Utility Week

UTILITY Week 13th January 2017

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16 | 13TH - 19TH JANUARY 2017 | UTILITY WEEK Policy & Regulation Analysis B efore Christmas, Ofwat published its final determinations for the business retail price controls that will take effect from April 2017 until 2020. As part of these, the regulator rejected Anglian's request for a 31 per cent increase in cost allowances, say ing the company had "failed to provide suf ficient evidence" in support of it. Responding to Ofwat's dra determi nation, published in September last year, Anglian Water submitted further information in support of its PR16 proposal – which the regulator had previously rejected. The company said the generous increase to its cost allowance was needed for a num ber of reasons, including that general costs were above PR14 levels; that there were extra accommodation costs because of its use of separate buildings; that extra staff were needed to support separation of its retail and wholesale operations; and the costs of new IT systems. Ofwat senior director for Water 2020 David Black tells Utility Week: "I think [Anglian Water] felt that it had a better understanding of its costs now than it previously did and that is causing some shis in its costs." However, Anglian was rebuffed by the regulator, which stated in its final determi nation document: "We have decided that this information does not meet the eviden tial thresholds described in our statement of method and so we have decided to retain the PR14 caps used in its dra determination in its final determination." Black says the regulator was "concerned" that some of Anglian's costs related to prepa ration to compete in the national market, and would be more appropriately borne by a wider set of customers. "We judge on the evidence in front of us, and we were not suf ficiently persuaded by the evidence that was presented." Anglian Water argues that its business has "changed considerably since 2014. A spokesperson tells Utility Week: "We're dis appointed that Ofwat hasn't accepted our evidence on the difference in costs since they were estimated in 2014, given our busi ness has changed considerably since then in preparation for the opening of the market and our costs remain lower than the industry average." Anglian also proposed that the gross mar gin cap for customers consuming 5 to 50Ml a year should be 6.8 per cent, rather than the 5 per cent Ofwat proposed. The reason it gave was that it had extra costs from the opera tion of its maximum daily demand tariffs. However, the regulator said most incum bent had suggested gross margins of less than 3.5 per cent, and on this basis a 5 per cent gross margin cap (consistent with the highest proposal of the 16 other incumbent companies) "looks relatively generous". Twelve companies (including South West Water, which made separate proposals for the South West and Bournemouth areas) accepted Ofwat's dra determinations. This included a modification to South West Water's proposal for Bournemouth Water. Following the publication of the dra determinations, five companies submitted new evidence in support of their PR16 pro posals. Four of these were accepted, and Anglian alone was le disappointed. The company now has two months to consider its position. Its choices are limited: it can refer its determination to the Competition and Markets Authority if it wishes, but otherwise the controls will be in place from April 2017 until 2020. Anglian yet to settle All the incumbent water companies have now accepted Ofwat's final determinations for business retail price controls for 2017-20 – except Anglian Water. Lois Vallely reports. COMPANY FINAL GROSS MARGINS – WATER 5-50ML Source: Ofwat 8% 7% 6% 5% 4% 3% 2% 1% 0% GW % SWW BW WSX SSW TW SEW PW NW UU BRW AFW SW SW SES AW Note: no companies wholly or mainly in Wales are included because water supply less than 50ML a year is not contestable in Wales What is PR16? PR16 is a mid-period reset of retail price con- trols for business customers. The PR14 price review set prices for a five-year period and Ofwat indicated that it would review them prior to market opening. The business retail price controls set the total allowed revenue that a retailer can earn for a given customer type based on an allowed average cost per customer and a net margin, as well as forecasts of wholesale revenue and customer numbers in each year. "We said when we set the controls in PR14 that we wanted to give the opportunity to review them ahead of the opening of the mar- ket in April 2017, so that's what this process was about," says David Black, Ofwat senior director for Water 2020. Companies were asked whether they pro- posed to change their default tariffs, which are in place to protect customers until competition develops. "The default tariff is there as a back- stop to protect customers who are worse off as a result of market opening," says Black. However, Ofwat hopes these controls will be temporary. "We're hoping that as the market evolves we will see new lower tariffs offered by suppliers, as well as better service and new offers. These price controls are to protect cus- tomers, but we are expecting to see the market develop alongside this."

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