Dig for Victory

A year into the post, Natasha Wiseman finds Thames Water chief executive Martin Baggs fascinated with the company - and passionate about the issues

Thames Water boss Martin Baggs is celebrating a year in the post of chief executive of the UK's largest water company, but his colleagues have neglected to buy him a cake. Baggs jokes good naturedly about this 'oversight', but it is soon clear that the bread and butter issue of providing water and sewerage for 8.7M customers across London and the Thames Valley holds much greater attraction for him.

Having been awarded the permanent post on 4 March 2010, Baggs has clocked up some 25 years in the industry, 19 with Southern Water, then a brief period as chief executive of South East Water (SEW) when it was part of the Macquarie Group.

He describes himself as a "simple engineer", but while working for Macquarie Infrastructure Funds, Baggs managed the divestiture of SEW, which had to happen for the bank to make its £8B acquisition of Thames Water in 2006. And prior to taking up the post, he sat on the board of Thames Water as well as looking after Macquarie's utility investments across Europe. Baggs is proud of the record of the UK industry and Thames Water since privatisation in 1989. He also boasts that great improvements have been made since the acquisition.

"Thames Water is currently investing about £1B a year, so the current investment programme is huge, and that's just Thames Water. But if you look at our £5B capital programme for the next five years, and the industry's capital programme for the next five years of £22B, it's massive."

"The industry's achieved a hell of a lot," he says. "In terms of efficiency, it's improved over that 25-year period. But also customer service and levels of service has improved."

Baggs reveals that the bad press coverage of 2005/2006 has had a lasting impact on the way Thames operates: "Headlines all over the Evening Standard, poor customer service, hosepipe bans, leakage - we've shifted away from that," he asserts.

Regulation
There is a lot of regulatory uncertainty in the air, with a review of the regulator and a Water White Paper on the way. One thing Baggs is sure about, is that Thames' investors do not want to see "wholesale change, without understanding the benefits of making that change."

Thames Water is owned by a consortium of infrastructure fund or pension fund investors. Baggs says they like the "long-term, predictable, transparent, mature regulatory regime. "

He continues: "The industry has very successfully invested £90B since privatisation, there's probably another £90B+ looking forward as well. We can't afford to disrupt that balance, because it's going to cost if you do. If investors are expected to take a higher risk, they're going to expect a higher return."

Baggs agrees with the initial assessment of David Gray, lead on the review of Ofwat, and says that the relationship between the regulators and water companies needs to be "developed". He says that there is an inherent mistrust between them, because the content of a five-year programme can be changed three to four months before work starts.

"Investors will not start spending money unless they know it is going to be funded by the regulator," he warns.

Baggs believes that the five year price review should be set within the 25-year plan: "What we shouldn't do is get the planning and the programme mixed up with the price review," he said. "Let the quality regulators and the customers focus on the long term plan and let the economic regulator set the prices within it."

Baggs confesses that he is "fascinated" by the company: "We are the biggest water and wastewater company in the UK. We serve almost 14M customers, that's almost 25% of the population [of England and Wales]. We span from the east coast, right down the Thames estuary, right out to the west and places like Swindon and Cirencester. "

But while the company's main purpose might be delivery of water and removal of sewage for those customers, Baggs believes Thames' role is more significant.

"The difference with Thames Water, because of who we are and what we are, and because of where we serve - we carry far more responsibility on our shoulders than just doing the day job."

One area of pride is having one of the lowest bills in the country. The average bill has just gone up from £306 a year to £319, he says, and out of that £13 increase, £12 is inflation and £1 is supporting the capital programme. The rest of the finance is coming from investors.

However, he is realistic in acknowledging that the bills are low "because the company is living in the past. We're living on a sewerage system that was built 150 years ago and actually the capacity of that sewerage system is coming to an end, irrespective of all the European directives and new quality standards."

Similarly with water mains, Baggs acknowledges the disruption to Londoners and visitors of the Victorian Mains Replacement programme (see WWT, March 2011), but urges the need for more of it - executed with the best in planning of course.

