Sweetcorn, sewage, and Wessex Water’s fight for the future

Please chew your sweetcorn!

If you are an avid enjoyer, realise that when not chewed correctly, it passes through your digestive system, through the pipes, into the sewage treatment plant, only to be eventually filtered out in the same skip as grit.

This was something I was shown during my work experience at Wessex Water, the water and sewage company of the South West. During my short internship at the firm, I have learned many things, ranging from business operations and how to conduct customer research, to the impact the external economic environment has on business. This article will discuss the knowledge many people lack about the water industry, along with insights into Wessex Water’s financial future and my opinions.

To begin with, I shall go back to the oddities of sweetcorn and how it relates to my trip to Saltford water recycling centre. The opportunity to visit such a site was truly eye-opening, as it makes you appreciate the work that comes after flushing your toilet or turning your tap on.

The site can treat approximately 550 litres per second, but can receive around 1050 litres per second during storms. Due to this operational gap, the site has two large storage tanks which can hold 25 million litres of wastewater in times of need – the equivalent of 10 Olympic swimming pools. When they are full, the only response is to have storm overflows, where untreated water, usually diluted significantly by rainwater, goes into our rivers. Otherwise, the additional water will come back to customers, flooding their homes and businesses.

The price charged for water in 2030 will be lower than it was in 2015, when accounting for inflation

Storm overflows are a particularly challenging issue, because they occur largely due to groundwater and rainwater infiltrating the sewage system. The main problem is that our sewer network is old, and was designed to include combined sewers where both foul water and rainwater enter the same pipes. This means that systems are easily overwhelmed during heavy rains, as water treatment sites become congested through treating rainwater which should never be in the system in the first place. Addressing such an issue is difficult, as the responsibility lies with private property, meaning Wessex Water has limited power to fix it.

This is why, at the Saltford site, they are constructing an additional capacity of around 40% for £35 million to help reduce the number of overflows experienced, along with a record investment of £515 million over the next 5 years to help reduce their impact on the environment.

However, Wessex Water is spending even more on nutrient removal, totalling over £800 million over the next five years. Nutrient removal is a relatively unknown aspect of the water industry’s job. According to my survey on water companies, which accumulated over 50 full responses, nutrient removal was ranked 9th out of 10 priorities (which included river quality, habitat preservation, and effective sewage management) when respondents were asked to place them in order of significance. The issue is that nutrient removal impacts all three of these named priorities and more, since it is the process that removes excess nitrogen and phosphorous from wastewater. The Environment Agency, a key regulator, finds that phosphorous is the most common cause of water quality failures, as it causes algae to multiply rapidly, leading to the water becoming murky which can in turn block sunlight.

Wessex Water is on track to eradicate water poverty (whereby you spend more than 5% of your income on water) by 2030

Another one of the most surprising things I found was that water bills are not unaffordable as I originally believed. According to my survey, respondents believed an average household’s water bill was £82 a month, while the average is closer to £50. In fact, the price charged for water in 2030 will be lower than it was in 2015 when accounting for inflation, as projections show price rises will be slower after current price hikes.

Furthermore, Wessex Water is on track to eradicate water poverty (whereby you spend more than 5% of your income on water) by 2030, with the firm increasing the number of households who pay lower social tariffs.

Now, as The Boar‘s Finance Editor, I am, of course, interested in finance (crazy, I know), and so please bear with me here as I discuss the financial difficulty that comes with operating in such a regulated industry.

Wessex Water’s economic regulator, the organisation that determines the maximum revenue and therefore the prices it can charge its customers, is Ofwat. In 2023, Wessex Water provided Ofwat with its plan for the 2025–2030 business cycle, with the revenue it needs to meet its expenditure amounting to over £4 billion. £2 billion of this is capital investment, essential for improving infrastructure and reducing the number of storm overflows.

However, Ofwat returned with an offer that was wholly unacceptable to the company, giving 17% less revenue than Wessex believes is the minimum needed to invest and meet new regulatory requirements. As a result, Wessex Water have appealed the decision, a move also being taken by four other water companies, by approaching the CMA (Competition and Markets Authority), who it hopes will overturn Ofwat’s decision.

This is a significant crossroad for Wessex Water, as the CMA’s decision will decide the company’s financial viability and stability over the next five years. For some background, Wessex Water has a credit rating of BBB+ by Fitch, a credit rating agency. BBB+ is a respectable investment grade rating, and the rating helps to determine the interest rate paid on bonds and loans issued by the company, as investors use these to assess risk.

One of the main indicators credit rating agencies use to assess ratings is gearing. In simple terms, a gearing ratio is the level of debt a firm has compared to its equity, with the higher the number, the more debt and the riskier the firm. Wessex Water has a gearing ratio of 72%, which is generally quite high but relatively typical for a utility firm that requires substantial capital investment. However, the CMA’s decision will determine the level of debt Wessex will need to take on over the next five years, thus influencing its gearing ratio. Fitch expects most BBB+ firms to have a gearing ratio of around 68%, which Wessex is currently above.

Suppose Wessex Water’s gearing ratio increases too much. In that case, Fitch will likely downgrade its rating to BBB, which will approximately add 0.3 percentage points to the interest rate Wessex Water pays on new debt. This sounds like a small number, but when you consider the vast levels of investment, debt, and the period of time during which interest will be paid, it can quickly add up to tens of millions.

As a previous sceptic toward the water industry, the internship has assured me that water management in my region will likely improve due to record investment and efficient management.

The CMA will likely compromise, meeting both Ofwat and Wessex Water in the middle. This would protect Ofwat’s regulatory strength, as a full overturn would make them look weak. Meanwhile, the CMA will likely want to provide Wessex Water with the ability to invest as Labour pushes for more growth.

The CMA’s decision should come in December, and no matter what, the press will determine its result as unfavourable, as prices will either go up for consumers or Wessex Water may not be able to invest as much as they would like, leading to more overflows.

As a previous sceptic toward the water industry, the internship has assured me that water management in my region will likely improve due to record investment and efficient management. Yet, it’s interesting to understand just how vulnerable a monopoly is to external factors like its regulators and even government policy. Under the Conservatives, Liz Truss-induced chaos wreaked havoc on balance sheets, with further high inflation leading to growing interest payments for Wessex. They have high levels of index-linked bonds (bonds whereby payments are linked with inflation). This, and Rishi Sunak’s increase in corporation tax from 19% to 25%, drove the firm into losses in 2022–23 and 2023–24, despite the firm maintaining good cash levels.

External economic environments can temporarily hurt business, but sometimes the problem is more internal. Privatisation has been an interesting experiment, and while some water companies have operated relatively well, others like Thames Water have been irresponsible to say the least.

Thames Water has a credit rating which is classified as junk, essentially meaning its interest payments are eye-wateringly high. Its total profit before tax for the year ending March 2025 was -£1.6 billion. Furthermore, its Trustpilot rating is 2.5, significantly lower than Wessex Water’s 4.5, indicating poor customer service. I would personally love to see Thames Water nationalised, as a way of experimenting whether nationalisation is truly the answer to the water industry’s woes, before such an expensive action is considered for companies that operate more responsibly.