Ofwat has taken a tough stance on all but three water companies and will push them to go further to deliver for customers between 2020 and 2025.
The regulator said Severn Trent, South West Water and United Utilities submitted plans that “set a new standard for the sector”.
It has given these companies the green light so they can get started on delivering their plans for customers.
Ofwat was not as impressed by the level of quality, ambition and innovation in the remaining companies and will be “pushing” them to go further to achieve the “new standard” set by the three companies placed in the fast track category.
The plans from the top performers set out how they will cut bills by up to £70 in real terms while significantly improving support for vulnerable customers, and deliver real change in the areas that “matter most to customers”, like cutting leakage, Ofwat said.
In a key milestone for Ofwat’s 2019 price review, PR19, the regulator published its initial assessments for companies’ business plans for the five-year period today (31 January).
Water companies in England and Wales have been waiting an agonising five months, since submitting their plans on 3 September, to discover if Ofwat deemed their efforts satisfactorily.
Ofwat has placed Thames Water, Southern Water, Affinity Water and Hafren Dyfrdwy in the “significant scrutiny” category.
The four companies will have to “substantially rework” and resubmit their plans. They will also be under increased regulatory scrutiny.
Steve Robertson, chief executive of Thames Water, said: “Thames Water is disappointed with today’s announcement from Ofwat on our £11.7 billion five-year business plan, which is built on the feedback of nearly one million customers. We remain committed to our forward-looking plan, which prioritises investment over everything else – including shareholder dividends.
“The plan includes significantly increased investment, to tackle issues that really matter to customers such as leakage, pollutions and resilience, while keeping average bills flat. It also supports job creation and regional economic growth and will deliver a four-fold rise in financial assistance to families in vulnerable circumstances.
“We are seeking Ofwat’s permission to invest more in areas where we know it is needed. Instead, it appears that we are being asked to reduce our current levels of spending. We are concerned that this will make it harder to meet the needs and expectations of our customers, amid the challenges of population growth and climate change.
“We’ll now study the feedback in detail and look forward to engaging constructively with Ofwat throughout this process.
“We are pleased that Ofwat has recognised the improvements in our reporting and transparency of information by promoting Thames to a higher category in the annual Company Monitoring Framework.”
The remaining companies have all been placed in the slow track category: Anglian Water, Dŵr Cymru Welsh Water, Yorkshire Water, Northumbrian Water, Wessex Water, Bristol Water, Portsmouth Water, South East Water, SES Water and South Staffs Water.
Ofwat said these companies have “further work to do” on their plans.
If the companies in significant scrutiny and slow track hope to be viewed more favourably when they resubmit their business plans by 1 April they will have to demonstrate they have addressed the shortcomings Ofwat has identified.
Business plans categorised as significant scrutiny are likely to receive reduced cost sharing rates and potentially capped outcome delivery incentive outperformance payments.
Not a single business plan stood out as “exceptional” to Ofwat.
Rachel Fletcher, chief executive at Ofwat, said: “We have challenged all water companies to deliver more for less for customers over the next five years.
“They’ve listened to the customers they serve. We’re seeing an increased focus on the things closest to people’s hearts such as keeping bills affordable, cutting leakage, protecting the environment and helping those most in need.
“Three companies have already stepped up to the mark with high quality plans and stretching commitments to customers for the next five years.
“The rest of the sector now needs to meet this high standard so that customers across the country get better and more efficient services.”
Ofwat has highlighted how the three fast track companies have demonstrated how they plan to be efficient, meet statutory and licence obligations and deliver “more of what matters” to customers, communities and the environment during the five-year period.
On the same day business plans were handed over to the regulator last year, Water UK published its manifesto for the sector, which revealed the plans were the result of an “extensive consultation exercise” with 5.3 million customers.
The trade body suggested the water sector is set to invest more than £50 billion on improving services between 2020 and 2025 – a 13 per cent increase on the previous five-year business period.
Both exceptional and fast track business plans will benefit from procedural and financial incentives, through an early determination with “early certainty on specified components of costs and outcomes”.
Ofwat will publish the draft determinations for companies with fast track plans on 11 April.
Draft determinations for companies categorised as either slow track or significant scrutiny will be published on 18 July, Ofwat has said.
The regulator is expected to publish final determinations for all water companies on 11 December 2019.
Ofwat’s PR19 is centred around four main themes – affordable bills, great customer service, resilience in the round and innovation.
PR19 sets the price, service and incentive package that the water companies must deliver during the five-year period from 2020.
As part of the price review each water company has set out a business plan detailing what it intends to deliver and what it proposes to charge customers.
Across the board, water companies are proposing significant improvements for customers in the period 2020-25, including:
- Help for up to 1.5 million customers struggling to pay their water bills;
- A 15 per cent reduction in leakage – the equivalent of more than 170 billion litres of water per year, which would save enough water for three months’ worth of daily showers for everyone in England and Wales;
- Cutting greenhouse gas emissions by 45 per cent, the equivalent of taking 360,000 cars off the road;
- Up to 80 per cent reduction in pollution incidents; and,
- At least £10 billion worth of extra investment to meet more stringent environmental standards, connect new homes and meet increased demand over the coming years.