TOMORROW the annual general meeting of Welsh Water will endorse a five year plan that is likely to see over a million customers overcharged.
Bills could be more than £50 million higher than necessary in each of the next five years.
The reason is the company may decide to spend more on capital expenditure than it has agreed with the regulator Ofwat.
Rebecca has discovered that Ofwat has already imposed an £85 million penalty on the company for over-spending on capital investment in the previous five years.
The decision went completely unnoticed in Wales.
When it was founded, Welsh Water promised it would be run “solely” for the benefit of customers.
It’s not true.
The real beneficiaries of Welsh Water are the highly-paid directors and the holders of the company’s colossal debts.
These debts — in the form of Eurobonds — are among the safest and most profitable investments in the world.
Additional capital spending makes them even more attractive to investors.
Interest on the bonds is paid via a complex mechanism which includes a subsidiary company in the tax haven of the Cayman Islands.
Welsh Water has been unable to provide convincing evidence this procedure isn’t being used for tax avoidance.
Rebecca will be writing to First Minister Carwyn Jones asking him to impose a “windfall tax” on the company.
Since it took over the business, Welsh Water has taken more than £8 billion from customers — and given them a paltry cash dividend of less than 2 per cent …
LAST YEAR’S Rebecca article The Great Welsh Water Robbery sent shock waves through the board of Glas Cymru.
For the first time in its 14 year history the company — which owns Welsh Water — faced a sustained critique of its stewardship of the business.
The main thrust of the investigation was that customers have been cheated of a quarter of a billion pounds in reduced bills.
At the same time, the board of directors were rewarding themselves handsomely — taking double the amounts given to their counterparts in the publicly-owned Scottish Water.
Mainstream Welsh media ignored the article, most notably BBC Wales.
Current Director Rhodri Talfan Davies has strong family ties with Welsh Water’s senior independent board member Menna Richards.
She joined the board of the not-for-profit utility just as her friend and mentor Geraint Talfan Davies was leaving.
Geraint is, of course, the father of Rhodri.
Political parties at the Welsh Assembly were also unmoved.
Plaid Cymru, the Conservatives and the Liberal Democrats didn’t answer our email.
Only First Minister Carwyn Jones took the trouble to respond:
“I am sure that Welsh Water will have taken note of the issues you raise in your article on Rebecca … ,” he said.
“Welsh Water has recently reiterated to Welsh Government their commitment to using any financial gains in the next investment period 2015-2020, which are estimated to be around £200 million, to benefit customers, either through dividends or accelerated investment.”
It turns out the company had already decided to abandon the customer dividend for this year — and may continue the policy throughout the five year period.
THE BOARD of Glas Cymru hit back at Rebecca.
At last year’s annual general meeting (AGM) in Swansea in July, chairman Bob Ayling spent five minutes addressing the article’s criticisms.
The article was also discussed at an earlier board meeting.
Ayling told the meeting that the board rejected our analysis.
He defended the company’s decision to spend more on capital expenditure rather than return profits to consumers in the form of “customer dividends”.
The recession had begun, he said, and the board was happy with its decision not to resume “customer dividends” — it gave the company more room for manoeuvre.
This was generally accepted by members.
But there were rumblings of discontent about the pay of board members.
This is running at more than double the rate enjoyed by their opposite numbers at publicly-owned Scottish Water.
A member who was present — he’s asked us not to reveal his name — told us that on the issue of executive pay, Ayling:
“ … was on more shaky ground and didn’t sound convincing.”
When Rebecca asked the company to confirm this account of what happened at the AGM, it said:
“The event was not recorded, and as the meeting was private it would therefore be inappropriate to share any notes of the meeting.”
We replied by saying Glas Cymru was revealing less information than a company with shareholders.
In the early 1990s Rebecca bought a handful of shares in what was then a privately-owned Welsh Water as part of the research for the Channel 4 Dispatches programme “Privateers on Parade’.
Any shareholder can attend AGMs.
The Dispatches programme included the fact that the chairman of Welsh Water at that time — John Elfed Jones — had become a millionaire as a result of privatisation.
The programme played a small part in Labour’s massive £5.2 billion windfall tax on the privatised utilities in 1997.
Welsh Water simply repeated:
“… these are private meetings” :
But whatever concerns some members felt, there were no moves to cut executive pay or force the board to resume paying dividends to customers …
AT THE time of the AGM last year, Welsh Water and the industry regulator Ofwat were negotiating bills for the next five years.
For the period 2015-2020 Welsh Water submitted a business plan.
It asked Ofwat to allow it to charge bills which would, by 2020, be 4 per cent below inflation.
As part of that exercise, Ofwat looked at the company’s performance over the previous five years.
If found that that company had spent an additional £234 million on capital expenditure — improving its infrastructure.
This sum is close to the £250 million Rebecca claims should have gone to consumers in the form of “customer dividends”.
