Martin Baggs, Chief Executive of Thames Water has said that “a national water grid is not going to happen in my lifetime” when he appeared as the keynote speaker at the Institute of Water annual conference in London yesterday.

Mr. Baggs said that currently the idea of constructing a grid “doesn’t make sense”, citing the fact that around three weeks ago river flow on the Thames at Teddington had been at a level of 700 Ml/d and had subsequently risen to 22,000 Ml/d. In such circumstances it would be preferable to build a new reservoir near the Thames to capture the water rather than construction in the North of England.

Mr. Baggs also questioned whether the current drought was really over, despite record rainfall in April at 262% of the long term average.  After two dry winters the UK was “still in a very serious situation” and the concern was what would happen in the event of a third dry winter. However, the drought had helped to provide greater visibility of other water resources and highlighted the benefits of collaborative working. There had been far more engagement with regulators in recent months than there ever has been before. However, he also raised the interesting question of whether there would have been the same level of collaboration over drought if the water companies were operating in a truly competitive environment e.g. by placing a question mark over the viability of water transfers.

Commenting on a range of political, regulatory, economic, and social challenges for the sector, Mr. Baggs highlighted the need to meet changing expectations of customers. Describing the proposed Thames Tunnel as a big issue for the company, Mr. Baggs said it was a key project to make London fit for the future – but how could it explain to customers as far afield as Cirencester and Cheltenham why they must pay for it.

Priority Substance Directive implementation could cost UK water sector £21 billion

 Mr. Baggs expressed particular concern about the potential financial implications for the sector of implementing the Priority Substances Directive – if fully applied, this could cost as much as £21 billion for the whole of the water industry. The cost of removing a single substance like oestrogen would cost 18 euros per person per annum. There are currently 33 on the list of Priority Substances and the expectation is that more will be added following the current review by the European Commission.

Need to preserve features of water sector which are attractive to investors

Commenting on proposed changes for the sector to introduce more competition, Mr. Baggs said there was a need to preserve the features of the current regime which have proved so attractive to investors – transparency, predictability and certainty.The water companies needed to secure investment at the right price in order to get lower customer bills – a 1% rise in finance costs would translate into a 5% increase in customer bills. However, Thames Water welcomed the proposals and saw the development of a business retail market as a priority for market development.

Leakage – problems down the line

 Commenting on leakage, Mr. Baggs said London faced a unique set of challenges caused by its ageing Victorian infrastructure. As a result, London had an average 300 bursts per 1000 km of pipe, compared with an industry average of 180 bursts. More than one third of the pipes are 100 years old, while more than 50% were over 80 years old. Ongoing deteriortation rates on the network, with implications for levels of service and the impact on customers’ bills would “all hit at once at some point”.

Innovation requires smarter and more flexible regulation

 Mr. Baggs said that innovation in the sector was not just about technology – it includes smarter and more flexible regulation. In his personal view, “we over-engineer as an industry” -  and the choice lies between end-of-pipe solutions or doing something different. More work was needed with other stakeholders on issues like point source pollution, changing society’s behaviour and building regulation requirements. In addition, investors did not want to see large capital programmes because these proved difficult in an uncertain business environment.

Next steps – more clarity and greater collaboration

 Looking to the future, Mr. Baggs called for greater clarity and “a more joined-up approach By Government and the regulator” on a really complex issue, coupled with more collaboration with the water companies.