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Periodic Review 2009

Final Business Plan

Water companies have to plan well ahead in order to make sure the service can be relied on well into the future. As a key part of this we were required to prepare a formal business plan which was submitted in April 2009 to Ofwat, the independent economic regulator of the water industry, to enable prices to customers to be set for the period 2010 to 2015.

Based on this plan, Ofwat made a draft determination of prices in July 2009 and gave water companies the opportunity to challenge its assumptions or to submit further explanation or supporting data. Following this, in November 2009 Ofwat issued a final determination of prices for the period April 2010 to March 2015.

The Final Determination set the maximum price increase for our company of the following "K" factors which are added to any Retail Price Index movement each year.

Charging year

2010/11

2011/12

2012/13

2013/14

2014/15

K factor

+4.0%

+2.1%

-0.5%

-0.8%

+0.2%

We accepted Ofwat’s final determination of prices and as a result have modified our plans to reflect its comments and what it believed should be funded through water bills.

Our plan builds upon extensive research with our customers on their priorities and their willingness to meet the cost of investment in improvements to the water supply for environmental protection and sustainability, together with our assessment of the needs for maintenance and enhancements to the water supply system to safeguard the availability and quality of water well into the future.

In December 2007 we published a long term strategic direction statement covering the next 25 years. We then published a draft business plan in August 2008, and a final business plan in April 2009 after receiving feedback from Ofwat, and other key stakeholders such as the Consumer Council for Water (which protects the interests of water customers), the Drinking Water Inspectorate and the Environment Agency. The plan also reflected independent national customer research, conducted at the end of 2008, which showed that a high degree of customers (64%) accepted our stated priorities and deemed the draft plan as being affordable.

The final determination of prices assumes improvements in the efficiency of our operations and reductions in the cost of building new or replacement assets. Ofwat accepted many of our arguments for investment to maintain the assets, to continue metering household customers and to enhance the service in certain respects. We have slightly revised the detail of our plans to reflect the final determination of prices, the most significant change concerning the resilience of our water supply system to failure of individual assets. We believe that it is quite robust to the possibility of failure of any one part but it is not possible to completely guarantee that something will not fail and that this will not impact on the service to customers. Although we have made significant progress over the last 10 years or so, and we will continue to engineer into the network of assets further resilience measures, we do in the longer term want to link the areas supplied by our two largest treatment works. Ofwat did not consider that we had made a sufficiently robust business case to doing this in the near future so we will carry out further work to improve our understanding of the associated costs and benefits.

Our current plan is evolutionary and builds on upon our already excellent performance in the water sector in terms of:-

  • Efficiency
  • Keeping prices low: (our prices are currently £29 (17%) below the England and Wales household average)
  • Low leakage
  • High quality of drinking water
  • Excellent personalised service
  • Never having a hosepipe ban

Our five year plan beginning in April 2010 involves about £43 million of capital expenditure on maintaining and improving the system.  This investment is aimed at:- 

  • Increasing further the reliability and quality of the service by replacing significantly more old and poorly performing water mains so as to ensure long term sustainability. This is necessary in order that we can continue to control leakage and deliver drinking water of a high standard well into the future.
  • Further improving the resilience of our water supply system against the impact of a more serious disruption of the water supply which could be caused for example by a catastrophic failure of plant or key water mains.

Continuing our programme of metering household customers in order to promote the efficient use of water, especially in the summer, and hence defer for the foreseeable future any need for any costly new water resource development. Metering is beneficial in the longer term because on average people use less water when they are charged by volume rather than a flat rate.

These are all improvements which our research with customers indicated a willingness to pay. In addition we have carried out extensive analysis of the costs and benefits of each of our proposed projects to ensure that the total benefit each of our investments will deliver exceeds its financial cost.

Like households and other businesses, water companies are not immune from cost pressures and in particular energy costs.  The industry uses significant amounts of energy for treating and pumping water.  Metering is helping to reduce demand for water which helps keep power use down, as does the installation of more efficient plant where possible.  However, energy costs nearly doubled in 2008, increasing our electricity bill to about 20% of our day to day operating costs.  Although they have since fallen as a result of the global recession, experts do predict that energy prices will increase steadily over the next few years. As a result we have taken steps to limit our exposure to volatility of energy prices in the market. We will continually work to improve our efficiency, and in turn mitigate the impact of upward cost pressures.

Our water bills will continue to be below the industry average. Costs we must incur to deliver our service and investments mean that prices need to increase slightly over the next 5 years. Most of this increase has occurred in 2010.

We believe our plans carefully balance the needs of our customers and other stakeholders and their priorities and that our proposals represent continuing good value for money with the average water bill in 2014/15 still costing around 37 pence2 per day.

The links below are to the detailed contents of the plan we submitted to the regulator in April 2009. Ofwat’s determination of prices for the industry can be found on its website here.

Strategic Direction Statement

Footnotes

1. Prices are shown in 2007/08 terms.

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