PR14, the much-trumpeted price review for the water companies’ 2015-2020 cycle, was intended to transform the regulatory culture. Putting the onus on companies to prove their business plans rather than provide its own metrics, Ofwat wanted to put an end to the “box ticking” culture. It also championed the customer agenda, requiring water companies to set up customer challenge groups to provide their own assessments of business plans.
This Monday morning, the long lead-up was over. As water companies pressed the “send “ button, and many trumpeted their bill freezes or cuts with a slew of press releases, staff at Ofwat and its “delivery partner” PWC, knuckled down to months of painstaking analysis. The regulator is now effectively in purdah until 30 April, when it will announce which companies have achieved the coveted “enhanced” status.
Ofwat’s agenda to cut bills and boost consumer input could not have been better timed. Chairman Jonson Cox’s speech in March challenging companies to pass gains back to customers looks remarkably prescient in light of political events later in the year. Following the Labour party conference in September, the “cost of living” has been firmly at the centre of national debate, and while energy suppliers are today’s bad guys, water companies are increasingly coming under the same scrutiny. Indeed, Labour’s shadow environment secretary Maria Eagles took the affordability fight to the water sector just last week with the announcement of a proposed amendment making social tariffs compulsory to the Water Bill.
To their credit, most water companies seem to have taken the regulatory and political agenda fully on board. Perhaps forewarned by the onslaught of outrage that energy suppliers currently face, they have been quick to announce price rises in line with or below inflation, while some have gone further, offering to forgo price rises that have already been approved by the regulator for 2014.
The headlines of the business plans submitted this week are:
- Most companies proposed price rises below or in line with inflation, including: Welsh Water, United Utilities, Southern Water, Northumbrian Water, Anglian Water, South West Water, Severn Trent, Wessex Water, and Yorkshire Water
- Several companies have promised to introduce social tariffs, including: Thames Water, which has brought its forward a year to 2014; Southern Water, which plans to introduce one “as soon as possible” after 2015; Anglian and Northumbrian; and Severn Trent, which has said it will “strengthen its existing wide range of social tariffs”
Given the robust half-year results announced by three water companies last week, these measures seem prudent. South West Water, owned by Pennon Group, cushioned news of its 8% rise in profits to £86m with a promise to freeze prices until 2015.
Some companies, however, seem less enthusiastic in their embrace of Ofwat’s agenda. Severn Trent risked the regulator’s ire with its announcement of a six per cent increase in dividends last week, despite a six per cent fall in profits to £141m. However, its proposed 2015 tariff freeze and subsequent below-inflation price rises may go some way to mollify the regulator. Thames, on the other hand, faces heavy scrutiny of its proposal to hike prices by £8 a year over five years, to pay for the Thames Tideway tunnel, when it posted profits up 19% to £134m in the six months to September 2013.
Even those companies which have proposed keeping price rises below inflation may not have gone far enough for Ofwat. The regulator has said that it hopes for business plans based on an average WACC (weighted average cost of capital) in the three per cent bracket. Those companies that told Utility Week their proposed WACC on Monday were all in the four per cent bracket: Thames, 4%; Severn Trent, 4.2%; South West Water, 4.2%; United Utilities, 4.3%; Welsh Water, 4.5%. If Ofwat cuts in the assumed WACC, as seems likely given its former comments, then it will pass the savings on to customers which could mean significant cuts in real terms.
Water companies have seized the affordability agenda this morning, making a virtue out of necessity. But whether that will be enough for the regulator remains to be seen.