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The principle of environmental leadership lies at the heart of our business strategy. It is not just a matter of demonstrating high environmental standards in the operations that we carry out; environmental leadership enables us to provide customers with practical and innovative services that address the environmental challenges of modern society.
As the fourth largest non-government-owned water company in the world, Severn Trent PLC supplies water and sewerage services to eight million domestic and industrial consumers across the British Midlands. In the mid-1990s, its service area encompassed 8,000 square miles, reaching from Gloucestershire to Humberside, mid-Wales to Rutland. Water supply became the primary activity of Severn Trent, the successor company to the state-owned Severn Trent Water Authority, when it was privatized--along with the rest of the water industry--in 1989. Privatization improved the company's profits, but also exposed it to controversy over such issues as executive salaries and environmental stewardship. Since becoming a PLC, Severn Trent also has diversified into several related areas, including waste management, water technology services, and the creation of software systems for a variety of industrial applications. The company also has reached beyond the boundaries of its home market, becoming involved in a number of consulting and operational activities abroad.
The Birth of Modern Water Management in 19th-Century Britain
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 Severn Trent region, the principal city of Birmingham was among the first to develop modern water management. In the 19th century water was brought to the city via an aqueduct dependent on gravity from the Elan Valley reservoirs in rural Wales. Other cities in the region, notably Derby, Nottingham, and Leicester, brought water from the Peak District in Derbyshire.
In these early days, water projects--the province of either private companies or local authorities--were regulated in the sense that each project required an act of parliamentary approval to proceed. Since each proposal was considered in isolation of the others, however, water supply across the nation was haphazard and inefficient. The major cities were comparatively well served, as were smaller settlements lucky enough to lie along the route from a water source to a city, but many areas had no water provision at all. As early as 1869 the problems inherent in such an unplanned system were recognized, and the Royal Commission on Water Supply raised the suggestion of regional planning. No action was taken, however, until 1924, when the Ministry of Health established Regional Advisory Water Committees to coordinate development and operation.
Privatization and the Water Act of 1973
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 ten regional Water Authorities in England and Wales. The far-reaching act also encompassed river management and sewage disposal, operations hitherto entirely separate from water supply, bringing all three related operations under common management.
During the 1980s Britain's Conservative government instituted a wide-ranging policy of privatizing public utilities and services. This policy soon affected the water industry, and as a result the Severn Trent Water Authority became Severn Trent PLC in 1989. After privatization, however, the former water authorities, as monopoly providers of an essential utility, remained subject to government regulatory control. The Office of Water Services (Ofwat) set a ceiling on the rates the water companies could charge their customers. Severn Trent and the other providers also were required to meet standards regarding water purity and pollution control stipulated by both the United Kingdom and the European Community. It would be difficult to determine which issue&mdash′icing or environmental quality--attracted more controversy after Severn Trent was privatized.
Public Relations Problems in the Early 1990s
In the 1990s the privatized water industry as a whole came under attack for its pricing policies, and Severn Trent certainly took its share of the criticism. It frequently was alleged that Severn Trent's profits were disproportionately benefiting shareholders rather than being recycled back to customers. The cost of water to the average domestic consumer in the Severn Trent region increased 69 percent from 1989 to 1994--during a period when Severn Trent's profits were steadily rising. The company stoutly defended its policies, however, citing the vast capital outlay required to achieve environmental standards mandated by both London and Brussels.
Environmental issues certainly did not receive adequate attention when the industry was in the public sector: Severn Trent and the other former authorities inherited an antiquated, ecologically hazardous infrastructure in urgent need of upgrading. Severn Trent invested heavily in improvements to the system, and continued to do so through a ten-year program, begun at privatization, that was estimated to cost £5 billion. Critics maintained, however, that the investment burden was being unfairly shouldered by consumers when it should have been borne by Severn Trent, whose healthy profits proved it perfectly capable of doing so. Further, it was alleged that the required capital outlay, much of which was expended in the first few years after privatization, was mitigated in the company's favor by two factors. First, the government's debt write-off was designed to ease the water authorities' financial obligations. Second, the cost of improvements was substantially lower than expected due to very favorable deals made during the economic recession of the early 1990s. Furthermore, critics argued that Severn Trent's financial commitments were actually significantly lower than those of the other former authorities. Because the Severn Trent region is landlocked, the company thus was saved the formidable expense of cleaning up beaches and treating sewage disposed of in the sea.
The company responded to such criticism by stating that the costs of necessary improvements were so onerous that they had to be shared by the consumer. Severn Trent also claimed that its charges were the second lowest among the country's water companies and that it had not raised water rates beyond the maximum allowed by the industry regulator, Ofwat. Finally, the company attributed its higher profits at least partially to the rigorous and successful cost-cutting program it had initiated since privatization.
