25/09/09
Short-term decision-making on prices could affect service quality and be a poor bargain for customers, says Water UK in response to Ofwat's 'Future water and sewerage charges 2010-15, Draft determinations'.
The industry is concerned that proposals to cut company plans and reduce bills will prove a false economy.
Unless Ofwat thinks again, the draft determinations will:
• put at risk capital expenditure needed for the sustainability of water services;
• delay service improvements consumers have requested and expect to be delivered;
• reduce investors' confidence in the financial stability of the sector leading to higher prices in the medium-term; and in consequence
• provide a poor bargain for customers and society.
Sustainability at risk
Water company business plans for 2010-2015 are the first steps in investment programmes which must look a generation ahead to meet the core priorities of consumers and businesses - reliable, high quality drinking water and failsafe wastewater services. The importance of the plans is growing all the time along with awareness of the threat from dangerous climate change.
Water UK is disappointed that in its treatment of capital expenditure Ofwat has abandoned the 25-year Strategic Direction Statements companies were required to develop as preparation for the price review. At the heart of the Statements, and the business plans, is sustainability - of the water service itself, the economy and quality of life it enables, and the environment on which everything depends.
Improvements delayed or cancelled
In return for a small cost saving compared with the current bill (£14 on the average bill in 2015) Ofwat inexplicably offers customers cuts in planned improvements which everyone accepts are urgently needed:
• fewer properties escape the nightmare of sewer flooding;
• reductions in meter installation even where water is scarce and companies face the challenge of population growth; and
• cuts in leakage control that defy public and customer expectation.
Ofwat has not recognised that companies have made every effort to consult and engage customers and to cut down their plans to reflect current economic realities.
Investor confidence shaken
Everyone accepts that delivering sustainabilty requires continuing investment at a high level. But the draft determinations put financial stability at risk by setting aside the long-term in favour of a short-term approach to prices.
In particular, Ofwat appears to be taking risks with equity investors, at a time when markets are volatile and investors are looking at water in a global context. An independent survey to be published shortly highlights falling market confidence in a sector and a regulator that until recently had commanded a high level of trust.
The weighted average cost of capital set by Ofwat is very low, but the actual returns allowed to companies are even lower. This has two linked outcomes: it leaves little scope for companies to out-perform the regulator's assumptions in the joint interests of customers and shareholders and, by so doing, destroys incentives to invest and innovate.
Water regulation
On the evidence of the draft determinations, Water UK has real concerns about the framework and direction of water regulation.
Ofwat's objectives are worthy, but implementation falls short. The regulator's approach is weighed down by demands for more and more data, lacks transparency and consistency and has lost sight of need for balanced incentives.
In its final determinations in November Ofwat has a chance to get back to the priorities of sustainability, incentive-based regulation, and a balance of risk and return that ensures a flow of capital into the sector at economic rates.
Water UK response to Ofwat's 'Future water and sewerage charges 2010-15, Draft determinations'
For more information please contact:
Water UK Communication
020 7344 1809 (out of hours 07833 450544)
Notes
The response is made by Water UK in representing the views of the 22 statutory water supply and sewerage companies in England and Wales. The water industry is firmly behind this response.
