THE GREAT WELSH WATER ROBBERY

WELSH WATER customers have been cheated of more than a quarter of a billion pounds.

That’s the conclusion of a Rebecca investigation into Glas Cymru, the company which owns Welsh Water.

Glas Cymru was set up in 2001 as a not-for-profit business claiming to exist solely for the benefit of its customers.

Since then consumers have paid nearly £8,500 million in bills.

Glas Cymru has given them a cash “dividend” of just £150 million over the same period — less than 2 per cent of the total.

Rebecca believes they should have received at least a further £250 million — equivalent to roughly £300 for every customer.

The analysis also demonstrates that the real winners in the Glas Cymru saga have been the members of the board.

They’ve taken millions out of the business when their counterparts in Scotland and Northern Ireland have been satisfied with modest payments.

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ON FRIDAY the 66 people who control Glas Cymru will meet for the fourteenth annual general meeting of the company.  

The company has no shareholders and appoints “members” to take their place.

Nine of these members are the directors of the board.

The other 57 — who receive no payment — are drawn from all over Wales as well as parts of England served by Welsh Water.

They include university professors, retired water employees and trade unionists, accountants, farmers, solicitors — a broad cross-section of the community.

Seventeen are women.

The company they control was conceived in the dying days of the break-up of the Welsh conglomerate Hyder which owned Welsh Water and South Wales Electricity.

Hyder had been created when Welsh Water bought South Wales Electricity in 1996.

LIQUID ENGINEER
ONE OF THE key architects of Glas Cymru, Chris Jones is the current chief executive. In 2001 the company farmed out almost all of its activities to other English utilites — leaving just 130 staff. Until most of these activities were brought back in-house in recent years, Glas Cymru was more a finance company than a genuine water business. Jones is well-rewarded — picking up more than £3.5 million in salary, annual and long-term bonuses in the past 14 years. 
Photo: Glas Cymru

Hyder expanded disastrously and was soon burdened with debt.

In the 1990s Labour accused the privatised water and electricity companies of profiteering.

When it came to power in 1997, the new government quickly imposed a £282 million “windfall tax” on Hyder.

Hyder’s share price collapsed.

It was eventually taken over by the US energy giant Western Power Distribution who were mainly interested in the electricity business.

Two young Hyder executives — Nigel Annett and Chris Jones — came up with the idea of creating a not-for-profit company and using money raised on the international bond market to buy Welsh Water.

Annett was a former merchant banker and Jones had been a civil servant at the Treasury when the water industry was privatised.

Western Power Distribution indicated that it was willing to sell Welsh Water — if Annett and Jones could raise the money.

Annett and Jones began to assemble a board of directors.

They recruited Lord Burns — former Treasury Permanent Secretary — to chair the new company.

Another appointment was Alison Carnwath, also a merchant banker.

Recently retired Controller of BBC Wales, Geraint Talfan Davies, also joined the team.

LORD BURNS
TERRY BURNS welcoming the new chancellor Gordon Brown to the Treasury after Labour’s 1997 victory. The Permanent Secretary left the post the following year and was made a Life Peer. Lord Burns was to play an important role at Glas Cymru — and was handsomely rewarded for his contribution.
Photo: PA

In May 2001 Glas Cymru raised £1,910 million on the bond market and took control of the company.

That same month the existing managing director of Welsh Water, Dr Mike Brooker, joined the board.

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IN 2001 the directors of Glas Cymru faced a fundamental choice about how they were going to be rewarded.

They had two models to choose from.

They could follow the nine other companies in the water sector in England — companies like the giant Thames Water which supplied water and sewerage services to London.

These were companies controlled by shareholders who expected a return on their investment.

The directors were rewarded with substantial salaries and pensions, bonus schemes and lucrative share option schemes.

This was the “Capitalist Nine” option.

Or the Glas Cymru directors could choose the publicly controlled model in Scotland and Northern Ireland where water had not been privatised.

