Incorporated: 1989
NAIC: 551112 Offices of Other Holding Companies; 221310 Water Supply and Irrigation Systems
SIC: 6719 Holding Companies Nec; 4941 Water Supply; 4971 Irrigation Systems
Thames Water plc is the largest water and wastewater services company in the United Kingdom, serving over 13 million customers in England and Wales. In the public sector for years, Thames was privatized in 1989 but certain operations remain subject to government regulation due to its position as a regional supplier of an essential utility. The company was acquired by the RWE Group in 2001 and then sold to Kemble Water Ltd.--formed by a group of investors led by Australia's Macquarie Group--in December 2006. While Thames Water has posted profits, significant leakage from aging pipes, the failure by the United Kingdom's water regulatory body to enforce fines for the leakage, and imposed consumer water bans have led to public outcry in the early twenty-first century. Thames Water has placed leakage control among its top operational priorities as a result.
Early History
Water suppliers to London and the surrounding area had been operating on a small scale for centuries, but not until the 19th century did modern water management systems come into being to meet the growing demands of the urban center. Increasing population and the phenomenal rise of industry meant that the city was no longer able to satisfy its water needs from local sources. Throughout the Victorian period and well into the 20th century, a network of supply systems sprang up, with both private waterworks companies and local authorities constructing technologically advanced dams, reservoirs, and aqueducts to meet the ever-increasing demand.
Water projects were regulated in the sense that each required a separate act of parliamentary approval to proceed, but because each proposal was considered in isolation of the others, no attempt was made to implement a coherent, interlocking system of water supply. As early as 1869 the problems inherent in such an unplanned system were recognized, and the Royal Commission on Water Supply raised for debate the idea of regional planning. No action was taken, however, until much later, in 1924, when the Ministry of Health, in conjunction with the water suppliers, established Regional Water Committees to coordinate development and operation. Successive acts of Parliament solidified the central government's control of the water industry, culminating in the Water Act of 1973, which put an end to the network of individual suppliers and created ten regional water authorities in England and Wales. The far-reaching act also encompassed river management and sewage disposal, operations that had hitherto been entirely separate from water supply. All three related operations were thus brought under common management.
Thames Water Is Privatized in 1989
Thames Water can claim a role in the water authorities' conversion to plcs (public limited companies) through the activities and lobbying of its chairman, Roy Watts. Appointed in 1983 (and serving until his death ten years later), Watts had already instituted streamlining measures at the water authority (including reducing the board of directors from 62 members to 15), "because I tend to think old companies get fat." Bringing his commercial background to bear, Watts cut costs to the extent that the authority was able to contain tariff increases to 3 percent--whereas the government favored an increase of 10 percent. The disagreement became public, leading to a House of Commons debate and, eventually, the government's decision to privatize all the water authorities. In 1989 Thames Water Authority became Thames Water plc.
The newly privatized water industry remained strictly subject to governmental control. The Office of Water Services (Ofwat), the industry price regulator, set a ceiling on the amount the new company could charge its customers. In addition, it was stipulated that Thames must meet--and annually prove that it had met--both the requirements of U.K. law and the standards of the European Commission regarding water quality and pollution control. These regulations placed the company in a somewhat delicate position. Constrained in how much it could charge, Thames was also required by law to invest a considerable amount of capital each year into improving its infrastructure to comply with public health and environmental standards.
Such investment was urgently needed as Thames, along with the other former water authorities, inherited a faulty and antiquated system whose myriad inadequacies had been too long ignored. By the mid-1990s, significant investment was necessary to upgrade or replace systems and equipment if they were to be acceptable to current water quality and environmental standards. It would take years, in the opinion of both Thames Water and independent observers, to rectify the mistakes and neglect of the past. These improvements would also take a great deal of money, and how this money was to be obtained was a source of great controversy.
