ofwat will publish its draft determination in July 2009 and will consider representations before issuing its final determination in November 2009.
The Government published a consultation paper on the draft Flood and Water Management Bill in April 2009. The Bill includes measures to implement the recommendations of the ‘Pitt Review’ on flooding as well as a range of other measures to tidy up aspects of water related legislation. The flooding measures primarily relate to local authorities and the Environment Agency but also have implications for water companies, particularly with regard to how they interact and cooperate with these bodies.
It is intended that the Bill will ultimately incorporate measures in response to the ‘Cave Review’ (published in April 2009) and the ‘Walker Report’ on charging and metering (published in June 2009). These measures will be added at a later date and will be subject to separate consultation.
The ‘Cave Review’ proposes a cautious step-by-step approach to the introduction of competition and envisages the main benefits arising from greater innovation. It proposes a number of regulatory changes including providing Ofwat with a duty to promote innovation and the incorporation of negotiated agreements involving customer representatives (eg CCWater) as part of future price reviews.
The most significant competition proposal, at least in the short term, is the legal separation of retail businesses. This will need to be considered in greater detail as part of a separate consultation. We remain to be convinced of the benefits of this proposal.
The Government has confirmed that it intends to proceed with the transfer of certain private drains and sewers into water company ownership by 2011, which would increase the sewerage network owned and maintained by NWL by about 60%. Further details on the transfer process are expected later in the year but this will be too late for the costs to be included in the PR09 price review. It is, therefore, likely that all sewerage companies will see an adjustment to price limits post 2010.
Another item of new legislation that will have a significant impact on the business, as and when the provisions are implemented by local authorities, is the Traffic Management Act which came into effect in April 2008.
The Right Honourable David Miliband MP, Secretary of State for Foreign and Commonwealth Affairs with residents of Newlands Court, an area where work is underway to protect homes from flooding.
Photo credit: Shields Gazette.
Environmental, social and governance risks
There are two environmental, social or governance risks considered to be significant to the value of the Group.
The first relates to the use of sewage sludge as a soil conditioner on agricultural land. If this disposal route was lost, the sector would need to find or develop alternative ways to re-use or dispose of its sewage sludge. This could mean higher capital and revenue costs to provide additional sludge processing facilities. The development of the ‘Safe Sludge Matrix’ and the proposed revision of the Sludge (Use in Agriculture) Regulations have reduced the immediate risk in this area. NWL is introducing advanced digestion to both reduce sludge volumes and the carbon impact of its activities. NWL will retain a facility to dry sludge and produce pellets as a fuel replacement, as a viable alternative way of using sludge in the medium term.
The second is the potential for sewer flooding. As rainfall patterns become more variable and intense storms more frequent, localised heavy rainfall can result in sewers becoming overloaded. We welcome the focus on integrated flood management in Defra’s strategic document ‘Future Water’ and in the ‘Pitt Review’ on recent flooding.