North West Water Group Plc Business Information, Profile, and History

History of North West Water Group Plc

North West Water is the largest water and wastewater utility in the United Kingdom, supplying the water needs of 7 million customers. Originally state owned, the company was privatized in 1989 but the core business remains strictly regulated by the government because of its status as a monopoly utility. Since privatization, North West Water has diversified from its core business of water supply and wastewater treatment in the northwest region of England to become involved in a number of long-term foreign initiatives.

The harnessing of water resources in Britain began during the Industrial Revolution, when rapidly expanding urban centers demanded more water than local rivers and lakes could provide. In the northwest region of England, the needs of Manchester and Liverpool were paramount, and most noteworthy early schemes were constructed for the cities. In 1809 a private company, Manchester and Salford Waterworks, built Manchester's first reservoirs at Gorton, but these soon proved inadequate to meet ever-growing demand. Developers looked to the upland regions where water was plentiful: first to the Pennines, where during the mid-nineteenth century a network of reservoirs, flood water channels, and aqueducts was constructed, and then to the Lake District, where in 1885 work began at Thirlmere. Here one of the country's first dams was constructed: 58 feet high, 857 feet long, raising the water level in the lake by 54 feet. At the same time work progressed on an aqueduct to carry the water some 100 miles to the cities. A pioneering achievement of engineering for its time, the aqueduct was mostly underground, with the water flowing naturally by the force of gravity. Significantly, the aqueduct was also designed to serve the needs of the communities that lay along its route, the first step toward a future regionwide network of water supply.

Following these landmark supply systems, development continued apace. The suppliers, whether private companies or local authorities, required in each instance an act of Parliament to carry out their schemes. Because each proposed development was considered in isolation from the others, a certain amount of inefficiency and confusion ensued, with no attempt to impose a rational, coherent policy on rival developments. As early as 1869 the problems inherent in such an unplanned system were recognized, and the Royal Commission on Water Supply mooted 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 Advisory Water Committees to coordinate development and operation.

Successive acts of Parliament solidified the central government's involvement with water supply, culminating in the Water Act of 1973, which put an end to the network of individual suppliers and created 10 regional Water Authorities in England and Wales, leaving only a handful of private water companies intact. The far-reaching act also encompassed river management and sewage disposal, operations that had hitherto been entirely separate from water supply, bringing all three related operations under common management. When the law came into full effect in 1974, well over 200 separate organizations were merged to become the North West Water Authority.

During the 1980s, the Conservative government led by Margaret Thatcher instituted a wide-ranging policy of privatizing public utilities and services: the North West Water Authority became North West Water Group plc in late 1989. Immediately after privatization, the company launched a drive to make its operations more cost effective. Some 1,700 jobs were shed as the company increased its use of advanced computerization and automation. A sophisticated database was developed to hold the region's maps in digitized form. New construction and development made use of computer-aided design. Routine water sampling was automated, with the results transmitted to the Central Laboratory and the Operational Control Centre. Many stations could now be activated or shut down by remote control, as needed.

Although it is privatized, North West Water Ltd. is a utility monopoly and as such remains subject to regulatory control by the government. The rate the company may charge its customers is determined by the Office of Water Services (Ofwat), the industry price regulator. In addition, the company must meet--and prove annually that it has met--both the stipulations of U.K. law and the standards of the European Commission regarding water quality and pollution control. Here the company finds itself in a somewhat difficult position. Constrained in how much it may charge, North West Water is also required by law to invest a considerable amount of capital each year (in 1994 the figure was some 425 million) into improving its infrastructure to comply with public health and environmental standards. Such investment is urgently needed--and only a drop in the bucket. The company--in common with all the former water authorities--inherited an operation riddled with problems. Much of the region's equipment, so innovative in the water industry's Victorian heyday, has not been replaced or upgraded since then; North West Water has had to struggle with an antiquated system that is in parts both prone to breakdown and unfit to comply with current water quality and environmental standards.

Indeed, the water industry's record of environmental care is an appallingly poor one. Although water pollution has been a problem--and has been recognized as a problem--since the nineteenth century, remarkably little has been done over the years to combat it. Increasing levels of industrial waste and sewage filth led to the Rivers Pollution Prevention Act of 1876. The only antipollution legislation in effect for the better part of a century, the act ostensibly prohibited pollution but was in practice heavily weighted in favor of industrial interests: in effect, industrialists could dump their waste as they pleased simply by claiming there was no alternative. The act was emasculated, too, by administrative confusion; with several authorities responsible for different sections of a single river, a coordinated policy was next to impossible.