There were three water authorities in Scotland and a single body for Northern Ireland.

These were spartan undertakings where the board were paid decent amounts but had to forego the valuable perks of their counterparts in the rest of the UK.

This was the “Public Sector Four” route.

Glas Cymru’s not-for-profit structure and its early statements suggested it should have been more sympathetic to the “Public Sector Four” club.

In 2001 a company press release was clear — Welsh Water:

” … a monopoly providing an essential public service, is a very low risk business.”

But the board members decided to follow the “Capitalist Nine” when it came to their pay and conditions.

This meant that the pay of the full-time directors would be decided by the non-executives while the latter’s fees would be decided by the entire board.

Soon after the company was formed, Annett and Jones were each awarded a £100,000 bonus.

By 2003 it was clear what the remuneration policy meant in practice.

In that year Scottish Water, a merger of the country’s three water authorities, was created under public control.

The new Scottish Water was far larger than Glas Cymru — its turnover in 2003 was £895 million, compared to the £462 million of Welsh Water.

The chief executive of Scottish Water was paid £175,000 in 2003.

Glas Cymru’s managing director, Dr Mike Brooker, was paid £311,000.

WATER NOT WINE
FIRST MINISTER Alex Salmond is having none of the English and Welsh “fat cat” syndrome on his patch. The much larger Scottish Water pays less than half the amount Glas Cymru feels it needs to pay its chairman and non-executive directors
Photo: PA

The chairman of Scottish Water was paid £70,000 compared to the £140,000 taken by Lord Burns, Glas Cymru’s chairman.

Ordinary non-executives in Scotland were paid £18,000 — their counterparts in Wales, like Geraint Talfan Davies, were awarded £35,000.

Fast forward to 2013 and the gap had widened.

Scottish Water’s chief executive’s £252,000 package was less than half of the £538,000 taken home by his then Glas Cymru counterpart Nigel Annett.

Glas Cymru’s new chairman, former British Airways boss Bob Ayling, was paid £204,000 — more than double what Scottish Water felt its chairman deserved.

Non-executive directors of Glas Cymru were paid £56,000 while their Scottish colleagues had to make do with an average of £22,500.

Glas Cymru stoutly defends its remuneration policy:

“Despite Welsh Water being equivalent in scale to that of one of the largest FTSE 250 companies, the Chief Executive’s remuneration (July 2013) was less than half of the average FTSE 250 CEO [chief executive officer].

“We provide drinking water of the highest quality and reliable sanitation to 3 million people; manage over 550 service reservoirs; 27,000km of water mains; over 30,000km of sewers and over 800 wastewater treatment works.”

“The scale and complexity of providing such an essential service warrants directors of the highest calibre and appropriate remuneration packages.”

Geraint Talfan Davies is the only director of Glas Cymru to publish a version of the company’s history.

Yet this account — in his book At Arms Length — is curiously muted about the achievements of Glas Cymru.

CAPTAIN OF INDUSTRY, OBE
GERAINT TALFAN DAVIES made nearly £500,000 as a non-executive director of Glas Cymru. The former BBC Wales Controller became one of the highest paid non-executives in Welsh corporate history when he joined the board of Glas Cymru in 2000. He was later joined by Menna Richards, the friend who succeeded him at BBC Wales — she’s currently paid £56,000 a year for her part-time role at Glas Cymru. Photo: Seren Books.    

Just three paragraphs are devoted to the company in a book of more than 350 pages.

There’s no mention of the “customer dividend” which, by the time he finished writing the book, had reached nearly £50 million.

Was he aware that the board faced the possibility that some journalist might come along and make the damaging comparison with Scottish Water?

And that, while the directors were lining their pockets, customers were losing out?

We put these questions to him.

He didn’t reply.

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IT WAS two years before Welsh Water customers began to benefit from the new structure.

In 2003-04 the company began to pay a dividend to its customers.

