Setting Price limits for 2010-15
PR09
Mark Worsfold
25 November 2010
http://www.ofwat.gov.uk/pricereview/
Water today, water tomorrow
Ofwat’s strategy
Water today, water tomorrow
Regulatory framework
Quality
regulators
Ofwat
Companies
Customers
Water today, water tomorrow
Investors
Setting price limits for 2010-15
Water today, water tomorrow
Communicating with stakeholders
Company meetings
Strategic
direction
statements
Draft
business
plans
Final
business
plans
Representations
Nov 09
July 09
Apr 09
Pre-DBP Post-DBP Pre-FBP
Aug 08
Dec 07
SDS
DD
FD
Stakeholder senior co-ordinator meetings – monthly
Stakeholder Chief Executive meetings – every two to three months
Ministerial briefing at key stages
Water today, water tomorrow
Approach to setting price limits
Output requirements
Operating expenditure
Revenue requirement (£)
Expenditure to finance
capital expenditure
programme
Return on capital
Revenue base
(bill payers)
Price limits
Tax
Protecting consumers, promoting value, safeguarding the future
Industry – water and sewerage past and future opex (2007-08 prices)
4,500
2009 final
business plan
4,000
1994 final determination
2004 business
plan
£ million
1999 business plan
2009 final determination
2004 final determination
3,500
Total opex adjusted for
exceptionals and atypicals
2009 draft
determination
1999 final determination
3,000
2,500
2014-15
Protecting consumers, promoting value, safeguarding the future
2013-14
Financial year to 31 March
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
2,000
Additional operating expenditure £0.4 billion 2014-15
Operating expenditure arising
from enhanced service 40%
Pensions 24%
Energy 4%
Transfers from capital
expenditure 6%
Other -2%
Rates 25%
Traffic management act 2%
EA abstraction charges 1%
The ‘other’ category is negative because it includes spend to save outputs
Protecting consumers, promoting value, safeguarding the future
30
60
25
50
20
40
15
30
10
20
5
10
0
0
1990-95
1995-2000
2000-05
2005-10
2010-15 FD
2010-15 FBP
Price review period
Enhanced service level
Capital maintenance
Supply/demand balance
RCV
Quality enhancement
Protecting consumers, promoting value, safeguarding the future
RCV £ billion
Investment in £ billion
Actual and projected net capital investment by purpose category
Cost of capital
FD
FD
WaSCs WoCs
Cost of equity (post-tax)
7.1%
7.1%
Cost of debt (gross of tax shield)
3.6%
4.0%
Gearing (debt:RCV)
57.5% 52.5%
WACC – gross of tax shield (vanilla)
5.1%
5.5%
WACC – post-tax
4.5%
4.9%
Protecting consumers, promoting value, safeguarding the future
FD
• Industry average K 0.5%pa (from -0.2 at DD)
• Average bills down £3 by the end of the period
(£14 at DD) – companies wanted bills to go up
by 9% (£31)
• £22.1bn capex (up by £1bn on DD)
Ofwat – Protecting consumers, promoting value and safeguarding the future
Bills profile
Average bills from 1989 to 2015 (today’s prices)
£350
335
£330
313
Annual average bill
£310
318 320 321
339
343 340 340 340 341 340
326
325
316
304
294
£290
287
285 283 283 286
272
£270
259
£250
246
236
£230
£210
£190
£170
£150
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Charging year
Ofwat – Protecting consumers, promoting value and safeguarding the future
Consumer research results
100
% acceptable – water
Acceptability responses to Q19 – water service
Source – Understanding customers’ views – PR09 quantitative research into
customers’ priorities – company reports (England)
% unacceptable – water
80
%
60
40
Protecting consumers, promoting value, safeguarding the future
TVN-TMS
THD
SES-TMS
SST
SEW-TMS
SEW-SRN
PRT
FLK
ESK-TMS
ESK-ANG
DVW
CAM
BRL
BWH-SRN
0
BWH-WSX
20
PR09 consumer research – Bristol Water
100
VFM responses to Q28a and Q28b – water service
90
Source: Understanding customers’ views – PR09 quantitative research into customers’
priorities – company reports (England)
80
70
60
%
50
40
30
20
10
0
Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM
Maintenance
Supply and
demand
Drinking
water quality
Water
aesthetics
Pressure and
interruptions
Customer
service
Resilience
Abstraction
Protecting consumers, promoting value, safeguarding the future
Water service
FTSE
100
5%
3 Dec 2009
12%
17%
16%
9%
Post-FD
Companies had 60 days to make decision on
whether to accept the price limits:
•
•
•
•
Balance risks and costs of referral with
potential benefits
Understanding the external risks
Not an easy decision – and best not
rushed
Bristol Water only company to go
CC had 6 months to decide
CC set BRL wholly new price limits – did not
just decide on components
Ofwat – Protecting consumers, promoting value and safeguarding the future
Next steps
We have set price limits – now the companies have to deliver!
We monitor performance through an annual return
We take action where we see performance
declining – or where things are not being done
We deal with requests to change price limits
We plan what to do in 5 years time!
Ofwat – Protecting consumers, promoting value and safeguarding the future
Key Documents
Framework and Approach for price setting:
Setting price limits for 2010-15: Framework and approach
http://www.ofwat.gov.uk/pricereview/pap_pos_pr09method080327.pdf
Final determinations 2010-15:
Future water and sewerage charges 2010-15: final determinations
http://www.ofwat.gov.uk/pricereview/pr09phase3/det_pr09_finalfull.pdf
Service and delivery report 2009-2010:
http://www.ofwat.gov.uk/regulating/reporting/rpt_los_2009-10.pdf
Financial performance report 2009-2010:
http://www.ofwat.gov.uk/regulating/reporting/rpt_fpe_2009-10.pdf
Ofwat – Protecting consumers, promoting value and safeguarding the future