Utility Week

16 | 2ND - 8TH AUGUST 2019 | UTILITY WEEK Policy & Regulation Analysis T he challenges currently faced by the water sector represent "the biggest since the early days of privatisation". This is the view of Ofwat chairman Jonson Cox, summing up the background to the regu- lator's dra• determinations on water company business plans for the 2020-25 period. In a speech to the City, he went on to clarify that the sector was facing pressures that were multifaceted, covering societal, operational and political upheaval. Water company bosses listening to his speech may have added "regulatory" to this list, given the demands set out by Ofwat over the next five years, set against its expecta- tions on resources available to achieve them. Cox is aware of the criticism and in his PR19 speech he referenced being "taken apart in the coffee area" about the level of challenge to the cost base. But he defended the regulator's role in driving standards and efficiency and insisted "it would not be in the interests of the sector if the independent regulator took on the role of being its cheer- leader". He said that if water companies rose to Ofwat's challenge it would help "secure trust and move reputation forward". But in four cases in particular, that chal- lenge remains a considerable one. Signifi- cant differences of opinion remain between Ofwat and Anglian, SES, Thames and York- shire over base costs. While the regulator praised Thames for shi•ing its position between January and April, a £580 million gap still needs to be closed. Speaking to Utility Week following the publication of the dra• determinations, Ofwat's senior director of Water 2020, David Black, said that while there had been general acceptance on performance delivery, costs had become a sticking point in some cases. He said: "A lot of companies didn't shi• much on cost. There was a reluctance to challenge themselves on cost efficiencies, whereas there was pretty broad agreement on performance delivery, particularly around leakage and supply interruptions." This is no small feat given the ambition of the targets set out in Ofwat's vision for the next five years. Supply interruptions are due to fall by 64 per cent and the leakage reduction target has been extended from 15 to 17 per cent. The plan also sets out a requirement to help almost 1.5 million customers who are strug- gling to pay their bills, and to add two million customers to the priority services register. Ofwat has allowed companies £49 billion for both "business as usual" services and new investment – plus an extra £12 billion on protecting the environment and services for their customers. The sector has also been set with a chal- lenge of cutting customer bills by 12 per cent beyond inflation. What Ofwat has set out is certainly ambi- tious, but Black defended Ofwat's message of doing more with less, saying: "The targets have been calibrated by looking at histori- cal performance so we are confident they are achievable by well-managed companies." In terms of specific reduction targets, Black cited the example of the supply interruptions goal, which he said had been inspired by the performance of leading companies: "Some are really proactive and looking far ahead so giving us 2030 and 2035 targets as well. Those give us confidence that reductions can be made. The best performing over the past four years have achieved a 50 per cent reduction." Cox reiterated the theme when discussing his coffee break assailant, saying that while he was challenged on a 16 per cent cost gap between Ofwat's view and that of the com- pany, this missed the point that Ofwat was allowing that company 15 per cent more from next April, compared with the current spend. For those companies requiring further work on their business plans, the clock is ticking – with representations due at the end of August. Ofwat will publish final determi- nations for all companies on 11 December and then water companies have until 11 Feb- ruary to decide whether to accept their final determination or request an appeal to the Competition and Markets Authority. Water's 'biggest challenge' Ofwat has ramped up the pressure in its much-anticipated draft determinations on water company business plans for the 2020-25 period. James Wallin examines some of the toughest targets. Moody's: PR19 presents more challenges than opportunities Moody's has said it will maintain a negative rating outlook on UK water companies until the PR19 process is complete. Stefanie Voelz, a vice-president at the ratings agency, said PR19 presented "more challenges than opportunities for companies from a credit perspective". These include the squeeze on returns proposed by Ofwat, which will put pressure on those companies with relatively high debt costs, she said. And overall, she said Moody's will maintain its existing negative outlook on the sector until the PR19 process has concluded next year and companies have had the opportunity to appeal to the Competition and Markets Authority (CMA) against their final determination. She said: "We're going to keep a negative outlook for a little while longer because the draŒ determination might not give sufficient clarity about where companies are going. We will probably want to see the final determination or wait for companies to decide whether they want to go to the CMA." SLOW TRACK AND SIGNIFICANT SCRUTINY COMPANIES' AVERAGE BILL REDUCTIONS*: COMPANY CHANGE Anglian 12% Dwr Cymru 14% Hafren Dyfrdwy 2% Northumbrian 26% Southern 14% Thames 10% Wessex 15% Yorkshire 10% Affinity 12% Bristol 16% Portsmouth 12% SES 15% South East 10% South Staffs 17% *in real terms. Fast track companies (without updates to cost of capital): Severn Trent -5%, South West -14%, United Utilities -11%

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