Ofwat was not impressed — and decided to reduce the amount the company could take from customers over the next five years.
As a result, it reduced the amount Welsh Water could charge customers over the five year period by £85 million.
The company denies this deduction amounts to a penalty.
“Customer bills are lower as a result of this adjustment,” it admitted but added:
“it is a ‘reconciling adjustment’ and not a ‘penalty’.
“This is one of many adjustments to reflect that outcomes were different to plans.”
“All companies have reconciling adjustments and this happens at every Ofwat review.”
An Ofwat spokesman told us:
“It might not be a penalty in the strict legal sense of the word, but it certainly penalises the company …”
“The mechanism was there to act as an incentive to make accurate investment forecasts and for companies to invest efficiently as set against our assumptions.”
In the end, the result of Ofwat’s decision — whether “penalty” or “adjustment” — is that customers will get a “customer dividend” of £85 million over five years.
Instead of the minus 4 per cent it had been asking for in the price review, Welsh Water were ordered or reduce it by another one per cent.
By 2020 bills will be five per cent lower.
At an average of £416 a year, they will still be among the highest of the ten companies serving England and Wales — only South West Water and Wessex Water are higher.
And it will still be a long way off the average bill of £376.
If Welsh Water did what Rebecca is calling for —giving a decent “customer dividend” — bills would be much closer to the average …
THIS IS not the first time Ofwat has stepped in to try and protect Welsh Water customers.
In 2013 Ofwat realised its 2010-2015 price review had been too generous to the water industry in England and Wales.
In March of that year Ofwat chairman Jonson Cox — a former chief executive of Anglian Water — gave a lecture.
“Customers, particularly vulnerable customers, are having a tough time,” he said.
He noted that, across the industry, bills had risen by 7 per cent in real terms since 2005.
But, he added:
” … over the same period there have been reductions in some household incomes of as much 5 per cent.”
He noted that the water industry had enjoyed higher profits because of lower interest rates and higher inflation.
“Given that the licence relates to a long-term monopoly public service, I would have hoped that companies would have shared gains that derive from external factors with their customers …”
In October 2013 he wrote to all water companies.
“As you know,” he wrote:
“having compared the harsh pressure on customers and the generous returns to water company shareholders from macro-economic factors over recent years, I … have been banging the drum about customers and water bills for most of the last year.”
He asked them to consider forgoing all or part of the price increase for the year 2014-2015.
Five of the ten companies did so — ten million households got lower bills as a result.
Welsh Water customers were not among them.
We asked the company for an explanation.
A spokesman said:
“To say that Welsh Water did not do this is incorrect.”
“Between 2010-2015, we were already delivering below inflation bill increases for customers thanks to our business model.”
But it was that very business model that Jonson Cox was complaining about.
He wanted them to give customers an additional reduction in 2014-2015.
We went back to Welsh Water, pointing out their reply was “circular and nonsensical.”
The company did not answer the point.
Welsh Water is also being economical with the truth in its statement about “delivering below inflation bill increases for customers thanks to our business model.”
Ofwat insisted its tough regulation was the main driver in forcing down prices at Welsh Water.
A spokesman said:
“Back in 2009, the company’s final business plan proposed that bills remain in line with inflation …
“Ofwat’s challenge saw bills reduced by 7 per cent in real terms.”
WELSH WATER makes great play of the work it does to help poor and vulnerable customers.
One “member” told us the company bombards him with large amounts of material about the help it gives poor and vulnerable customers.
In its 2014 accounts the company said:
“Around 60,000 are currently receiving help to pay their bills through our social tariff …”
When we asked for financial details, the company told us:
“ … 63,000 (Winter 2014) customers benefit from a range of our social tariffs, compared to only 70,000 (April 2014) for all of the English water and sewerage companies combined.”
The reply included no figures.
We did some research and found some statistics.
We went back to Welsh Water — and this time they provided figures.
It turns out that the actual number of customers receiving financial benefit is just under 47,000.
Of these 12,000 were people in receipt of benefits: they all got the same amount — a flat £25.
The remainder — over 34,000 customers — received an average payment of £188.
The total cost was just under £6.8 million.
There is no doubt that Welsh Water out-performs its rivals on this score.
But, since they all provide assistance at some level, we think the extra amount Welsh Water give is around the £5 million mark.
This is undoubtedly a benefit of the Glas Cymru structure.
But the programme doesn’t seem to be having any impact on bad debts.
In 2014 the bad debt provision — from those customers “… who choose not to pay or who are not able to pay …” — was £28 million.
That’s £1 million up on 2013.
Only a third of this money will ever be collected.
So the company still seems to have a long way to go before it meets the social needs of its poorest customers.
That’s why the “customer dividend” is so important.
At £50 million, it’s more than ten times bigger than the company’s “social dividend”.