"We've got a water network that's 100 years old, it's beyond its life. If we continue the rate of spend we've got at the moment, it's probably got to last another 500 to 700 years," he says.

"What we should be doing far more of is investing in the future, and if that means an another £10 or £20 or £30 a year on our customer bills, actually people recognise that and the feedback we get is that they're willing to pay for that."

Water efficiency
Whilst Baggs is aware that leakage and flooding are the most pressing issues for customers, his own passion is for the issues surrounding water and energy efficiency and recognising the true value of water.

"I'm a big believer in education. You get those messages in your homes through children, " he told me.

Baggs advocates Thames' newly launched water efficiency web tool, Waterwisely, a virtual town where users can pick up hints and tips and make pledges to save water. He sees customerside leakage as another area that can be handled through education. The campaigning chief executive says he is in dialogue with a number of energy companies with the aim of delivering a coherent message to consumers: "What actually drives that behaviour on water efficiency isn't just water on its own, it's also the energy costs to go with it."

He thinks far more can be done between water companies and the other utilities and is adamant that the Government's Green Deal for energy should be "joined up to water".

Metering is another area Baggs believes needs coordination across the utilities: "Does the customer need three different people knocking on their doors to read the meters?" he asks. "If you get to the point when you have smart metering across the major utilities, such as water, and then you get those joined up, I think there are great opportunities there for customers to benefit."

While Thames has not got a compulsory metering programme, it is running trials on future generation smart metering to be prepared for future deployment strategy.

"In my mind you can forget the days of walk-by or drive-by water meter reading, you've got to be jumping towards fixed networks, so you actually work off the communications infrastructure that's already there.

"That's of great benefit in terms of driving down costs straight away and gives the customer access to information straight away. It does start to enable seasonal tariffs."

Whether talking about securing investment, or water resources, for the future, Baggs believes sustainability is about "Making the right decisions for tomorrow today." The company has had its £1B Abingdon Reservoir scheme rejected, but he says that there isn't a "single answer" to a sustainable water supply.

Thames needs to be pursuing several routes at once: metering can help demand management, he says, and customers want more done on leakage. However, Baggs does see planning as a barrier to securing water resources.

"I shouldn't say this," he confides, "but you almost want another drought to make people realise we need some headroom in the system and the way regulation and planning is at the moment is much too tight. People get hung up on theoretical models without being able to take the decision."

He continues: "The sad thing is, for us to build a new reservoir will take about 14-15 years; it will only take about four to five years to actually build a reservoir, it will take us about 10 years to get all the necessary permissions to do it."

He rejects the assumption that there is a statutory barrier to companies sharing resources, citing the example of the Bewl Water reservoir, which his old firm SEW shares with Southern Water, an agreement that has been in place for decades. He believes much more can be done to improve abstraction licensing. "There must be a whole range of abstraction licences that aren't being used," he says, highlighting the lack of flexibility in the Environment Agency's system.

Baggs is intensely proud of some innovative developments his team has put in place over the past year and promises more. One shining example is a scheme to put gas back to the grid from Didcot sewage works, a Water Industry Achievement Award winner (see page 36).

Another programme in Slough is a European first for the water industry. The £2M project extracts struvite from wastewater, which reduces pipe blockages, and recycles the phosphate into Crystal Green fertiliser pellets for reuse as fertiliser. Leakage is another area where Baggs believes Thames is leading the way. He explains how a new approach, correlating leakage to raw water temperature meant that the company got a head start in a very cold year when leakage peaked earlier and harder than previously.

"We can predict, based on water temperature, our future levels of leakage," he explains.

Customer service is expanding at Thames too. While still quite small, Thames digital communications team is growing. Baggs says the company is looking at new channels of communication, so Twitter was used for the Tweet-a-Leak campaign and iPhone applications are being set up so people can better handle their bills.

"Innovation's not only about how you dig holes in the road," he concludes, "we're looking to open up more and more channels about how we innovate with our customers."

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