Nevertheless, one outraged journalist at the Birmingham Post responded: 'If the commercial minds at Severn Trent were to be troubled by conscience, they would be asking themselves this: how the financial rewards can have been reaped so richly from privatization and the environmental responsibilities so grossly neglected.' Severn Trent pointed to several improvements it had made since privatization in response to environmental concerns, including the reservoir Carsington Water and a complete overhaul, at a cost of £70 million, of the Frankley Water Treatment Works. The company also cited encouragingly high compliance rates with quality standards: 99.8 percent in drinking water purity, and 99.0 percent with effluent standards. Severn Trent was convicted of six pollution offenses in 1993, however, making it the fourth worst offender in the United Kingdom for dumping waste into rivers.
The company was widely suspected of incompetence if not malfeasance in a 1994 incident in Worcestershire, for example, when a pollution scare left 35,000 homes without water for a few days. A Shropshire waste disposal firm known as Vitalscheme dumped--without, Severn Trent emphasized later, the knowledge or permission of the water company--a chemical cocktail of industrial solvents into its sewerage works. The pollutant flowed 80 miles down the River Severn, undetected for several days, until it reached drinking water supplies and consumers reported evil-smelling, foul-tasting water. Several people became ill. Severn Trent reacted quickly to the complaints, warned consumers against drinking the water, traced the pollution to its source, took steps to remedy the situation, and subsequently voluntarily paid £25 compensation to each household affected. Nonetheless, the incident damaged Severn Trent's reputation. Some alleged that the company, even if not actually compliant in the original dumping, was deficient in detecting the pollutant and reckless in precipitately assuring consumers that the water was again safe to drink. Severn Trent set up its own independent enquiry into the affair, led by Professor Kenneth Ives, and decided to prosecute Vitalscheme. The Ives report found that, 'Severn Trent responded with great speed and efficiency to the emergency, thanks to well prepared emergency planning.' The long-term health effects of the chemicals, if any, were unknown.
Severn Trent's image also suffered from the financial arrangements surrounding Chairman John Bellak's early retirement in 1994. Most customers and some shareholders were already disgruntled with the massive increases in executive salaries after privatization. Severn Trent was by no means unique in boosting its top executives' pay--it was a common practice among Britain's privatized industries--but critics questioned the necessity for raising the chairman's salary a total of 241 percent, from a 1989 level of £51,000 to the opulent 1994 figure of £174,000. The controversy came to a head when Bellak (who had enjoyed some very lucrative share options in addition to his increased salary) received £500,000 in compensation for being requested to retire a few years early. Severn Trent's customers and shareholders and a group of 50 members of Parliament condemned the deal and repeatedly demanded an explanation for Bellak's departure. Tempers were not improved by the subsequent revelation that Richard Ireland, Bellak's replacement, was garnering £100,000 for a work schedule that equated to attending less than one meeting per week. Ireland responded that he would, in fact, be devoting two days a week to his job.
Severn Trent's noncore business activities were by contrast free from controversy. The company became a major player in the waste management industry with its 1991 purchase, for £212 million, of Biffa Waste Services, the fourth largest firm of its kind in Britain and the tenth largest in Europe. Biffa operated a threefold business in the United Kingdom and Belgium: collection, whereby it disposed of other companies' waste materials; landfills, a rapidly growing area; and liquid waste management, handled through liquid treatment plants. Biffa's financial returns were somewhat disappointing, but this was due not to the subsidiary's actual performance--its productivity and potential were sound--but rather to the financing scheme by which it was purchased. Severn Trent bought Biffa through Eurobonds with an extremely high interest rate (the annual interest bill was some £24 million) and this adversely affected profits. Independent financial commentators agreed with Severn Trent that once it came out from under its financing cloud, Biffa would prove a credit to the company.
Severn Trent Systems was the computer software arm of the company. The business arose almost tangentially from Severn Trent's own need to process the volumes of information necessary for running a major utility. Customers' needs and specifications, billing, costs of labor and materials, resource management, regulatory and environmental requirements--all such data needed to be processed quickly and accurately. At first in conjunction with IBM and later on its own--after it had purchased the U.S.-based Computer Systems and Applications--Severn Trent developed systems appropriate to its needs. Having established the groundwork, it was a logical next step to market the experience to other, similar organizations. Severn Trent Systems offered a highly complex and sophisticated range of computer services encompassing work management systems, customer information and complaints systems, systems specific to industry types, and professional consulting services in an array of procedural and technical areas. The company's clients in the utility industries included Western Reserves, which supplied Kansas City, Missouri, with gas and electricity; London Electricity; Houston Lighting and Power Co.; Sydney Electricity; and the City of Seattle Water Department.
Severn Trent Technologies developed and marketed purification technology. The subsidiary Capital Controls was in the chlorine, ozone, and ultraviolet disinfection business, while Stoner Associates specialized in pipe network computer modeling and served the water, gas, and oil industries. Severn Trent Technologies operated in the U.S. and European markets and was investigating opportunities in China.
Severn Trent Water International Ltd. operated on numerous levels: as a water management consultant, a provider of water and wastewater technology, an operations contractor, and a water utility manager/operator. The company's most significant operations were centered in the United States, Mexico, and Belgium. In the United States, Severn Trent had contracts to operate more than 150 water and wastewater treatment plants. The acquisitions of the American companies AM-TEX and McCullough Environmental Services helped to increase Severn Trent's penetration of the market.
