Utility Week

Uberflip 15 11 13

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Comment Utility Week expert view Karma Ockenden "Spending to protect and enhance the water environment would be the likely casualty of political pressure to drive down water bills." W hen Ofwat last week threw out Thames Water's application to increase 2014/15 prices by 8 per cent, it surprised no-one. It was more surprising that Thames bothered to appeal against Ofwat's October draft decision on the matter at all. The draft response itself was a blunt rebuff. And then Ofwat upped the ante with a consultation on whether Thames had in fact benefited from wider economic circumstances beyond its control, and whether Ofwat could deduct these gains via the "substantial favourable effect" mechanism. That consultation also closed last week. Thames may yet feel grateful for the small mercy of the 1.4 per cent above inflation price hike for 2014/15 allowed at PR09. Industry watchers may well wonder why the capital's water company chose to walk into this particular brick wall, particularly because it wouldn't have done wonders for regulatory relations (or indeed 2015-20 price package consultation with customer representatives), just three weeks before the submission date for PR14 business plans. Whatever the reason, Ofwat's "takingno-prisoners" response should be viewed as the latest of a growing number of flashing neon signs pointing to an uncompromising 2014 price review. In the past couple of weeks we've had a few unusual interventions – words-in-the-ear of water companies, if you like. Regarding prices in 2014/15 specifically, Ofwat chairman Jonson Cox has written to incumbents asking them to consider whether they need to increase their bills next year by the full amounts set in the last price review, given the hard economic times. Environment secretary Owen Paterson has also, interestingly, stressed that these are tough times and has told companies to ensure customers get a fair deal. Separately, Ofwat's chief regulation officer, Sonia Brown, has pressed the case for 2014 business plans to do the very best they can for customers. Few would dispute the fact that low interest rates and cheap debt will exert downward pressure on bills after 2015. Brown talks specifically of such matters, and of the scope for efficiency savings, in her message to companies. But there is a definite and growing sense that, politically, even greater downward pressure on prices would be smiled upon. Ratings agency Moody's has caught wind of the same. It says there have been no deal-breakers yet – the Paterson initiative stopped short of government interference with the independent economic regulation of the sector by Ofwat. But it cautions: "However, if political pressure were to result in Ofwat departing from its established price- setting methodologies and the outcome of the 2014 price review were politically driven, we would view this as a clear credit negative for the sector." Ofwat has talked openly about the scope for bill reductions in the next five-year period. Should the political appetite to extend this scope beyond what is possible through efficiency improvements, cheaper financing and the like gather pace, something would have to give. The water bill balancing act has three key components: affordability, security of (high quality) supply and environmental safeguards. If the scales tip in favour of affordability, it is unthinkable that security of supply would be allowed to suffer. Aside from business-as-usual customer expectations, there is currently pressure for the Water Bill to up its game on resilience in light of climate change. Writing in Utility Week a couple of weeks ago, Environment, Food and Rural Affairs Select Committee chair Anne McIntosh, for example, said of the Bill: "More urgency is needed to push through changes that will improve resilience and flood protection." So that leaves the environment. Spending to protect and enhance the water environment would be the likely casualty of political pressure to drive down water bills. (It is the same story in energy. "Green levies" have quickly found their way into the line of fire as the government desperately seeks quick fixes for high energy prices). Severn Trent for one seems to have clocked this. In a report out last week (it was a busy week), the company tries to steer a course on this issue by suggesting how environmental legislation – particularly the Water Framework Directive – can be squared with affordability. It praises water bill-derived investment in the environment to date and says this should continue but at an appropriate pace and scale. For example, it argues investment in the poorest quality rivers should be prioritised. Realistic contributions to the debate such as this are to be welcomed. True, it would be better for the government to set its sights on helping people who struggle to pay their water bills and leave those who can pay to continue paying at a level that allows environmental legislation to be implemented as envisaged. But if that's not going to happen, if green spending is the only thing it will be politically acceptable to curtail to ensure bills are cheaper for all, companies – which have consulted with consumers as part of the PR14 process – and customer representatives must speak up. Better for the cost cutting to be in tune with customer priorities for the environment than based on arbitrary political whims. UTILITY WEEK | 15th - 21st November 2013 | 7

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