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Water report: Cashing in on AMP5

Negotiations are underway for the next round of water company price increases in England and Wales. Jackie Whitelaw asks what are the key issues for the companies?

Talking to a selection of senior executives at the English and Welsh water companies you get the feeling that AMP5 - the asset management plan period which runs between 2010 and 2015 - is being approached as an exciting, reinvigorating challenge.

After four AMPs focused purely on creating work programmes to meet environmental quality requirements, the next is posing some tricky questions that will demand innovative responses from the companies and from water industry regulator Ofwat.

The companies still have environmental quality targets to meet and Ofwat allows them to raise money from customers to fund spending on this. But in the last few years the rules of the environmental game have changed significantly. Water quality used to be everything but with the introduction of the Carbon Reduction Commitment in 2010 which obliges public bodies to reduce their carbon emissions, and by default their energy use, there’s a balance to be struck around the aquatic and atmospheric environments.

Yes, companies could do, and customers could fund, new work to clean water courses and supply still further. But that could in turn be an energy intensive and carbon polluting process and could force the companies to start buying expensive carbon credits that would impact on their ability to either fund the work or keep their prices down. At the same time, other climate changeissues are coming into play.

The Pitt Review following last summer’s floods is demanding that water and sewerage assets are adequately protected against surface water flooding - which makes good sense but again will be pricey and will add another dimension to discussions with the regulator.

The businesses are interested in sourcing their energy from renewables and in fact creating renewable energy of their own, either by building renewable supplies on their sites or reusing byproducts from the treatment process. But at the moment that sort of innovation is not accepted by Ofwat as being part of the Periodic Review 09 process that leads to the AMP5 price determination next year.

Customers and their willingness to pay for all these exciting new developments are the big preoccupation however. With families facing huge rises in energy and mortgage bills and a shaky economic climate it is going to be hard to sell “nice to have” environmental ideals if they require significant increases in water bills.

The water companies are not prepared to be painted as the bad guys if bills do rocket because of regulatory or legislative requirements and in fact are setting out their stall as champions of the customer.

There are interesting times and debates ahead.

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