In this first year the average customer got a rebate of £9 — worth £12 million in all.

The company continued to pay a dividend — it later became known as the “customer dividend”— until 2010.

In that year the “customer dividend” amounted to £28 million — an average payment of £22 for every household.

The total given back to customers was £150 million.

But in 2010, as the world-wide recession kicked in, the company decided that it would suspend the dividend “until prudent to do so”.

The new chairman, former British Airways boss Bob Ayling, said average bills would fall by 7 per cent between 2010 and 2015.

He added:

” … the board has decided that our customers’ interests are best served by accelerating future planned investment to improve the reliability and quality of the essential public service our customers rely on …”

WATER GONG
NIGEL ANNETT collecting his CBE at Windsor Castle earlier this year. One of the key figures in Glas Cymru, the former merchant banker was part of a team obsessed with the company’s credit rating. Between 2001 and 2010 part of the team’s bonus came from improvements in this rating. Better credit ratings came largely from increased company reserves — money Rebecca believes should have gone to customers. Annett was paid more than £4 million in his years as a director of Glas Cymru.  Photo: PA

Glas Cymru said that, by 2015, £136 million would be spent on this additional capital programme.

Rebecca believes this money should have gone to the company’s hard-pressed customers in the form of a cash dividend.

And our analysis suggests it should have formed part of a total rebate of at least £250 million.

In the period Glas Cymru was giving back £150 million to its customers, South West Water — a company roughly the same size — was paying more than £700 million in dividends to its shareholders …

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THE OWNER of Scottish Water — the Scottish Government — has given up its right to a dividend from the company.

As a result, the regulator can impose lower charges.

In 2014 Scottish Water’s average bill was £339 compared to Welsh Water’s £445 — one of the highest in the UK.

To be fair, it is notoriously difficult to compare one water company’s charges with another.

Completely different circumstances — such as geography, population densities — apply.

However, the trend of pricing is significant.

In 2005 Scottish Water harmonised all of its charging into one integrated system.

In that year the average household bill was, in todays prices, £379.

This year that bill is £339 — £40 a year lower.

In 2005, Glas Cymru’s bill was £396 in today’s money.

This year it’s £445 — £49 a year higher.

Against that increase, Welsh Water can say that it gave consumers back £150 million in the form of “customer dividends” over its 14 year history.

But the value of the £40 reduction in the Scottish Water bill is probably worth £100 million in this year alone.

In March last year Jonson Cox, chairman of the water regulator Ofwat which covers England and Wales, gave a lecture.

“Customers, particularly vulnerable customers, are having a tough time,” he said.

JONSON COX
CHAIRMAN OF the water regulator Ofwat, Jonson Cox has pointed out that water companies made higher profits than expected in the period 2010-2015. He called on water companies to share some of their good fortune with customers.   Photo: Ofwat

He noted that, across the industry, bills had risen by 7 per cent in real terms since 2005.

He added ” … over the same period there have been reductions in some household incomes of as much 5 per cent.”

He noted that the sector 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 (‘gainshare’) …”

He added that Glas Cymru’s structure

“… does provide a form of gainshare with customers …”

But, despite making windfall profits in the period 2010-15, Welsh Water gave none of it back to its customers in the form of cash.

And its figure of £150 million in “customer dividends” has to be treated with some reserve.

Many of the other private equity water companies also gave rebates.

For example, in 2006 South West Water made huge profits and gave each customer a rebate of £20 at a cost of nearly £15 million.

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SO WHAT should the “customer dividend” have been? 

The regulator Ofwat pays close attention to water companies “gearing”.

This is the ratio of debt to what Ofwat calls the Regulatory Capital Value.

By the end of next year, the company expects to have a Regulatory Capital Value of £4,800 million.

The company has debts of £2,900 million.

Glas Cymru’s gearing is 60 per cent.

When Ofwat was preparing its pricing structure for the industry in the period 2015-2020, it believed gearing “should be in the range of 60 to 70 per cent.”

