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Thursday 02 December, 2004

OFWAT

Water Companies Price Limit

Office of Water Services
2 December 2004

PN 55/04                                                         2 December 2004


             OFWAT ANNOUNCES FINAL PRICE LIMITS FOR WATER COMPANIES

Ofwat today published final price limits for the water and sewerage companies in
England and Wales for the five years from 1 April 2005.


Effect on customers' bills


  • Price limits of 4.2% a year on average for five years (before inflation)
    compared with 6.2% proposed by companies.

  • Increase in average household bill of £46 (18%) from £249 this year to
    £295 by 2009 (before inflation) - one-third less than £72 (29%) increase
    sought by companies. Compares with Ofwat draft increase of £34 (13%).


  • Bill increases needed to finance substantial (£16.8bn) capital programme,
    and higher running costs faced by efficient companies.


  • Increase of 8.5% in bills in April 2005 to reflect companies' costs in
    2005-06. Companies sought 12% increase.


Benefits


  • Safeguards essential customers' services and the environment - requires
    bigger programme than in the past to maintain pipes, sewers and treatment
    works for the future.

  • Ensures customers receive even safer, more reliable supplies of drinking
    water - achieved through further improvement schemes in water quality and
    security of supply.

  • Further protection to the environment - major programme of more than 3,000
    schemes to improve rivers and coastal waters, and over 500 investigations to
    inform decisions on future environmental protection.

  • Resolve or alleviate internal flooding from overloaded sewers for all
    high-risk properties identified by companies.


Effect on companies


  • Price limits enough to enable efficient companies to carry out and finance
    their functions now and in the future.

  • Reductions in company proposals reflect some cuts in outputs and realistic
    cost assumptions.

  • Demanding efficiency challenges assume all companies, especially less
    efficient, will improve further and faster than economy as whole. Scope for
    all companies to out-perform our assumptions.

  • Financing assumptions appropriate for efficient companies to maintain
    access to the capital markets, e.g. post-tax cost of capital kept at 5.1%.
    Regulatory capital value estimated to rise from £35 billion to £41 billion
    over five years.


Philip Fletcher, Director General of Water Services, said:

'These decisions strike the right balance. They will enable water companies to
meet the needs of customers and the environment whilst continuing to deliver a
safe and reliable service. The price limits are as high as they need to be but
no higher.

'We have considered carefully the comments made by customers, the companies,
environmental groups and the City on our draft decisions published in August.
And we have taken into account Ministers' final guidance.

'To protect the progress that companies have already made to customer services
and the environment, and to deliver further improvements, bills will need to
increase by an average £46 over the next five years. But the increase will still
be one-third lower than the companies sought.

'We know these increases will be unwelcome, especially to customers on low
incomes. We have challenged the companies' costs to ensure customers continue to
receive value for money from their water and sewerage services. This means that
by 2009 customers will be paying on average only around 7% more, before
inflation, than they were in 1999.

'We have responded to the wishes of customers, WaterVoice and the sewerage
companies who wanted to see further investment to deal with the scourge of sewer
flooding. The new price limits will now enable companies to resolve or
alleviate, by 2010, all the known high-risk problems identified in their
business plans where overloaded sewers cause flooding inside properties. They
will also be able to make further progress in dealing with external sewer
flooding problems.

'We have confirmed a significant increase in work on maintaining pipes, sewers
and treatment works. This will safeguard water companies' assets and ensure
secure supplies in the future.

'We have worked closely with the environmental regulators to ensure the water
companies will be able to continue to play their part in protecting the
environment on a long-term sustainable basis.

'We have included almost all of the water quality and environmental schemes, and
investigations, sought by Ministers. But in the small number of cases where the
company proposals appear poor value for money we have asked for these to be
reappraised. Our price setting regime can deal with the costs of any extra work
confirmed during the 2005-10 period.'



Notes to Editors:

 1. The Director General of Water Services is the economic regulator of water 
    and sewerage companies in England and Wales. He exercises his powers in a 
    way that he judges will allow them to carry out their functions properly, 
    and finance them.

 2. The final determination document, 'Final Determination - Future water and
    sewerage charges 2005-10', will be available from the Ofwat library on 0121
    625 1373 and on Ofwat's website www.ofwat.gov.uk.

 3. The figures quoted in all the attached tables are before inflation. Tables 1
    and 2 are presented in 2004-05 prices.

 4. Ofwat has published ten regionalised press notices to provide more
    information on our final decisions for Wales, and for the other nine regions
    in England: Anglian, Northumbrian, Severn Trent, South West, Southern,
    Thames, United Utilities, Wessex and Yorkshire.

 5. Although this marks the end of the periodic review, companies will have 
    until 1 February 2005 to ask the Director General to refer the price limits 
    he has set to the Competition Commission for redetermination.

 6. Ofwat published its draft price limits in August 2004. These are available 
    on the Ofwat website www.ofwat.gov.uk.