Overcoming a Negative Public Image
Although Thames's customers' water bills were lower on average than those of any other of the former water authorities, the company reaped its share of the general public disapproval of the privatized companies' performance. To what extent consumers were not receiving value for money was debatable. Certainly water bills had risen well in advance of inflation since 1989 and certainly high-ranking executives in all the water companies were commanding salaries substantially higher than those they had received while the industry remained in the public sector. In Thames's case, the chairman's salary rose from £41,000 in 1989 to £317,400 in 1994. On the other hand, Thames, along with the other former authorities, had to invest huge amounts of capital to improve its legacy of a defective and outmoded infrastructure to meet increasingly stringent environmental and public health standards. Furthermore, Thames had not raised its prices to the highest limit allowed it under the rules established at privatization.
Wherever one chose to assign blame, it was perhaps inevitable that a monopoly supplier of an essential utility would be viewed with some suspicion. Thames Water attempted to counteract this negative image by producing a flurry of informational material for better public understanding and by initiating an active program of market research to determine just what its market would bear. The company undertook such a study in 1992, explaining to customers that it faced two kinds of financial obligations, mandatory and discretionary. Mandatory spending, by far the lion's share, included all the improvements to its systems and equipment that Thames must finance if the company was to satisfy the requirements of the European Commission. Thames outlined three possible scenarios for the future balancing of water purity and environmental concerns with water rates customers would be obliged to pay by the year 2000. If Thames Water met the minimum requirements demanded of it, and no more, the average consumer bill (£162 in 1994) would be £200 in 2000. If Thames were to take what the company termed the "pure and green" route, meaning doing all within its power to ensure the purest possible water quality and the most environmentally healthy treatment of wastewater, the average bill would be £440 per year. If Thames took a middle ground, the bill was likely to be around £315 per year. Thames's market research found that, overwhelmingly, customers preferred the lowest cost option. Similarly, with regard to discretionary spending, which Thames defined as desirable but not essential spending to accelerate solutions to such problems as interruption to water supply, poor supply pressure, flooding from sewers, and odors from sewage works, customers were willing to pay more only to prevent sewers from actually flooding. The provision of water services, Thames's report concluded, was "taken for granted" and "customers find it hard to imagine what money is actually being spent on."
In July 1994, five years after privatization, Ofwat imposed new and more stringent controls on the water companies' profits, limiting price increases to an average of 1 percent above inflation for the ten-year period between 1995 and 2005. It was likely that the water companies would have to borrow or drastically cut their operating expenses in order to finance environmental improvements.
Problems with Diversification
Like the other privatized water companies, Thames Water attempted to escape the government's regulations by diversifying into noncore activities where it could operate in a freer market. Thames was active internationally since well before privatization, largely in consultancy and training roles, but since 1989 the company widened its scope to include projects in water process engineering and specialist treatment products. The company's international portfolio included projects in the privatization of existing utility organizations, the management and operation of water and wastewater utilities, process design and construction, the management of water distribution systems, project financing, demand forecasting and conceptual designs, and feasibility studies.
In 1989 Thames acquired Portals Water Treatment (later PWT Worldwide), a leading water process contractor through which Thames designed and constructed water and wastewater treatment plants. The subsidiary undertook projects in Pakistan, Hong Kong, Nigeria, Japan, Singapore, Australia, India, the United Kingdom, and the United States. Discussions initiated in 1990 resulted in a significant 1993 agreement whereby a consortium led by Thames would design and build a water treatment plant at İzmit, Turkey. The subsidiary Thames Water International, the technical and managerial services arm of the Thames group, would then operate the finished project for a period of 15 years before relinquishing it to the management of local authorities. Also in 1993 Thames acquired the environmental engineering business of Simon Engineering, which allowed the company additional scope for wastewater treatment projects. The German Utag was acquired in 1992 for its expertise in consulting, contracting, and the construction of environmental products.
Despite such an ambitious international portfolio, Thames had little success in its noncore activities; indeed. the Evening Standard stated bluntly in 1994: "The company seems accident prone overseas. ... After five years abroad, Thames has yet to make a penny profit outside Britain." In the same year the Financial Times, alluding to Thames's overseas activities, called it the "worst performing water company since privatization." Thames Water defended its record, citing the monumental costs of restructuring its foreign acquisitions and unwise contracts entered into by its subsidiaries prior to their acquisition by Thames. The company insisted that its overseas strategies must be taken in a long-term context, and that its unprofitable foreign ventures would be breaking even by 1994-95 and bringing in profits thereafter.