YESTERDAY WE wrote to Welsh Water telling them the thrust of this article and inviting a response.
We said our investigation suggests “the company operates for the benefit of bond-holders rather than customers.”
We said that if the company goes ahead and spends more in the next five years on additional capital expenditure than has been agreed with the regulator Ofwat:
“ … you will be overcharging customers by at least £250m.”
The company’s “response” was a long statement.
It does not answer the points we made and it is not included here — it’s attached, in full, as a note at the end of the article.
The result of spending more on capital expenditure is that the company’s “gearing” — the ratio of debt to the company’s overall value — falls.
This improves the credit rating of the £2 billion worth of bonds the company has issued.
In the early 2000s the bonus paid to directors like current chief executive Chris Jones was partly based on these credit ratings.
SEVERAL TIMES this year we’ve asked Welsh Water for a list of the companies and institutions which invested £2 billion in the company’s bonds.
Each time, the company has declined to give it.
The bonds are issued using a complex mechanism involving a subsidiary company in the tax haven of the Cayman Islands.
Because they are also listed on the Luxembourg stock exchange, they are known as Eurobonds.
The principal advantage is that Welsh Water does not have to impose a “with-holding tax” of 20 per cent on the interest.
This “with-holding tax” is a UK measure designed to prevent tax avoidance by foreign companies lending money to British businesses.
This is why we wanted to know if any of Welsh Water’s £2 billion worth of bonds were held by foreign companies.
If so, they can legally avoid paying UK tax.
Welsh Water told us, variously, that their bonds are held “primarily”, “predominantly” and “principally” by UK institutions.
These pay tax in the normal way.
But the company would not supply the full list.
Welsh Water deny that their bond operation permits tax avoidance:
“ … we have not undertaken any ‘tax avoidance’ activity.”
The company added:
“Note that the Cayman financing company was set up in advance of the purchase of Welsh Water by Glas Cymru.”
“ … Glas bought both Welsh Water and the financing company at the same time in 2001.”
“Our understanding of the commercial rationale of the Cayman financing company was that it was more cost efficient to set up the financing company in the Cayman Islands in 2001, as opposed to the higher costs of setting up a financing company in the UK.”
The first part of this statement is nonsense.
The Cayman financing company was set up a team which included the current chief executive Chris Jones.
The company’s Cayman Islands subsidiary is based at the offices of the law firm Maples and Calder.
It’s called Ugland House.
The building has been singled out by President Obama as the base of many US companies which use it to avoid tax.
In 2008 Obama — then a Senator — said:
“You’ve got a building in the Cayman Islands that supposedly houses 12,000 corporations”.
“That’s either the biggest building or the biggest tax scam on record.”
Yesterday we emailed Welsh Water to say
“the company has not been able to satisfy Rebecca that its bond operation — using Cayman Islands and Luxembourg — is not used by some foreign entities to avoid UK taxation. “
The company did not answer the point.
Our investigation into this issue continues …
IT’S CLEAR Welsh Water has abandoned the principle of a “customer dividend” — at least for this year.
There is no indication it will resume the dividend during the next four years.
Tomorrow’s AGM in Llandrindod Wells has the chance to persuade the board to change its mind.
If it doesn’t Rebecca believes the Welsh Government should consider a windfall tax on the company.
In 1990s the newly-privatised Welsh Water was an obscenely profitable business.
In 1991, for example, it made a profit of £128 million on a turnover of £287 million.
For every pound it was taking from customers, it was pocketing 45 pence in profit.
Normal business struggle to make ten per cent …
In 1997 the incoming Labour government hit the company’s owners — Hyder which also owned South Wales Electricity — with a massive £282 million “windfall tax”.
Today’s Glas Cymru is nothing like as excessive as the old privatised Welsh Water.
But consumers are still not getting the financial benefit of the so-called “not-for-profit” model.
We believe the Welsh Government should impose a windfall tax of at least £250 million on the business.
Rebecca will be writing to First Minister Carwyn Jones to ask him to consider a proposal to levy a “windfall tax” of £250 million on the company.
This is the full statement Welsh Water provided yesterday:
“As a company owned on behalf of our customers, our track record shows that
customers are central to every decision we take and that is they who benefit from our
unique business model in the industry. We are committed to providing safe and
reliable services at the most affordable price.
“Between 2010-2015 our model has enabled us to return £136 million to customers by
accelerating investment in our services, reducing bills and helping even more
customers who genuinely struggle to pay their bills. We have also already pledged to
help more than 100,000 of our most disadvantaged customers by 2020. The average
household bill will also fall by £21 compared to current prices which means our
customers will have benefitted from a decade of below-inflation increases by 2020.
“Customer will continue to benefit from our model and we will continue to reinvest
and return value to customers – either through a customer dividend or increased
investment to improve services for customers over the next five years”.
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