 7. Media enquiries to Ofwat Press Office on 0121 625 1416/1496/1442. Out of
    hours enquiries to pager: 08700 555 500 water 503/509.



  Table 1 - What is driving the changes in bills?                                                                     

  Average household bill in 2004-05                          £249         
  Less  (1) past efficiency savings and outperformance         (3)         
        (2) scope for reduction through future efficiency     (13)         
        improvements                                                       
  Plus  (3) maintaining base services                          18          
        of which (a) changes in revenue                                (6)  
        (b) changes in operating costs                                 10  
        (c) changes in capital maintenance                              7   
        (d) changes in impact of taxation                               5   
        (e) financing                                                   2   
        (4) maintaining security of supplies to all            11          
        customers                                                          
        (5) the impact of improvements in services             33          
        of which (a) drinking water quality                             9   
        (b) environmental improvements                                 21  
        (c) service performance                                         3   
  Average household bill in 2009-10                          £295         

  Change from 2004-05 to 2009-10                              £46         
 
 
 
 
Table 2 - Average expected household bills  
                                                                                                                      
                                          Average annual household bills (£)                                          

                      2004-05                 2005-06                  2009-10                 Change (from 2004-05 to  
                                                                                                      2009-10)(1)       
   Water and   Water  Sewer-   Total  Water   Sewer-   Total   Water      Sewer-  Total      Water  Sewer-      Total(1)
   sewerage           age                     age                         age                       age                 
   companies                                                                                                    £    %  
                                                                                      
   Anglian       122     172    294      133     169    302      140        173    313         18       1      20    7 
  Hartlepool      94       -     94      103       -    103      108          -    108         14       -      14   15
    (water                                                                                                            
    only)                                                                                                             
  Dwr Cymru      123     163    286      144     178    323      153        199    352         30      36      65   23
  Northumbrian   100     132    232      106     137    243      114        146    260         14      14      28   12
    Essex &      132       -    132      141       -    141      153          -    153         21       -      21   16
   Suffolk                                                                                                            
    (water                                                                                                            
    only)                                                                                                             
    Severn       116     105    221      126     119    244      133        132    265         16      27      43   20
    Trent                                                                                                             
  South West     126     231    357      145     241    386      179        265    444         53      34      87   25
   Southern       91     168    259      109     182    290      110        214    324         19      46      65   25
    Thames       113      98    210      146     100    246      156        104    261         44       7      50   24
    United       133     136    269      131     146    277      147        175    322         14      39      53   20
  Utilities                                                                                                           
    Wessex       126     151    276      144     157    301      170        177    347         44      26      70   25
  Yorkshire      117     126    243      122     133    254      133        155    288         17      28      45   18
     WaSC        118     132    250      131     140    271      142        155    297         24      23      47   19
   average                                                                                                            
  (weighted)                                                                                                          

  Water only                                                                                                          
  companies                                                                                                           
  Bournemouth    107       -    107      123       -    123      122          -    122         15       -      15   14
      &                                                                                                               
     West                                                                                                             
  Hampshire                                                                                                           
   Bristol       108       -    108      121       -    121      122          -    122         14       -      14   13
  Cambridge       91       -     91      100       -    100      101          -    101         10       -      10   11
  Cholderton     136       -    136      146       -    146      166          -    166         30       -      30   22
  Dee Valley     107       -    107      110       -    110      106          -    106         -1       -      -1   -1
   F'stone &     143       -    143      153       -    153      176          -    176         33       -      33   23
    Dover                                                                                                             
   Mid Kent      131       -    131      142       -    142      151          -    151         19       -      19   15
  Portsmouth      77       -     77       76       -     76       80          -     80          4       -       4   5 
  South East     129       -    129      148       -    148      151          -    151         21       -      21   16
     South        91       -     91      100       -    100      106          -    106         15       -      15   17
    Staffs                                                                                                            
  Sutton & E     127       -    127      142       -    142      143          -    143         16       -      16   13
    Surrey                                                                                                            
   Tendring      162       -    162      159       -    159      158          -    158         -4       -      -4   -2
   Hundred                                                                                                            
     Three       118       -    118      134       -    134      138          -    138         20       -      20   17
   Valleys                                                                                                            
      WoC        113       -    113      126       -    126      129          -    129         16       -      16   14
   average                                                                                                            
  (weighted)                                                                                                          
   Industry      117     132    249      130     140    270      140        155    295         23      23      46   18
    average                                                                                                           
  (weighted)                                                                                                          

(1) Changes totals may not add up due to rounding. 
 