Success As a Utility
During this time period, Thames had a better record in its primary function as a U.K. utility. The company's brightest star was the London Water Ring Main, needed to alleviate pressure on the city's antiquated pipe system, which was in danger of leaking or even bursting. Eighty kilometers long (longer than the Channel Tunnel) and 40 meters deep (deeper than most London Underground lines), the £250 million project was built to supply half of London's drinking water. Thames completed the project in 1994, to budget and two years ahead of schedule.
Other significant successes for Thames included its 1993 completion of a five-year modernization program at the 140-year-old Hampton water treatment works, and a £400 million investment to install advanced water treatment facilities at its plants to filter out pesticides. The company also pointed to its success in containing leakage. At privatization the company was losing 25 percent of its water through leaks; this loss had been reduced, as of 1993, through a technologically sophisticated system of leakage detection and solution, to 17 percent, obviating the need to build new reservoirs. Such improvements (and others involving better water clarification systems, safer sewage plants with improved odor control, and more efficient sludge management systems) pointed to the company's active research and development team.
Scope for improvement remained, however. In 1992-93 the company was successfully prosecuted four times by the National Rivers Authority for improper treatment and disposal of sewage. Much work remained to be done on Thames's nearly 400 sewage treatment works, virtually all of which were in an inadequate condition at privatization.
Thames Water was required by the government Code of Practice on Conservation, Access, and Recreation to report regularly on the company's sensitivity to these issues. Some 20 percent of Thames-owned land was in designated Areas of Outstanding Natural Beauty. Furthermore, as the Thames region encompassed a high proportion of densely populated urban centers, the need for conservation and recreational areas was particularly acute. In compliance, Thames worked with dozens of conservation, environmental, and community groups and was involved in numerous projects to protect the region's natural and manmade heritage and to improve recreational access to its land.
Privatization almost always resulted in staff cuts and more rigorous cost controls, and the privatization of Thames was no exception. Personnel numbers were reduced by some 6.6 percent since 1989 and the company cut operating costs where possible--replacing, for instance, the authority's 25 small laboratories dotted throughout the region with two large central ones in London and Reading. In addition, the company sought to improve its level of customer service, building a new centralized customer service center in Swindon. The status of a privatized but still closely regulated utility was in many respects a problematic one. Like the other water companies, Thames saw its share of controversy as it tried to strike the balance between the public duty of a monopoly utility and the profit motive of the private sector. It had also seen its share of disappointment in its diversifications abroad. Nevertheless, over 99 percent of the water Thames supplied to its millions of customers met all the stringent requirements of both the United Kingdom and the European Commission.
Focusing on International Expansion
Throughout the latter half of the 1990s, Thames Water was intent on increasing its global presence. While certain international ventures had failed to secure profits--the company sold the German Utag in 1996--Thames looked to expansion abroad as a necessary means to profits as the government continued to enforce stringent price controls in the water sector. Instead of focusing on noncore design and construction operations, however, the company looked to securing water and wastewater contracts in Thailand, China, and Australia. During 1996, the company secured a contract in Puerto Rico and also landed an $860 million contract in Turkey, which at the time was the largest privately financed water project in the world. That year, Thames' international business unit secured its first profit, a sure sign that its international efforts were paying off.
Additional international contracts were secured in 1997, including an agreement to oversee the water infrastructure in East Jakarta, Indonesia. In 1999, the company gained a presence in Chile through a joint venture. During 2000, Thames gained a foothold in the North American water market through the purchase of New Jersey's Elizabethtown Water Company. At the same time, Thames worked to strengthen its domestic operations. The company began supplying water to the Ministry of Defense's Tidworth Garrison and also worked with Stirling Water on a project in Edinburgh, Scotland.
During 2001, Thames Water was acquired by Germany's RWE Group. The $9.4 billion deal catapulted RWE into the upper echelon of water companies and secured its position as the third largest water concern in Europe. As part of RWE's water division, Thames continued to expand its operations. Later that year, the company announced plans to acquire American Water Works Company Inc., the largest investor-owned water company in the United States, in a deal worth approximately $7.6 billion. RWE, a large utilities concern that had diversified into many sectors over the years, decided to exit the water business in 2005 and put Thames Water up for sale. A consortium of investors led by Australia's Macquarie Group formed Kemble Water Ltd. and acquired Thames in December 2006.
