What your water company plans to charge you

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Two figures have loomed large in the thoughts of water company bosses during the last year.

One is Jeremy Corbyn who, if he makes it to 10 Downing Street, has threatened to nationalise the industry.

The other is Jonson Cox, chairman of Ofwat, the industry regulator.

He is a wily operator who, as a former managing director of Yorkshire Water and chief executive of Anglian Water, knows the industry inside out and who, as a poacher-turned-gamekeeper, understands the ruses some water companies have used in the past to maximise the efficiency of their balance sheets.

It is the latter who the water companies will have had foremost in their minds when, on Monday, they handed Ofwat their plans for the next regulatory period between 2020 and 2025.

They detail how much they plan to invest and where they intend to invest; the extent to which they will cut leaks; how they intend to become more efficient; what they propose doing with customer bills and how much they propose to return to their shareholders.

The latter issue in particular had shot up the agenda even before Mr Corbyn’s nationalisation pledge.

Thames Water, the biggest operator in the sector, has attracted particular opprobrium for cranking up payments to its investors at the expense of investment in its infrastructure and for an elaborate company structure that involved the use of vehicles based in the tax-efficient Cayman Islands.

That arrangement, which has been recently attacked by the Environment Secretary Michael Gove, has now been unwound. But it still prompted Mr Cox, in a speech in March, to put the industry on notice that things had to change.

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Michael Gove has warned water companies they face tougher regulation unless they put customers first

He ordered them to prove in their business plans that they were financially resilient for the long-term and to be more financially transparent.

Mr Cox added: “Where a company’s track record has included aggressive-looking structures, or dividends that raise questions, those companies not only need to persuade us, but will have to explain convincingly to the public they serve, how these practices will deliver resilience.”

In all, the proposals outlined on Monday mean more than £50bn will be invested by companies during the period, up 13% on the current five-year regulatory period, while nationally, average household bills are set to fall by 4% in real terms.

But what is really striking about the individual plans set out today, when you examine them in detail, is the extent to which they differ.

United Utilities, the supplier for the North West of England, has promised a real-terms cut of 10.5% in average bills during the period – with the average annual customer bill coming down from £427 in 2019-20 to £382 in 2024-25.

This will be paid for, it proposes, by investing £1bn less.

Severn Trent, the supplier to the Midlands and which was singled out for praise by Mr Cox for its work in reducing flooding, plans to reduce average bills from £345 to £327 during the period and is promising to return 1% of its profits each year in a ‘community dividend’.

The owner of South West Water, which presently charges the highest bills in the land, is proposing to give customers shares in the business that allow them to receive a share of profits just as existing shareholders do.

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Water firms are currently battling the effects of the hot summer

By contrast, Thames Water – which is to cap dividends to its shareholders – is proposing merely to keep bills flat in real terms during the period, putting a greater emphasis on increased investment.

Anglian Water is proposing a rise in household bills of just under 1% in real terms and, like Thames, is putting a greater priority on investment.

Both companies are in parts of the UK where the population is growing most rapidly – one in five of all new homes built during the five year period will be in Anglian’s region alone – and, with the prospect of dryer winters and hotter summers, they regard ensuring the resilience of water supplies as paramount.

The big question is whether all of these proposals pass muster with Ofwat.

Mr Cox has already ordered companies with particularly high levels of borrowing to cut customer bills as a way of encouraging them to reduce their debts.

He has also told them, as part of demonstrating their financial resilience, to explain the role of their dividends to shareholders, “taking account of the perspective of the communities they serve”, which means better explaining the link between performance and shareholder pay-outs.

There is little doubt that the water companies, stung by Mr Gove’s criticisms and Mr Corbyn’s threats, are changing the way they behave.

Today’s business plans are peppered with examples of the work each company does in its community and, in particular, some big commitments on helping those household customers who struggle to pay their bills.

Ofwat made clear today that it will be looking in particular at the extent to which the companies have sought the opinions of their customers in putting together their business plans – a reason, perhaps, why nearly every company has been stressing the number of customers they consulted.

Whether they have gone far enough to satisfy Ofwat will become clear when, on 31 January next year, the regulator publishes its initial assessments – with final decisions on how much customers can be charged to be made in December next year.



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