Table 3 - Final price limits for 2005-06 to 2009-10 
                                                                                                                      
                                                                            Annual price limits (%)                     
        
  Company                                             2005-06    2006-07    2007-08    2008-09    2009-10  Average(1) 

  Water and sewerage companies                                                                                        
  Anglian                                                 3.8        0.0        2.8        2.7        2.7         2.4 
  Dwr Cymru                                              14.2        3.6        4.1        3.3        2.2         5.4 
  Northumbrian                                            6.5        3.7        3.2        1.0        0.6         3.0 
  Severn Trent                                           11.8        4.8        2.0        1.7        2.3         4.5 
  South West                                             12.5        9.8        9.8        1.7        1.4         6.9 
  Southern                                               12.6        3.9        3.5        5.8        2.6         5.6 
  Thames                                                 14.9        2.1        1.2        1.3        1.5         4.1 
  United Utilities                                        5.0        6.4        4.4        3.5        3.0         4.5 
  Wessex                                                  8.9        4.9        5.6        4.0        2.9         5.2 
  Yorkshire                                               5.5        4.9        3.6        3.6        2.1         3.9 
  WaSC average (weighted)                                 9.4        4.0        3.4        2.7        2.2         4.3 

  Water only companies                                                                                                
  Bournemouth & W Hampshire                              15.9        2.2        1.6       -0.6       -2.4         3.1 
  Bristol                                                13.8        2.8        1.5        0.7       -2.3         3.2 
  Cambridge                                              11.8        1.6        0.3       -0.8       -0.3         2.4 
  Cholderton                                              7.0        7.0        5.6        0.0        0.1         3.9 
  Dee Valley                                              5.7       -1.4        0.2        0.6       -0.7         0.8 
  Folkestone and Dover                                    8.3        7.3        4.0        1.9        2.6         4.8 
  Mid Kent                                                9.0        0.5        1.9        2.6        2.7         3.3 
  Portsmouth                                             -0.7       -0.6        1.5        2.5        1.0         0.7 
  South East                                             15.8        2.3        2.2        0.5       -1.6         3.7 
  South Staffordshire                                     9.9        2.5        1.7        1.0        1.3         3.2 
  Sutton and East Surrey                                 12.9        2.0        1.1       -1.0       -1.1         2.7 
  Tendring Hundred                                       -1.8       -0.7        0.6       -0.3       -0.5        -0.5 
  Three Valleys                                          15.3        1.8        1.2       -0.2        0.1         3.5 
  WoC average (weighted)                                 12.4        1.9        1.5        0.4       -0.3         3.1 

  Industry average (weighted)                             9.6        3.9        3.2        2.5        2.0         4.2 

  (1) The average for the price limits is the geometric average of the annual price limits                              
 
 
 
 
 
Table 4 - Comparison of price limits with business plans by company 
                                                                                                                      
                                                            Average annual price limits 2005-06 to 2009-10              
     
  Company                                       Business plan                 2004 Final determination    Difference  

  Water and sewerage companies                                                                                        
  Anglian                                            4.6                                 2.4                 -2.2     
  Dwr Cymru                                          5.9                                 5.4                 -0.5     
  Northumbrian                                       5.0                                 3.0                 -2.0     
  Severn Trent                                       5.6                                 4.5                 -1.1     
  South West                                         8.7                                 6.9                 -1.8     
  Southern                                           7.7                                 5.6                 -2.1     
  Thames                                             6.7                                 4.1                 -2.6     
  United Utilities                                   7.8                                 4.5                 -3.3     
  Wessex                                             6.5                                 5.2                 -1.3     
  Yorkshire                                          4.3                                 3.9                 -0.4     
  WaSC average (weighted)                            6.3                                 4.3                 -2.0     

  Water only companies                                                                                                
  Bournemouth & W Hampshire                          3.2                                 3.1                 -0.1     
  Bristol                                            6.2                                 3.2                 -3.0     
  Cambridge                                          4.3                                 2.4                 -1.9     
  Dee Valley                                         1.9                                 0.8                 -1.1     
  Folkestone and Dover                               8.3                                 4.8                 -3.5     
  Mid Kent                                           4.3                                 3.3                 -1.0     
  Portsmouth                                         3.7                                 0.7                 -3.0     
  South East                                         5.8                                 3.7                 -2.1     
  South Staffordshire                                3.8                                 3.2                 -0.6     
  Sutton and East Surrey                             7.7                                 2.7                 -5.0     
  Tendring Hundred                                   0.7                                -0.5                 -1.2     
  Three Valleys                                      6.7                                 3.5                 -3.2     
  WoC average (weighted)                             5.5                                 3.1                 -2.4     

  Industry average (weighted)                        6.2                                 4.2                 -2.0     


Table 5 - Capital investment assumptions 2005-10 
                                                                                                                
                                                          Final determinations            
                                                       Water    Sewerage    Total 
                                                        £bn         £bn      £bn 
        Capital expenditure(1) (2) (five year total)                                                                
        Capital maintenance                             4.2         4.2      8.4 
        Supply/demand balance                           1.7         0.6      2.3 
        Quality enhancements                            2.1         3.4      5.5 
        Enhanced service levels                           -         0.6      0.6 
        Total                                           8.0         8.8     16.8 
        £ per property                                  341         391      732 

        (1) Capital expenditure is net of grants and contributions.                                               
        (2) The price base is 2002-03 prices.                                                                     



                      This information is provided by RNS
            The company news service from the London Stock Exchange