ofwat – protecting consumers, promoting value and safeguarding the future ofwat city briefing 11...
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Ofwat – Protecting consumers, promoting value and safeguarding the future
Ofwat City briefing11 November 2008
Introduction
Ofwat – Protecting consumers, promoting value and safeguarding the future
Company performance – levels of service and finance
Draft business plans
Development of regulatory regime
Summer 2007 floods highlighted challenges
Current performance
Ofwat – Protecting consumers, promoting value and safeguarding the future
Leakage targets met for first time
Consumer complaints rising
Capital investment in 2007-08 – £4.9 billion
Overall investment still 9% below expectations
Capital maintenance 5% above expectations
Increased investment and improved management has led to better serviceability
Current performance – expenditure
Ofwat – Protecting consumers, promoting value and safeguarding the future
2007-08 operating profits greater than in 2006-07
2007-08 pre-tax return on capital 6.5%(2006-07: 6.4%)
Companies have maintained financial indicators consistent with investment grade credit rating
Rest of AMP4 expenditure is prefunded
Current performance – financial
Ofwat – Protecting consumers, promoting value and safeguarding the future
Severn Trent paid penalty to Exchequer of £35.8m. Additional £2m for SFO findings
Tendring Hundred fined £42k for misreporting measured income accrual
Unable to fine Three Valleys for deliberate misreporting – company committing £2.5m to a charitable trust
Financial penalties place incentive on companies to comply. We will consult on our approach to enforcement
Current performance – enforcement
Ofwat – Protecting consumers, promoting value and safeguarding the future
Draft determination announced 5 November
Our view is that price limits should not change
Company could have done more to manage impacts
Company still able to finance its functions
Sutton & East Surrey substantial effect
Ofwat – Protecting consumers, promoting value and safeguarding the future
Draft business plans – price limit proposals
Ofwat – Protecting consumers, promoting value and safeguarding the future
Industry average annual K +2.4WASC range +0.5 to +4.6
Industry average first year K (2010-11) +4.5WASC range -2.2 to +14.8
Ofwat – Protecting consumers, promoting value and safeguarding the future
Company proposals show bills rising by about £29 over five years (on top of inflation)
Some proposed unmeasured bills reach very high levels in 2015
Draft business plans – bill proposals
Draft business plans – bill proposals
Ofwat – Protecting consumers, promoting value and safeguarding the future
Draft business plans – operating expenditure
Ofwat – Protecting consumers, promoting value and safeguarding the future
Proposals would add around £12 to bills for 2010-15
Draft business plans – capital expenditure
Ofwat – Protecting consumers, promoting value and safeguarding the future
Proposals would add around £58 to bills for 2010-15
Draft business plans – finance
Ofwat – Protecting consumers, promoting value and safeguarding the future
Cost of capital assumptions would reduce average bills by around £12 over 2010-15
Industry might need to raise c£17bn (£5bn Thames) – we will challenge this
Companies’ views on the cost of capital (fully post-tax):
Water and sewerage companies: 4.6 – 4.9Water only companies: 4.9 – 5.7
Investor views on risk relative to water and sewerage
Ofwat – Protecting consumers, promoting value and safeguarding the future
Other regulators’ vanilla WACC assessments
Ofwat – Protecting consumers, promoting value and safeguarding the future
NB CC recommendation to CAA (Stansted) from analyst report
Financing functions
Ofwat – Protecting consumers, promoting value and safeguarding the future
“Credit crunch versus the price control is fortuitous”
“The market sees the upcoming UK water regulatory review as a significant negative risk to the sector”
Ofwat will not give its view of the cost of capital until draft determinations in July 2009
Developing the regulatory regime
Ofwat – Protecting consumers, promoting value and safeguarding the future
Regulation has delivered a lot: approximately £75 billion invested, leakage reduced by more than a third, bills a third lower
Future challenges: Climate changeMore single householdsIncreasing consumer expectations
Need improved regulation and effective market mechanisms
Cave review and Floods and Water Bill
Useful documents
Ofwat – Protecting consumers, promoting value and safeguarding the future
Setting price limits for 2010-15: overview of companies’ draft business planswww.ofwat.gov.uk/aptrix/ofwat/publish.nsf/AttachmentsByTitle/sub_bpd_pr09summary.pdf/$FILE/sub_bpd_pr09summary.pdf
Financial performance and expenditure of the water companies in England and Wales 2007-08www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/Content/rpt_fpr_2007-08
Service and delivery – performance of the water companies in England and Wales 2007-08www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/Content/rpt_los_2007-08