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Water UK response to NAO report

The water industry has worked closely with the NAO over many months and provided a range of figures and information to assist their review of regulation in the sector. Such reviews are important to ensure that customers, Government, the regulator and the water industry itself get the best out of our vital water and wastewater suppliers and their services.

The NAO has been looking at the fifth regulatory periodic review, conducted by Ofwat in 2009, for the period 2010 to 2015, which saw some turbulent economic conditions and volatile financial markets. We have since moved on significantly with the sixth periodic review having been conducted in 2014, when Ofwat took the results of previous predictions into account in making their determinations for the 2015-2020 period.

As a result, over the next 5 years customers will see:

• a 5% average drop in water bills,
• one million more people receiving assistance through schemes to help them paying their bills
• £44 billion of investment to improve services, improve resilience and improve the environment
• the industry pressing for customers having an even greater say in the setting of prices in the future.

In conducting any regulatory review both Ofwat and water companies have to make estimates of the costs over the next five years for future plans to provide services to customers as well as the costs of investment in maintenance and new capital projects.

The NAO, on the other hand, has the benefit of using the actual figures for income and expenditure and these will inevitably find some variations from the earlier predictions. The results could be expected to be the similar if this process were applied to any company or industry sector.

Overall, the report contains no real surprises. Many of the recommendations are on things that we are already discussing with Ofwat as part of their Water 2020 process for reviewing the regulation of the sector in advance of the next price review in 2019. We look forward to continuing to discuss them with Ofwat and other stakeholders through this process.

Note to editors

• Since privatisation in 1989, Ofwat, the water industry regulator, has conducted 6 price reviews, the most recent was in 2014 for the current price period 2015-2020.
• The package of measures from this review includes a 5% average drop in water prices of the next 5 years; 1 million more people receiving assistance through schemes to help them with paying their bill; and £44 billion of investment in improving services, resilience and protecting the environment.
• The NAO report, published on 14 October 2015, relates to the 5th price review, some 6 years ago, back in 2009, for the period 2010-2015.
• This particular price review set a package of measures at a time of financial crisis and uncertain economic climate, making accurate forward projections extremely difficult and challenging, both for Ofwat and water companies.
• Between 2010 and 2015 there were several changes to policy, such as the carbon reduction commitment, and to the ownership of private sewers, as well as changes to tax rates and allowances.
• In reaching its determination, Ofwat takes a forward look at company plans for efficiencies, investment and prices as well as a retrospective assessment of their actual performance and the financial climate in which they have operated.
• As part of accepting the regulatory package, water companies take the risk of costs rising, as well as falling, in the knowledge that unplanned or unexpected gains or losses will be taken into account at the next regulatory review.
• Water companies enjoyed lower than predicted costs of borrowing to finance the multi-billion pounds of investment projects during the period 2010-2015. This enabled companies to increase investment on customer priorities, not put up prices as much as they were allowed, while also increasing assistance to customers who were facing financial hardship.
• CCWater, the independent statutory consumer body for the water sector, identified that over the same period companies had provided over £1 billion of additional benefits, including additional investment into the areas which matter most to customers, such as reducing the risk of sewer flooding, improving resilience and reducing leakage.
• Moody’s recent report on the outlook for the water sector identified financial returns over the 2010-2015 review period were in line with Ofwat’s assumptions. This has also been acknowledged by the NAO.

Water UK Communication
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