So Glas Cymru is currently right at the bottom of the range.

The lower the percentage, the less is available to pay a “customer dividend”.

The higher the percentage, the more money is available to give back to consumers.

So a straightforward approach would be to say that Welsh Water should go for 65 per cent — bang in the middle of Ofwat’s range.

So what does that five percent mean in terms of a potential “customer dividend”?

The arithmetic is complex but in crude terms it means Glas Cymru could have given back an additional £250 million over the past 14 years.

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ALL IS not lost.

Although the Rebecca investigation shows that customers have been denied £250 million of badly needed cash refunds, the money hasn’t been stolen.

Of course, millions of pounds have been pocketed by the board — but that’s only a fraction of the total sum.

Some of the money — £136 million — was spent on additional capital projects.

That is, on improvements to the infrastructure over and above what the regulator Ofwat required.

Rebecca asked Glas Cymru if that money could have used instead to pay “customer dividends”.

“Correct”, was the response of a spokesman.

The rest of the £250 million lies in the company’s £1,900 million reserves.

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THE AGM next Friday has the power to remedy the situation.

The 57 ordinary members can instruct the board to restore the “customer dividend” with immediate effect.

And they could order the board to find the most cost-effective way to repay the rest of the £250 million cash bonus it owes customers for the period up to 2015.

Rebecca has written to First Minister Carwyn Jones about this investigation.

The Welsh Government has no powers to intervene in the affairs of the company.

CARWYN JONES
Rebecca has asked Welsh First Minister Carwyn Jones to investigate Glas Cymru’s handling of the “customer dividend” issue. Labour is campaigning about the “cost of living” crisis for ordinary working people — and a refund from Glas Cymru would be welcomed by many hard-pressed families in Wales.  Photo: PA

But it does have a moral right to speak out on behalf of more than a million Welsh customers if it feels they’re being unfairly treated.

We also asked him to examine the constitution of the company.

In particular, the fact that ordinary members meet formally only twice a year, have no structure of their own, have no secretariat and no research officer.

We also sent a copy of the letter to the leaders of Plaid Cymru, Welsh Conservatives and Liberal Democrats.

None had replied before this article went on-line.

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GLAS CYMRU was angry we had sent the letter before they had a chance to answer the last set of questions we put to them.

“It is very disappointing that you have issued this letter to the First Minister before receiving our final response,” a spokesman said.

“Your hypothesis that customers have been short-changed is wrong.”

The company says it would “be remiss of you” not to acknowledge that

— throughout the decade 2010-2020 bills will have risen by less than the rate of inflation

— in the same period, £3 billion will be invested in improvements to service

— the company’s good credit rating allows it to borrow cheaply, keeping bills lower than they otherwise would be: “a win, win for our customers”

— £250 million has been returned to customers either through dividends, accelerated investment, social tariffs and lower bills

— this is money “that in any other company would have gone to shareholders”

— customer satisfaction and “perception of value for money ranks us either top or second compared to other companies …”

— Glas Cymru adds £1,000 million to the Welsh economy

— although the 57 ordinary members meet formally only twice a year, other meetings with high-profile experts also take place

— the company also has a Customer Challenge Group which scrutinises the company’s plans.

In another statement, the added that its social tariffs helped 64,000 households in Wales compared to 72,000 for the whole of England.

Glas Cymru said it is

“proud of its unique non-shareholder business model which has delivered significant benefits to our customers in the form of lower bills and increased investment.”

Many of these points had been made in earlier responses to our questions.

Some we disagree with.

Others are irrelevant.

The fundamental point is that every penny Glas Cymru is talking about comes from consumers.

And the plain fact is that the actual direct cash benefit most customers have seen from Glas Cymru’s stewardship of Welsh Water is pitifully small.

The money given back to customers is £150 million — just 2 per cent of the £8,500 million they’ve paid out in bills.

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