Ofwat flags base expenditure gaps at four firms ahead of PR19 draft determinations

In an unusual move just two weeks before draft determinations are due, Ofwat wrote to four water companies last week expressing “substantial concerns” about their April business plan resubmission proposals on base expenditure.

Senior director, David Black (pictured) challenged Anglian Water, Thames Water, Yorkshire Water and SES Water, identifying a “significant gap” between his view of efficient costs and the company view, as follows:

• Anglian – a 16% gap for each of water and wastewater costs

• SES – a 29% gap for retail costs

• Thames – 11% gap water costs and 14% gap for retail costs

• Yorkshire – a 16% gap for wastewater costs.

Black commented: “We said we would scrutinise each and every plan in detail to ensure they are robust enough to deliver a high quality, affordable and resilient service to customers in the next five years and beyond. We are disappointed that revised proposals from Anglian Water, SES Water, Thames Water and Yorkshire Water have not yet risen to the challenge we have set them. For this reason, we have taken the step of writing to these four companies now to allow them additional time to reconsider and ensure they are in the best interests of customers.”

Black said Ofwat would not discuss this further until draft determinations are published on 18 July, but “we expect this issue to form part of the consultation process after that date”.

The letters did not deal with enhancement expenditure.

Moody’s commented: “Although Ofwat has told the companies that they need to take ‘urgent action to address the efficiency challenge on base costs,’ the persistent gap increases the risk that cost allowances will be insufficient to cover the companies' actual costs over the period. Under-funding base totex by 10% is equivalent to reducing a company's allowed return by around 0.5 percentage points, based on a capital programme of average size. The impact will be greater for water-only companies, which tend to have larger capital programmes relative to their size.”