In 1994, Severn Trent received a ten-year contract to provide an array of water and wastewater services to a quarter of Mexico City. Included in the project were the installation of 250,000 water meters, the development of customer billing services, and operation and maintenance of secondary water distribution and sewerage systems.
In Belgium, Severn Trent operated through its 20 percent interest in Aquafin, a designer and builder of sewers and wastewater treatment facilities whose influence was spreading throughout the northern part of the country. The Belgian arm of Biffa provided extensive waste management services. In addition, Severn Trent acquired Cotrans in 1994, through which the company entered the municipal contracts market, responsible for the collection of domestic and industrial waste. Severn Trent Water International also was actively pursuing interests in Germany, Puerto Rico, Swaziland, Mauritius, and India.
Severn Trent's post-privatization diversification program proved more successful than many such programs initiated by the other former water authorities. Expansion seemed likely and promising for the company. For the foreseeable future, however, the majority of Severn Trent's profits were expected to derive from its primary function as a U.K. supplier of water and wastewater services. In this area of its business, Severn Trent had been hounded by controversy. As a monopoly supplier of an essential utility, Severn Trent's position was in some ways an unenviable one: struggling to balance the sometimes conflicting needs of the environment, customers, and shareholders.
Nevertheless, in late 1994, the company announced that its operating performance and profits continued to improve and that it remained committed to achieving, in the words of Chairperson Ireland, 'the right balance between the interests of our shareholders and our customers.' Toward that end, the company allocated a total of £47.5 million for improving customer service and reducing the impact of tariffs on customers. As a result, Severn Trent's domestic customers received a £4 reduction in their bills during 1995--96. Moreover, a similar reduction was expected for 1996--97.
Into the 21st Century: Further Steps Toward Unregulated Business
As the year 2000 approached, the company continued its aggressive pursuit of new opportunities in the unregulated business arena, while striving to maintain its role as a leading water provider in the United Kingdom. At times, however, the effort to run a profitable water utility in England's tightly regulated market seemed like a losing battle. The severe drought that hit most of Europe in the summer of 1995 delivered yet another series of negative blows to Severn Trent's public image. The dry season exposed the weak infrastructures of the newly privatized English water companies, whose inefficient management practices and poorly maintained pipe networks resulted in continually unreliable service. The problem was exacerbated by the revelation that Severn Trent had seen big profits during this same period, further undermining the public's, as well as the government's, faith in the company.
Eventually The Office of Water Services decided to impose stricter control over the company's profitability. In November 1999 Ofwat issued a determination compelling Severn Trent to reduce customer costs by 14.1 percent in April 2000 and to implement additional reductions of one percent each of the following two years. In response to subsequent lost revenues, which were estimated to exceed £115 million the first year alone, the company felt obligated to carry out a radical restructuring of its regulated water business. Intent on cutting £52.5 million in costs, the company closed several plants and laid off 1,100 employees. Even after this streamlining, however, Severn Trent Water saw lower profits between the 1998--99 and 1999-2000 fiscal years, with an overall growth in sales of only 3.1 percent, by far the least aggressive of the company's various businesses. By contrast, Severn Trent Services experienced a sales increase of 63.4 percent during the same period, while Biffa's sales rose by 17.5 percent.
Toward decade's end, Severn Trent paid increasing attention to growth potential outside the water industry. In 1999-2000, the company's nonregulated divisions were responsible for 42 percent of total revenue and employed more than half of the Severn Trent workforce. The company made a number of key acquisitions during this period, the most significant of which was the purchase of UK Waste in June 2000, which made Biffa Waste Services the largest waste management concern in the United Kingdom. The company also added 24 new labs to Severn Trent Services in 2000, with the intent of becoming a major provider of lab analysis and onsite monitoring in the United States. At the same time the company introduced a new line of telecommunications products for small and medium-sized businesses, which it offered through Severn Trent Talks, in association with TCI; created Severn Trent Energy, a gas and electric utility division; and began marketing an innovative new water meter with no moving parts.
In spite of this apparent shift toward its unregulated interests, Severn Trent was determined to remain a leading water provider into the 21st century. Some favorable press in the late 1990s helped rebuild public confidence in the company. In September 1999 it was included in the Dow Jones Sustainable Group Index, and in 2000 the company received a top ranking in the Environment Index of Corporate Environmental Engagement. That same year, Severn Trent was the only water company in England invited to participate in the World Business Council for Sustainable Development. With the movement toward utility deregulation in other European countries Severn Trent began to recognize growth potential for its water business outside of its traditional territory, and in February 2000 it officially entered the Italian water market with the purchase of Ecotecnica.
Principal Subsidiaries: Severn Trent Water Ltd.; Biffa Waste Services Ltd.; Severn Trent Water International Ltd.; Severn Trent Industries Ltd.; Severn Trent Systems Ltd.; Severn Trent Services Inc. (U.S.); Stoner Associates (U.S.); Aquafin N.V. (Belgium; 20%); Severn Trent Property Ltd.; Charles Haswell and Partners Ltd.
Principal Competitors: Hyder PLC; Suez Lyonnaise des Eaux (France); United Utilities PLC.
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