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Ofwat threat to water spend

WATER COMPANIES this week warned that spending on renewal projects risked being substantially cut if industry regulator Ofwat continued with its 'fundamentally flawed' system for capping their spending.

A report produced by Ove Arup and EC Harris for the water industry trade association Water UK, obtained exclusively by NCE this week, concludes that Ofwat's system of assessing water company spending fails in its main objective of improving industry efficiency.

Water UK's Jim Bostock claimed that this independent report - submitted to the regulator in December - proved that conclusions reached by Ofwat when ruling on industry costs and when capping expenditure were based on unrealistic assumptions.

'Companies were asked to give several hundred million pound cost estimates with virtually no information,' claimed Bostock. 'The implication is that companies will be required to reduce prices on the basis of random factors. The inevitable consequence is that the capital programme might be reduced.'

The Water UK claims surfaced this week after publication of Ofwat's analysis of water industry costs Capital works unit costs in the water industry. This report highlighted what Ofwat described as a 'wide range' in water company costs and showed 'significant scope' for improvements in efficiency of up to 18% in some areas.

It maintained that its assessment system based on unit costs for standard items of work by water firms - on which its whole structure of capping water company charges is based - has been shown to work effectively in the past and been an accurate measure of efficiency. Each firm's five year asset management plan - due to be submitted to the regulator in April - is assessed on the basis of benchmark figures, calculated using the lowest of the each company's unit costs, and taken to represent the most efficient work practice.

Ofwat assistant director Bill Emery insisted: 'We believe this is a reasonable way to assess individual company plans'. He added: 'It is difficult to compare and contrast standard costs. But for regulatory purposes it is an effective tool to address how you get value for money.'

In the Arup/Harris study, Ofwat's methodology is scrutinised by comparing the unit cost data from eight water companies in 19 of Ofwat's 112 standard cost categories. It concludes that Ofwat's comparison of standard costs was flawed because:

variations in standard costs reflect assumptions when calculating standard unit costs rather than efficiencies

standardised costs are not representative of the size or scope of actual work

low costs may reflect favourable circumstances rather than greater efficiency

there is poor communication and understanding between parties.

But Emery claimed that all the points raised by the Arup/EC Harris study were addressed in Ofwat's latest report. He also insisted that there was a direct correlation between the efficiency of companies in 1994 and the extent of reductions in costs made since.

Emery also claimed that the Arup/Harris study did not take account of work carried out by Ofwat consultant Babtie since June. 'I think [the Arup/Harris] study does address the inconsistencies between companies,' he said. 'But we spotted these in June and have made improvements.'

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