Further legislation began to be enacted from the mid-twentieth century, but the continuing poor quality of Britain's waterways is testimony to the lack of political will--and public funds--needed to confront the issue. (To take just one example, 9 out of 33 bathing beaches in the northwest region of England have been deemed by the European Commission, as of 1994, to be unsuitable for swimming.) This was North West Water's inheritance and, as the company itself stresses, it will take years to set the environmental mistakes and neglect of the past even partially right.

Pollution caused by wastewater is one side of the coin, water quality for consumption the other, and here the picture is rather brighter. North West Water takes numerous water samples each day (from treatment works, service reservoirs, and customers' taps) and could claim, in 1993, that over 99 percent of its samples met the water quality standards of the European Commission--the highest percentage yet.

North West Water derives its water mostly from reservoirs and lakes in the Lake District, the Pennines, the Peak District, and, although technically out of its region, North Wales. Water is also taken from rivers and streams and from water sources within rock strata. Underground water is the purest, usually requiring only chlorination to keep it free of bacteria. Water from other sources needs more complex treatment before it can meet the European Commission's standards relating to bacteria, chemicals, taste, odor, and color.

The water found in the northwest tends to be "soft," meaning it contains relatively few dissolved minerals. However, traces of dissolved iron, manganese, and aluminum do occur, and the water needs to be carefully filtered and treated with chemicals to be safe to drink. Another characteristic of water in the region is its mild acidity; such water may dissolve the lead in lead water pipes. Although North West Water ensures that water leaving its treatment works is lead-free, by the time it reaches consumers' taps it can possibly have a high lead content because the old lead piping, much of which is in consumers' homes, has yet to be fully replaced. The company is able to alleviate this problem to some degree by adjusting acid levels, but it cannot be solved until new piping is installed. (Interestingly, water consumers themselves are complacent; when asked via a North West Water survey if they would voluntarily pay more for water services in order to accelerate needed improvements, the response was resoundingly negative.) Here again, North West Water is held strictly accountable, required to supply its water quality findings to the government-appointed Drinking Water Inspectorate, the local authorities, and the general public via the Drinking Water Register.

North West Water's involvement with environmental issues is not confined to pollution, nor does the company's duty to the public interest stop with the provision of good-quality water. As the largest landowner in the northwest region, North West Water owns some 140,000 acres of England's loveliest and most popular countryside, and must therefore be sensitive to issues of conservation and recreation. North West Water draws extensively on the Lake District, the Pennines, and the Peak District. Some 30 percent of North West Water's supply is taken from the world-famous Lake District, which, like the Peak District, is a national park; the North Pennine region and the Forest of Bowland are designated Areas of Outstanding Natural Beauty.

Historically, water industry development has been treated with deep distrust. The first excursion into the Lake District at Thirlmere, undertaken in 1885 by one of North West Water's predecessors, was greeted by the lake's owners with threats of unspecified but "very severe" measures to be taken against anyone suspected of being an agent of Manchester City Council. Subsequent development at Ullswater and Windermere faced similarly fierce opposition. Today North West Water makes it a policy to try to balance its needs with the conservation of the countryside, the wishes of the locals, the demands of the tourist trade, and the activities of countless recreational users of North West Water land. The company has connections with conservation and environmental groups, such as the British Trust for Conservation Volunteers and the Groundwork Trust. It has set up a special Conservation, Access and Recreation Department, guided by the regulations of the 1989 Code of Practice on Conservation, Access and Recreation. A portion of its annual capital expenditure is allocated for conservation projects, preservation of man-made heritage, and recreational facilities.

Despite the constraints of price controls and government-mandated improvements to its infrastructure, North West Water has returned steadily increasing profits each year since its privatization. Nonetheless, the company, in a bid to escape the regulators and seek a profit in the free market, has pursued a policy of diversification since 1990, just after its privatization. Indeed, all 10 of the former water authorities opted for diversifying, but North West Water has taken a more aggressive approach than most.