Meanwhile, Thames came under fire for its failure to meet leakage targets. Ofwat, the industry's regulatory body, also received negative publicity when it failed to impose fines for the company's significant leakage. In fact, Ofwat relaxed its requirements, allowing Thames to leak an additional 7.7 millions gallons of water per day. Overall, the company's antiquated pipes had leaked 196 million gallons each day during 2005-06, which according to a January 2007 Evening Standard article was enough to fill over 500 Olympic size swimming pools every 24 hours. At the same time, the company was urging consumers to conserve water, all while posting record profits.
Under the new ownership of Kemble, Thames Water worked to clean up its image. A July 2007 Utility Week article reported CEO David Owens' comments: "The battle to restore the company's standing has only just begun, but Thames today is a stronger, more efficient, more reliable company than the one the new management team inherited in December. There is still much to be done, however." Indeed, while the company met its leakage targets during the 2006-07 fiscal year and increased its capital spending by more than 40 percent over the previous year, it faced the daunting task of replacing the antiquated pipe system throughout London. Nevertheless, management was confident that Thames Water was on the path to success in the years to come.
Principal Subsidiaries
Thames Water Utilities Ltd.; Thames Water Services Ltd.
Principal Competitors
Severn Trent plc; SUEZ S.A.; Veolia Environnement S.A.
Further Reading
Barriaux, Marianne, "Thames Profits Hit As It Plugs Leaks," Guardian, June 30, 2007.
Barrow, Becky, and Sam Fleming, "Most Wasteful Water Firm Escapes a Fine over Its Leaky Pipes," Daily Mail, July 5, 2006.
Bream, Rebecca, "UK: Competitors Eye Thames Water's Fate," Financial Times, October 25, 2005.
Court, Mark, "REW Offer Accepted by Thames," Times, September 26, 2000.
"Dangerous Waters," Evening Standard, June 15, 1994.
Hudson, Repps, "Water, Water Everywhere and None of It Is Actually Owned by Americans," St. Louis Post-Dispatch, December 31, 2001.
Kay, Helen, "Thames Water Makes Waves," Management Today, July 1991, pp. 34-39.
"Keep Taking the Waters," Times, June 16, 1994.
Lea, Robert, "Watchdog in Hot Water over Thames," Evening Standard, January 19, 2007.
"The Lex Column: Thames Water," Financial Times, June 16, 1994.
Martinson, Jane, "Thames Trebles Return from Non-Core Areas," Financial Times, June 18, 1997.
Mortished, Carl, "Water Bills Will Be Capped for 10 Years," Times, July 29, 1994, p. 1.
Murray, Ian, "Ofwat Plans to Cut Flow of Profits to Water Industry," Times, July 12, 1994, p. 7.
Norman, Margot, "Muddying the Waters," Times, July 12, 1994, p. 16.
"Of Wealth and Water," Economist, October 6, 1990, pp. 39-40.
"Out of the Sweetshop," Financial Times, November 6, 1996.
Porter, Elizabeth, "Water Management in England and Wales," Cambridge Geographical Studies, no. 10, Cambridge University Press, 1978.
Taking Care of the Future: Thames Water Market Plan, London: Thames Water, 1993.
"Technology: Stopping the Flood," Financial Times, March 4, 1994.
"Thames Drops to Pounds 242m after Costs," Daily Telegraph, June 16, 1994.
"Thames Looks for Growth with 'Dirty Water' Industry," Yorkshire Post, January 13, 1993.
"Thames 'Making Progress,'" Utility Week, July 6, 2007.
"Thames Water Shares Take a Dive," Independent, June 16, 1994.
"Thames Water to Lead Dollars 700m Turkish Project," Financial Times, February 4, 1993.
"Water Profits Under Pressure," Times, July 7, 1994, p. 26.
Wilsher, Peter, "British Water Makes Waves Overseas," Management Today, October, 1993, pp. 86-90.
— Robin DuBlanc; Updated by Christina Stansell Weaver
