Water regulator Ofwat’s final determination on business plans for water and sewerage companies in England and Wales for 2010-2015, published today, sees tough limits imposed on how much they will be able to charge but has earmarked £22bn for capital investment.
The price limits set increase by an average of 0.5% a year before inflation. They will lead to average household bills falling just below today’s levels by £3 in real terms over the period to 2015. The average bill at the end of that period (2014-15) will be £340, compared to £343 at the end of the current period (2009-10).
This compares with an increase of £31 that the companies proposed in their business plans − an increase of 9%.
According to Ofwat, price limits allow for a capital investment programme of more than £22bn − a 7% increase on the present − which is a significant programme and is higher than any previous five-year period.
“This determination is balanced. It is fair for customers but it is also fair for companies and their investors.”
Regina Finn, Ofwat
The figure is £1.3bn higher than the draft determination set in July. “Between the draft determinations and final determinations we have included some specific costs for some specific schemes,” said Ofwat chief executive officer Regina Finn. “For this increase we expect more outputs.”
Finn said the best managers would focus on “managing the water and sewage assets better” and “reap the rewards for the companies”.
The cost of capital remains unchanged at 4.5% fully post tax real. Finn said a universal cost of capital despite companies’ differing capital expenditures provides the incentive for “the best of the best” to outperform.
Finn said that improved evidence and clarification of business plans were among the factors in changes from July’s draft determinations to today’s final ones.
Water companies are expected to take some days to fully assess the impact of the determination on investment plans. However, South West Water has already admitted the determination will leave a funding gap.
“We believe our Business Plan achieved a good balance between safeguarding our achievements over the last 20 years and keeping customer bills stable,” said South West Water chief executive Chris Loughlin.
“It is inevitable that we will have to make some far-reaching decisions, but protecting service levels for our customers remains a key priority.”
Chris Loughlin, South West Water
“We still need time to examine Ofwat’s determination and understand all its implications for our business, customers and suppliers. However, this leaves around a £50M funding gap in our investment plans, so it is inevitable that we will have to make some far-reaching decisions, but protecting service levels for our customers remains a key priority.”
ICE director general Tom Foulkes said the £22bn capital expenditure would be vital. “The £22bn earmarked for upgrading the water network is good news but with years of under-spend our assets are already stretched to their maximum capacity and the network is brittle,” said Foulkes.
“Water companies will need to invest heavily in maintaining, upgrading and building new infrastructure in coming years if we are to meet growing demand, while always ensuring best value for the consumer.
“We have seen what happens when key infrastructure fails over the last few days, with hundreds of people without water or power in Cumbria. It is a timely reminder that we must invest in making our critical utilities as resilient as possible, ensuring there is spare capacity when it is most needed.”
Finn identified three major future challenges for water companies:
- Climate change
- Increasing population
- New environmental standards
Water is a scarce resource that must be managed, she said, and Ofwat are keen to “drive sustainable behaviour and sustainable decisions”.
Finn said the final determinations are built on the success of the past, and that Ofwat’s approach would place it well to face the challenges of the next five years. “This determination is balanced. It is fair for customers but it is also fair for companies and their investors,” she said. “It puts us in a very fortunate position to face those challenges.”
“This is quite a low risk industry and this balanced approach that we have adopted lowers that risk even more.”