Ofwat to rule on water firms' five-year plans

22nd Jul 2009 11:29

Just two days before Ofwat, the water regulator, was due to give its preliminary verdict on water firms' plans for inflation-busting price rises, Severn Trent became the latest to complain of consumers cutting back on water use.Unfortunately for the water firms, given that the fall in consumption is caused by cash-strapped consumers seeking to cut their utility bills, they may not get much sympathy from Ofwat.Severn Trent said that lower water use should impact revenues by about £15m to £20m this year, though the figure appears trifling when you consider that revenues totalled £1.64bn in the previous year. Other companies have been hit harder by reduced consumption. Earlier this year, South West Water, which serves 1.6m people in the West Country, saw revenues climb by 2.5% to £431.7m in the year to March 31, but owner Pennon said customers switching from unmeasured to metered charging hit sales by £9.5m.Dee Valley, which operates in northeast Wales and northwest England, also lifted revenues between the two periods, but said the 5.4% increase to just over £20m was less than the average 9.3% rise in charges.It blamed the shortfall on 'the continuing drop in demand by our industrial customers and the switching of household customers from unmeasured to measured charging.'It seems strange to react to reduced consumption by raising prices even further, but water firms insist that it is necessary if they are to invest in upgrading their infrastructure. The biggest claim is that of Thames Water, which is asking Ofwat to allow it to raise prices by 17.2% above inflation in the five year period 2010 to 2015. Among companies listed on the stock exchange, Northumbrian is planning to raise prices by 2.8% above inflation, Severn Trent by 0.9%, South West by 7.4% and United Utilities by 11%.We are currently in the 'decisions and determinations' phase of the current price review. The proposals to be released on Thursday are draft plans, with a final recommendation due in November.While Ofwat is unlikely to indulge the most outlandish claims, faced by a chorus of pleas to let water firms to give them enough leeway to maintain and improve the country's water system, it faces a difficult balancing act.Consumers are unlikely to be happy about bigger water bills, but it may be that some of the price hikes proposed are necessary and Ofwat is likely to recognise this.Regulation is often cited as one of the risks associated with water companies, but their position as utilities also confers advantages because governments depend on them for investment in the country's infrastructure so cannot afford to alienate them.The public position of Ofwat over the next few months may be tilted toward the consumer, but in reality the regulator has to weigh up a complex range of factors to ensure continued investment in our water infrastructure. The final business plans will reflect this.