Utility Week

Utility Week 6th December

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Page 13 of 31

Policy & Regulation Analysis In search of 'enhanced' status Now that water companies have finished their business plans for 2015-20, Ofwat must knuckle down to the painstaking analysis. Ellen Bennett and Conor McGlone assess the plans' headlines. P R14, the much-trumpeted price review for the water companies' 2015-20 cycle, was intended to transform the regulatory culture. Putting the onus on companies to prove their business plans rather than provide its own metrics, Ofwat wanted to put an end to the "box ticking" culture. It also championed the customer agenda, requiring water companies to set up customer challenge groups to provide their own assessments of business plans. This Monday morning, the long lead-up was over. As water companies pressed the "send" button, and many trumpeted their bill freezes or cuts with a slew of press releases, staff at Ofwat and its "delivery partner" PwC knuckled down to months of painstaking analysis. The regulator is now effectively in purdah until 30 April, when it will announce which companies have achieved the coveted "enhanced" status. Ofwat's agenda to cut bills and boost consumer input could not have been better timed. Chairman Jonson Cox's speech in March challenging companies to pass gains back to customers looks remarkably prescient in light of political events later in the year. Following the Labour party conference in September, the "cost of living" has been firmly at the centre of national debate, and while energy suppliers are today's bad guys, water companies are increasingly coming under the same scrutiny. Indeed, Labour's shadow environment secretary, Maria Eagles, took the affordability fight to the water sector just last week with the announcement of a proposed amendment to the Water Bill making social tariffs compulsory. To their credit, most water companies seem to have taken the regulatory and political agenda fully on board. Perhaps forewarned by the onslaught of outrage that energy suppliers currently face, they have been quick to announce price rises in line with or below inflation, while some have gone further, offering to forgo price rises that have already been approved by the regulator for 2014. And so to the headlines. Most companies proposed price rises below or in line with 14 | 6th - 12th December 2013 | UTILITY WEEK inflation, including Welsh Water, United Utilities, Southern Water, Northumbrian Water, Anglian Water, South West Water, Severn Trent, Wessex Water, and Yorkshire Water. Several companies have promised to introduce social tariffs, including Thames Water, which has brought its forward a year to 2014; Southern Water, which plans to introduce one "as soon as possible" after 2015; Anglian and Northumbrian; and Severn Trent, which has said it will "strengthen its existing wide range of social tariffs". Given the robust half-year results announced by three water firms last week, these measures seem prudent. South West Water, owned by Pennon Group, cushioned news of its 8 per cent rise in profit to £86 million with a promise to freeze prices until 2015. Some companies, however, seem less enthusiastic in their embrace of Ofwat's agenda. Severn Trent risked the regulator's ire with its announcement of a 6 per cent increase in dividends last week, despite a 6 per cent fall in profit to £141 million. However, its proposed 2015 tariff freeze and subsequent below-inflation price rises may go some way to mollify the regulator. Thames, on the other hand, faces heavy scrutiny of its proposal to hike prices by £8 a year over five years, to pay for the Thames Tideway tunnel, when it posted profits up 19 per cent to £134 million in the six months to September 2013. Even those companies that have proposed keeping price rises below inflation may not have gone far enough for Ofwat. The regulator has said that it hopes for business plans based on an average Wacc (weighted average cost of capital) in the 3 per cent bracket. Those companies that told Utility Week their proposed Wacc on Monday were all in the 4 per cent bracket: Thames, 4 per cent; Severn Trent, 4.2 per cent; South West Water, 4.2 per cent; United Utilities, 4.3 per cent; Welsh Water, 4.5 per cent. If Ofwat cuts the assumed Wacc, as seems likely given its former comments, then it pass these savings passed on to customers, quite possibly significant cuts in real terms. In this vein, the industry's consumer watchdog, the Consumer Council for Water, said the business plans were "a good start" and "we now need Ofwat as economic regulator to scrutinise companies' costs to ensure that all customers are getting the best possible deal and that future water company profits will not be excessive." Water companies have seized the affordability agenda this week, making a virtue out of necessity. But whether that will be enough for the regulator remains to be seen. THE WATER BILL Running in tandem with the PR14 process is the Water Bill, which had its second reading in the House of Commons last week. A damp squib if ever there was one, the Bill finally got interesting when shadow environment secretary Maria Eagles announced that she would be seeking an amendment to make social tariffs compulsory. Eagles said her proposal to make social tariffs compulsory would end the current "postcode lottery whereby companies choose whether to offer a social tariff". However, this week's PR14 business plan submissions seem to show water companies are already on board. Currently, three companies offer social tariffs – but at least five more have outlined plans to introduce them in the next 24 months, including the UK's largest water company, Thames. According to Conservative MP Anne McIntosh, chair of the Efra committee, the government is also set to introduce measures that would allow water companies to access information on customers who receive benefits, making it easier for them to target social tariffs at those in need. The one real change in the Water Bill is the introduction of competition for non-domestic customers – but even that is less than drastic. In the words of the new water minister, Dan Rogerson, it represents "evolution, rather than a radical overhaul."

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