Water only company Affinity Water has moved from the top of the class with “enhanced” status for its business plan in PR14 to bottom of the class for the 2019 price review.
Ofwat’s initial assessment of water companies’ business plans for PR19 published today (31 January) ranks Affinity Water in the “significant scrutiny” category.
It is joined by Thames Water, Southern Water and Hafren Dyfrdwy. Ofwat has warned the four companies that they will have to“substantially rework” their business plans before resubmitting them by 1 April.
Affinity Water was given enhanced status along with South West Water in PR14. The latter managed to secure its fast track position for a second consecutive price review.
Pauline Walsh, Affinity Water’s new chief executive who took over from Simon Cocks in April last year, said the company is “surprised and disappointed” by Ofwat’s assessment.
Ofwat said Affinity Water’s customer challenge group (CCG) report makes clear that it considers there were “delays in the company’s process” for developing its business plan, which adversely affected the ability of the CCG to challenge the company and assure the plan.
The regulator has outlined that it has concerns in a “number of key areas” about the water company’s plans, although it acknowledges there are some “high quality” elements.
Ofwat said: “It falls significantly short on securing long-term resilience. There is insufficient evidence that it has engaged with its customers on options to improve the resilience of its network. Its water resource management planning is not robust and it does not propose any bespoke resilience performance commitments, despite being in an area at risk of severe water restrictions.
“It also falls significantly short on the balance of risk and return in its plan. There are inconsistencies in the financial metrics the company uses to assess its financeability. There is not enough evidence to support its view that its pay as you go and regulatory capital value run-off rates are aligned to its customers’ bill profile preferences.
“There is unconvincing evidence to support the company’s long-term view of inflation, which results in a higher real cost of capital than our early view and higher bills for customers.”
Walsh, who was formerly director of gas transmission at National Grid, said: “We are surprised and disappointed by Ofwat’s initial assessment of our 2020-2025 business plan and look forward to discussing this with Ofwat in the coming weeks as part of this on-going process.
“Our plan builds on the vision we committed to in our current 2015-2020 business plan to become the UK’s leading community focused water company.
“So far in this regulatory period, we have reduced the amount of water we take from the environment by 42 million litres a day and we have committed to the largest percentage leakage reduction (14 per cent) of any water company in England and Wales.”
Only three water companies were given the green light for their business plans – South West Water, Severn Trent and United Utilities. The remaining companies were all categorised as “slow track”.
Business plans categorised as significant scrutiny are likely to receive reduced cost sharing rates and potentially capped outcome delivery incentive outperformance payments.