Why are UK water utilities rebelling?
Yorkshire, Anglian and Northumbrian utilities rebel against price controls
Yorkshire Water is the largest water utility to challenge regulator Ofwat’s industry price review (PR19), which sets prices and investment for the next five years.
Anglian Water and Northumbrian Water have mirrored the move, with Thames Water considering the same action before finally accepting the proposals.
In what Ofwat is calling its “greenest price review ever” the regulator is ordering the water companies to reduce bills for customers by £50, at the same time cutting water leaks by 16 per cent, while £51 billion will be spent for the next five years.
Competition and Markets Authority to step in on water dispute
Every five years Ofwat sets the price, service and incentive package for monopoly water companies. Written last year as ‘PR19’, this sets out for consultation the draft determination of the price controls for utilities which will apply over the 2020 to 2025 period.
Ofwat’s demands face unprecedented discontent however. These will be referred to the CMA which will decide whether the price controls are justified in a review that could take six months, and can be extended if needed.
Yorkshire Water will now hope the CMA will agree that current demands mean the company is being “forced to focus on short term performance at the expense of longer term capital investment”.
Ofwat’s demands to the industry
Along with calling for cuts to customer water bills, Ofwat’s PR19 review consists of a spending package of £51 billion for the next five years.
A quarter of this, around £13 billion (or £6 million every single day for five years), will be investment “dedicated to providing resilient services and a better environment in the face of a growing population and climate change”.
Ofwat is looking for companies to cut water leaks by 16 per cent, a move which it stresses will save enough water to meet the needs of everyone in Birmingham, Bristol, Cardiff, Leeds, Liverpool and Sheffield.
Rachel Fletcher, chief executive of Ofwat, said:“This price review lays down a major challenge for the sector to transform: introducing a demanding set of new performance targets backed by investment for the future, including £13 billion dedicated for the environment and future generations.
“This is the greenest price review ever.”
Fletcher added: “We have been clear that shareholders’ rewards will only be earned through a new standard of operational excellence. Some investors have accepted this scale of ambition and change, but others need to face up to the new reality.
“We are ready to fully engage with the CMA, setting out our analysis and why we are confident this is the right settlement for customers, the environment, and companies.”
Yorkshire Water and Ofwat at loggerheads
Commenting on Ofwat’s determination, Yorkshire Water said “long term risks to its resilience and customers would be at a level which it cannot accept”.
Liz Barber, Yorkshire Water’s chief executive, added: “Everyone at Yorkshire Water shares a common purpose to provide safe and reliable services to our customers and our county long into the future.
“We’re naturally committed to being the most efficient company we can but have decided that accepting this determination would jeopardise Yorkshire’s resilience and our own.”
Yorkshire Water says that 86 per cent of its customers were supportive of its five-year plan which will review all customer accounts to ensure they are on the cheapest tariff. Work includes the company already investing £260 million to improve leakage, supply interruptions and more.
Almost 20 per cent of all planned spending for the period will be focused on ensuring environmental improvements, with a particular focus on the removal of phosphorus from river water; upgrading 80 wastewater treatment works before 2025.
The firm plans to double the amount of money it contributes to affordability schemes.
“The Anglian region faces specific challenges”
Anglian Water promised in its five-year plan a “modest increase” in bills (“less than 1 per cent”) which will support investment of £1.5 billion in resilient water supplies. It also has a target to reduce leakage levels by 22 per cent by 2025 and 50 per cent by 2050.
Chief executive Peter Simpson said: “The Anglian region faces specific challenges brought about by a changing climate and a population growing faster than almost anywhere else in the UK.
“Our plan aimed to address these challenges, and our customers wholeheartedly supported it. They want us to invest now, not wait.”
Simpson added: “As we do not believe the Final Determination enables us to meet these needs, we are making use of the next step in the regulatory process and asking the CMA to consider if the right balance has been struck between bill reductions and investment.”
Northumbrian Water: PR19 contrary to “best interests of our customers"
Northumbrian Water’s plans include creating “confidence in our drinking water so that nine out of ten of our customers choose tap water over bottled water” and promise a significant bill reduction of 14 per cent for its water customers and 17 per cent for wastewater customers by 2024/25 (with a significant initial reduction of 12.6 per cent and 12.6 per cent respectively in the first year).
NWL states Ofwat’s review falls “well short of what customers clearly stated were their priorities and secondly it would adversely impact the long term financial resilience of the company”.
CEO Heidi Mottram said: “Our assessment [of PR19] is that it is contrary to the long term best interests of our customers and doesn’t provide for sustainable investment going forward, to the detriment of all our stakeholders.”
Thames Water avoiding “significant management distraction"
Thames Water accepted Ofwat’s final determination of the company’s business plan for 2020-25 but only “after detailed consideration”.
A spokesperson said: “While the company is committed to doing all it can to increase efficiency and deliver an improved service for customers, there are some areas of concern.
“Ofwat’s settlement is most challenging on the water network and does not allow for essential resilience upgrades over the entire system.
“However, it was agreed a CMA referral would lead to significant management distraction at a time when the company is seeing improvements in customer service and leakage reduction.
“It was deemed to be in the best interests of both customers and employees to accept the final determination.”
The current five-year plan for Thames Water includes reducing leakage by 15 per cent and investing to replace more than 700km of water pipes, improving response to severe droughts, and the installation of around 700,000 smart water meters.
The company will help customers to reduce their water use by 4 per cent, give at least 200,000 customers, who find it hard to pay, a discount on their bill; while delivering a “£5 reduction to the combined average annual household bill in real terms”.
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