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16 | 9Th - 15Th JanUarY 2015 | UTILITY WEEK Policy & Regulation Analysis O n 12 December, Ofwat – with great fan- fare – published its end-of-year spec- tacular: its PR14 final determinations. This marked the end of the first price review under the regulator's radically differ- ent approach, where customer consultation formed a central part of drawing up the busi- ness plans. The upshot for consumers: bills set to fall by 5 per cent in real terms. Waterwise managing director Jacob Tomp- kins says that with the final determinations, Ofwat has done "a good job for the environ- ment, a good job for investment, a good job for customers, and the City is happy". However, Ofwat has been tough on the companies and is eager to drive efficiencies in the industry. The fact that the weighted average cost of capital (Wacc), which stood at 5.1 per cent for PR09, was initially to be slashed to 3.85 per cent, before finally being trimmed to 3.74 per cent, is one example of the regulator's relentless cost-cutting focus. United Utilities and Thames Water are prime examples of how this new regime – with a focus on total expenditure rather than the dual silos of capital expenditure and operational expenditure – has worked. United Utilities faced a gap of £1 billion between its business plan and Ofwat's dra determination in August. Through a process of concession, compromise and cutback, this was reduced to a "relatively small" £179 million. But despite this "manageable" gap, RBC Capital analyst Maurice Choy says the price review "revealed a few things about its cost efficiency" and that United Utilities is "not as cost efficient as the rest of the sector". Choy adds that alongside the £370 million totex cut United Utilities imposed on itself and the £300 million in additional expendi- ture allowed by the regulator, part of the sav- ings have been engineered by pushing capex into AMP7. Thames Water, another significant outlier when the dra determinations came out, has worked with Ofwat to form something that resembles a workable business plan for the next five years. There are still disagreements – most prominently around the £93.2 million to cover bad debt. The water companies – other than those with enhanced status – have remained tight-lipped about the final determinations, although the relentless squeeze must be painful. Some are suffering more than oth- ers. Namely Bristol Water. The water-only company was the third significant outlier in August but, unlike United Utilities and Thames Water, has been unable to appease shareholders and the regulator. "Signifi- cant material differences" remain between the revised business plan and Ofwat's final determination. A £132 million difference. Ofwat's chief regulation officer, Sonia Brown, tells Utility Week that Bristol Water needs "a wide range of further efficiencies" otherwise the company's shareholders "will be exposed to additional cost". In its initial response, Bristol Water said it would analyse "in detail" the final determi- nation "before deciding whether it is in the best interests of our customers and stake- holders to accept". It added that it is "very confident" in its business plan and 92 per cent of households it surveyed said the plan was acceptable or very acceptable. This is why analysts view Bristol Water as the most likely company to challenge the final determination, although we will know by 12 February if it – or indeed any other water companies – will refer the final deter- mination to the Competition and Markets Authority. The big winners are Affinity Water and South West Water – which are benefit- ting from the 'do no harm' principle Ofwat adopted for enhanced status companies. Not only did they have a headstart with their AMP6 preparations, but they have avoided a cut in the Wacc and will benefit from the 3.85 per cent rate. As PR14 moves into AMP6 and business PR14: the winners and losers As Ofwat completes its latest price review, which companies have met the regulator's demands and which still have work to do? And will it lead to a better deal for consumers? Mathew Beech reports. Final determinations – the consumer view The price review has been a long and challenging journey, but Ofwat's final determinations should be seen as a landmark vic- tory in placing the customer's voice at the very heart of the water industry. This has been the most customer-driven price review since privatisation and Ofwat's final decisions are saturated in the views and influence of customers, delivered through the role of CCWater and customer challenge groups. Over the next five years, most households will see their bill fall before inflation, with water companies committed to deliver- ing many of the service improvements their customers have demanded – something we will monitor closely to ensure they deliver. But while that is good news for many, the industry cannot afford to ignore the impact of inflation, which is the most significant caveat to what has been a successful price-setting process for customers. Adding inflation will mean that most customers still end up paying slightly more in cash terms than they do now. That will only intensify the pressure on those customers who are already in debt or struggling to pay their water bill. Thames Water cus- tomers also face the prospect of a future increase to their bill to help fund construction of the Thames Tideway Tunnel. That's why we will sustain our pressure on water companies to ensure they deliver the assistance schemes they have committed to, such as social tariffs, to help vulnerable customers. If the water industry can meet this challenge and keep customers at the heart of future price reviews, then the legacy of PR14 should be one we can all be proud of. Tony Smith, chief executive, Consumer Council for Water