OFWAT SPONSOR OF
Water Industry Achievement Awwaards
2010
INTERNATIONAL
CONVENTION
CENTRE
BIRMINGHAM MAY 20 2010
Is regulatory change in the air?
The AMP5 Price Review made 2009 an exceptionally
busy year for Ofwat’s director of regulatory finance,
Keith Mason, with the largest programme of capital
expenditure that there has been. Speaking to
Natasha Wiseman in December, he explained the
issues surrounding this, his fourth AMP cycle
I
n the AMP5 Price Review, the water industry regulator, Ofwat, has
agreed a £22B programme of expenditure for water companies in
England and Wales. Given that the review was undertaken at a time of
great economic uncertainty, internationally, I asked Ofwat’s director of
regulatory finance, Keith Mason, what impact the recession has had on the
water companies and the Price Review.
Mason revealed that some companies were slow to consider how the
recession might impact on their final plans, “Despite that, some of them
came in with relatively high price increases,” he said.
“I think we were very clear from the beginning that companies needed to
look at how the recession might impact on them particularly on customer
bills going out as opposed to anything else, but it is still a case of balancing
the longer term need for investment with a shorter term need to keep
prices as low as they possibly can in a very difficult time.
“We didn’t see any great evidence in terms of bad debts and we didn’t
make any specific allowance for increases in future bad debts, but we did
have Notified Items, where if companies were experiencing higher levels of
bad debt because of the recession they could come back and we could
adjust their price limits. But they would have to prove that the increase in
their bad debts is solely due to the recession.”
Mason explained that there was a period when the risk of deflation
‘We have all recognised that setting price limits is a monster of its own’,
looked high: “I think the worry about deflation has really disappeared, but it says Ofwat’s Paul Mason
was a big item for companies certainly in the run up to the final review,” he
said. The other area for water companies to deal with is the decline in sustainability. He said that the water companies’ strategic direction
commercial revenue from closures or the slowdown of businesses; the Tees statement were a key part of the process.
area in Northumbria has been particularly hard hit. I challenge Mason that “They were all very reticent about beginning to do it, and committing
the goals of reducing water use for sustainability and water companies resources to it, but I think having gone through it, they all thought ‘yes it’s a
losing money when less water is being used are incompatible. good idea which we should carry on’.”
“One of the features we’ve got in this price review is the revenue I asked how dramatic change relating to climate might be built into an
correction mechanism,” he explained. “It takes away the incentive for water existing 25-year plan.
companies to sell as much water as they can because ... if customers use “I think the plan should have looked and made an estimation as to what
less, you will get less revenue.” they think the impact of climate change was over the 25 year period,”
He explained that the reduced revenue would be replenished at the next Mason explained. “None of them, I think it fair to say, assumed absolutely
price review. Conversely, if the water companies sell more, then that would dramatic changes of say, massive upsizing of the size of sewer networks in
be taken off them. That mechanism is only for domestic customers, I ask terms of capacity. They saw a more incremental change so I suppose that’s
Mason if a similar incentive is needed for industrial use. more mitigation I suppose and then slow adaptation to climate change. “
“What we think is that industrial users themselves will look to try to The UKCIP data came in too late for the Review, but Mason explained
reduce their costs so if they can find a way of using less water, they will do that Notified Items mean that additional finance for climate change impact
it because it is straight forwardly money in their back pocket.” can be sought under the scheme.
I suggest that it might be a little idealistic to assume companies are so
efficiently run, but Mason is probably right that the recession is a time when Metering
companies will be looking harder to save what they can. Mason told me that pretty much all the plans that companies submitted for
metering were approved. “We have allowed the companies almost to go as
Sustainability far as they wanted to with the few exceptions where it wasn’t cost
With over abstraction still occurring in many areas and population and urban beneficial. Take Southern Water – they actually wanted to go to 100%
growth anticipated, I asked Mason what Ofwat was doing to achieve metering by 2015. We’ve allowed them to go to 93%.
6 Consultant & Contractor File February2010