The company laid the groundwork for its plans during 1990 and 1991 by acquiring several process engineering and process equipment companies, both domestic and foreign. Acquisition of the U.K.-based Water Engineering and Edwards & Jones, the U.S. firms Envirex and Wallace & Tiernan, and the Irish company Jones Environmental immediately and impressively expanded North West Water's expertise and experience in the design, manufacture, and installation of water and wastewater treatment equipment and services. Aside from generating business on their own account (just after Envirex was acquired, for example, the subsidiary undertook to supply sludge collection mechanisms to Boston as part of that city's efforts to clean up its harbor), the technological benefits these firms bring to North West Water can be applied both to the company's core domestic business and to its various ventures abroad. Its own regional experience thus bolstered by the know-how of its new subsidiaries, North West Water International undertook in the early 1990s several ambitious foreign projects.

Many countries, whose water and wastewater systems are less developed, are looking to foreign expertise to help them improve existing inadequate methods; most of North West Water's projects abroad involve designing and building a system, operating it for a specified period of time, and then handing it over to local authorities. In Mexico City, North West Water entered into a 10-year contract to provide water services for 5 of the city's 16 municipalities. In Malaysia the company signed a 28-year contract with a local consortium to upgrade the sewerage systems for 43 cities and towns. The Macau project commits North West Water to design, build, and operate a wastewater treatment plant and a sludge processing plant, and in Bangkok the company is installing a wastewater network and treatment facility for some 700,000 customers. Other contracts to design, build, and operate a water treatment plant were negotiated with authorities in Melbourne and in Sydney. With these projects still in their infancy in 1994, North West Water has seen little return as yet on its substantial investment, but the company is confident that foreign diversification will prove a lucrative enterprise.

Research and development is an important aspect of North West Water's operations, as the company aims to be a world leader in water management skills and technology. In 1993 the company acquired Ceramesh and ICI Membranes, developers of advanced membrane technology that helps in the filtering of water and wastewater.

The privatized water companies have been severely criticized by consumer groups because the cost of an average consumer's bill has risen dramatically, along with the company's profits and the earning level of top executives in the industry. North West Water is by no means the worst offender in terms of water bills; at £182 per year in 1994, the charge is the third lowest among the 10 former water authorities. (Still, this compares to a 1989 figure of £147; the increase has well exceeded the rate of inflation.) On the other hand, the salary increase of the then company's chairman is one of the highest of the 10: from £47,000 in 1989 to £338,000 in 1994. The Water Services Association, spokesman for the industry, cites the tremendous burden of financing the necessary improvements to systems and equipment as the reasons for higher bills, an argument rejected by those who feel the consumer should not be made to foot the bill for years of neglect while the industry was in the public sector.

In July of 1994, five years after privatization, Ofwat imposed new and more stringent restrictions on the water companies' profits, limiting price increases to an average of 1 percent above inflation for the 10-year period 1995-2005. It is likely that the companies will now be forced to borrow or drastically cut their operating expenses in order to fund environmental improvements.

In late November of 1994 North West Water announced a proposed worldwide partnership with the Bechtel Corporation. Both companies hope the establishment of this wide ranging business partnership will accomplish the following objectives: to vigorously grow water and waste water operations internationally; to develop a significant presence in the North American water and waste water market; through the proposed sale of North West Water Engineering to Bechtel to develop a world class design resource that will be available to support operations in the United Kingdom and internationally; and to challenge aggressively the cost of the capital works of North West Water's UK Utility.

Inheritor of a faulty and neglected system, North West Water still has far to go in implementing necessary improvements to the infrastructure of its core business. The company faces a challenging remit, as it struggles to balance the conflicts between consumers' pocketbooks and environmental standards--and its own financial imperative to return a profit to its shareholders. At the same time it is meeting further challenges as it seeks to raise its profile in the international arena. North West Water's future will be an interesting--and doubtless controversial--one, as it strives to provide at home and abroad what the company proudly terms "world class water."

Principal Subsidiaries: Consolidated Electric Co., Inc. (U.S.A.); Edwards & Jones Ltd.; Envirex Inc. (U.S.A.); North West Water Australia Pty Ltd.; North West Water Ltd.; North West Water (Malaysia); North West Water International Ltd.; NWW Canada Ltd.; U.S. Water Inc.; Wallace & Tiernan Inc. (U.S.A.); Wallace & Tiernan GmbH; Wallace & Tiernan de Mexico SA de CV; Wallace & Tiernan Pty Ltd.; Wallace & Tiernan Canada, Inc.; Wallace & Tiernan do Brasil SA; NWW Properties; Asdor Ltd.; General Filter Co. (U.S.A.); Edwards & Jones Ltd.; Indah Water Operations Sdn Bhd; Agua de Mexico, SA de CV; North West Water (Thailand).