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