Ofwat outlines key PR19 interventions

Earlier this month Ofwat wrote to Anglian Water, SES Water, Thames Water, and Yorkshire Water to air substantial concerns about their proposed costs for 2020-25.

At the time, Ofwat said it had identified a significant gap between its view of efficient costs for retail and wholesale costs, and the four companies’ proposals.

With the draft determinations now published, Utility Week examined the areas in which Ofwat intends to intervene with each of the four companies.

All will see cuts to their totex budget and have had their performance commitment levels raised in areas where they are currently performing poorly.

Three companies have been refused extra funding to reduce leakage, despite raising the overall industry target to a 17 per cent cut by 2025, while one firm only gets a partial allowance.

The full list of interventions is as follows:

Anglian Water

• Ofwat has reduced Anglian’s totex costs by 20.5 per cent – equivalent to £1.3 billion because the company did not provide convincing evidence to explain why its proposed costs were higher.
• Only partial allowance has been made for enhancement expenditure for leakage reduction as Ofwat only funds the element of the company’s performance commitment beyond the forecast upper quartile. It said it expected an efficient company to achieve leakage reductions below this level.
• Ofwat has significantly increased expected performance on some common commitments to reach upper quartile.
• The regulator has added performance commitments with outcome delivery incentives to recover costs if the company does not fully deliver its smart metering and interconnection programmes.
• Ofwat has applied further underperformance payments for WINEP and Bathing Water quality performance commitments.
• It has also set the level of split between fixed and variable bioresources costs.

SES Water

• Totex allowances have been reduced by 18.3%, equivalent to £54 million.
• Enhancement expenditure on leakage has been disallowed because SES is not forecasting to go beyond upper quartile performance.
• Ofwat has removed outperformance payment for the mains repair common performance commitment.
• It has significantly increased performance and reduced outperformance for a number of bespoke commitments.
• The regulator has brought forward £1 million of pay as you go revenue to maintain notional company financeability.
• The company specific adjustment to the cost of debt has been removed.
• Ofwat has decreased net PR14 reconciliation revenue as a result of the service incentive mechanism.

Thames Water

• Ofwat has ordered Thames to make more cuts to its totex budget, which it said would save customers £1.73 billion. It stressed that while differences remain on totex, the gap of 15.7 per cent was lower than at the initial assessment phase.
• Despite increasing the proposed reduction in leakage to 25%, Ofwat has refused to allow Thames enhancement expenditure in this area or for reducing pollution incidents and water supply interruptions. Ofwat said the company “must deliver its performance commitments at no additional cost to customers.”
• The regulator has also increased performance commitment levels of stretch in areas of poor performance such as clearance of blockages.
• It has introduced underperformance payments where environmental schemes are delivered late and added a performance commitment and an underperformance payment in relation to delivery of schemes in the Security and Emergency Measures Direction (SEMD).
• There has been a significant increase in expected performance and outperformance payments removed on unplanned outage. An extra £77 million has been allowed to achieve this more stretching performance.
• Ofwat has strengthened incentives to ensure the company delivers enabling works for the Tideway project on time.
• Three uncertainty mechanisms the company proposed for costs arising from increased business rates, the selection and scheduling of SEMD costs and a ‘true down’ mechanism covering the first phase of the North East London resilience scheme have not been allowed –  “ensuring Thames Water takes responsibility for business risks”.
• There are £150 million of downwards adjustment to the regulatory capital value (RCV) in relation to its Counters Creek sewer flooding programme, which Ofwat considers to be cancelled. This is designed to fully compensate customers for “the company’s failure to deliver on the programme in the 2015-20 period”.
• A gearing benefit sharing mechanism has been introduced to ensure customers get their fair share of benefits from Thames Water gearing levels
• The company’s pay as you go rates have been increased for each year for the water and wastewater network plus controls by 0.7%, bringing forward £41 million revenue from future customers.

Yorkshire Water

• Totex costs have been reduced by 16 per cent (£801 million) with Ofwat saying Yorkshire’s plan did “not provide convincing evidence to explain why its proposed costs are substantially higher than our view of efficient costs”
• Enhancement expenditure for leakage was disallowed as the company is not forecasting to go beyond upper quartile performance.  Expenditure for reducing pollution incidents and water supply interruptions is also disallowed.
• Ofwat has significantly increased expected performance on some common commitments to reach upper quartile as well as performance commitment levels in areas where the company is currently a poor performer, such as asset health.
• The regulator has altered the adjustment for the whole revenue forecasting incentive mechanism to reflect actual reported values for grants and contributions.
• Underperformance payments for the PR14 drinking water contacts performance commitment have been added as an adjustment to RCV.