Bill cuts feature high in fast-track draft determinations

Bill cuts headlined the draft determinations for companies fast tracked through the PR19 process, when Ofwat published them this morning.

South West Water customers stand to save the most by 2025, with the average bill falling by £77. United Utilities customers will save £49 and Severn Trent customers £16 (see table). In addition, the companies will substantially expand their financial support schemes for those who find it hard to pay, including through social tariffs.

Consumer Council for Water chief executive Tony Smith said, though: “Our research suggests Ofwat could still go slightly further in reducing bills, without eating into the essential investment Source; Ofwat

that every company in England and Wales has promised. Companies should also make clear what impact inflation and the regulatory rewards that customers pay for will have on their bills.”

Ofwat emphasised the price cuts had not come at the expense of investment. Senior director David Black said: “Our draft decisions for these companies show that investment in service and infrastructure can go hand in hand with more affordable bills.” The regulator explained: “By reducing the cost of capital and creating opportunities for companies to improve efficiency, we have opened the way for lower bills.”

Among the fast track draft determination highlights were:

Stretching customer service commitments

• ST will halve the time to fix significant customer reported leaks and reach upper quartile on sewer flooding.

• Ofwat said “South West Water leads the sector with its outcome performance commitment and incentives package.” This includes a 58% cut in pollution incidents and a 24% cut in internal sewer flooding.

• UU will reduce sewer floods by 22%, cut the number of customer receiving low pressure by 20%, and offer a wide range of flexible and payment support options.

Resilience

• ST - £107m on strategic water grid; 3hr+ supply interruptions down 66%; 96% of customers to be back on within 24hrs after a single failure event.

• SWW - Sewer collapses down 28%; 3hr+ interruptions down 61%; 27% fewer properties affected by unplanned supply interruptions.

• UU - £79m on Haweswater Aqueduct serving Manchester; 75% cut in duration of average supply interruption, c10% cut in sewer collapses and blockages.

• The DDs include £26m each for UU and ST to develop strategic water transfer options.

Innovation

All three plans demonstrate innovation. Ofwat highlighted a very recent development, that ST and UU are contributing members of the new World Water Innovation Fund alongside organisations from Australia, Brazil and the USA. The fund aims to develop innovative techniques and carry out new research and large-scale trials of new technologies. It will share and publish its findings, allowing customers all around the world to benefit.

Environment

• ST DDs include £419 million to deliver environmental obligations and another £102 million to ensure an adequate balance between water supply and demand.

• SWW DD includes £143 million and UU £622m to deliver environmental obligations.

Back in balance

• The fast track company DDs reflect Ofwat’s early view of cost of capital (3.4% CHPI /2.4% RPI) Other DDs will use an updated cost of capital.

• None of the companies forecast high gearing, but all have said they will share the benefits with customers if their gearing does exceed 70%.

• All dividend policies meet Ofwat’s expectations.

• “Each fast track company has taken steps that demonstrate its commitment to meet our expectations on performance-related executive pay.” ST committed to weight 51% of the annual incentive to customer, environment and health and safety delivery. SWW committed that 70% of the annual incentive will be based on customer delivery and UU said at least 60% of the annual incentive will be linked to customer delivery. All three committed to align the long term incentive to customer delivery.

Benefits sharing

• ST will donate 1% of its profits to a community fund for local schemes; fund hardship payments; and build a new technical academy.

• SWW will fund hardship payments and share c£20m of its outperformance on the embedded cost of debt over 2020-25.

• UU will spend £71m of its own money on financial assistance schemes over 2020-25 and match any shareholder distributions

with contributions to its community fund, if they are more than 2% above its base dividend.

The companies have until 24 May 2019 to make representations.