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Southern Water still has a “reasonable gap” to close with Ofwat to agree on its PR19 business plans for 2020-25.
Chief executive Ian McAulay told Utility Week the company is close to reaching an agreement over the business plans but would not rule out an appeal to the Competition Markets Authority (CMA).
Asked directly if the company would appeal the regulator’s determination, he said: “The process is in train for a compromise with Ofwat to be reached. Overall, I think the biggest hurdles to overcome to get to an agreement have been addressed.
“Our gap is relatively small in comparison to some of the other companies. Ofwat recognises our plan is strong in a number of areas. We’ve reached a resolution on the historical issues and I think people now understand why we were in significant scrutiny.”
McAulay said the tough challenges set by the regulator are the right thing for the industry, even if it is not yet certain how they will all be met.
He said the sector as a whole needed to be more forward thinking, with plans for what will be required in 30 years time being worked on now to move towards that future and said Ofwat is making a much bigger call for innovation, with chief executive Rachel Fletcher pushing the agenda.
The key commitments for Southern Water include a 14 per cent drop in bills; halving water supply interruptions; £257 million funding to make sure there is enough water where it is needed; and 41 per cent reduction in pollution incidents.
“In some ways it’s a stretch we don’t know how to answer yet, but I’m not saying that’s a bad thing because if you are not pushing people to the point where you don’t have the answers you probably aren’t pushing people far enough,” McAulay said.
“It’s right to look at getting as much efficiency in place as we possibly can, so the challenges are correct. Some of the boundaries are very, very challenging and you’ll see that in some of the responses to the draft determination. From the perspective of pushing the boundaries as far as possible to get the highest possible efficiencies and lowest possible prices, yes, that’s been done and achieved in quite a big way.”
McAulay described the peaks and troughs of the investment cycle as a “source of frustration”.
“We see this crazy peak in year three with the biggest investment spend and then it drops down, year one is quite flat and then it smooths back out – that is not efficient and we really want to smooth that out.
“We have a benefit that we had a slow start in this AMP before I arrived, we’ve caught that up and we’re going to spend more than £400 million this year,” McAulay said. “We need to be adequately funded but I’m confident we can smooth this out going forward.”
He is keen to see sufficient flexibility in the business plan to allow for the adoption and implementation of innovative practices to let the company meet its targets.
“Ofwat are good with that and the Environment Agency is helpful, but we need to change how we think about it. I want to see us take an innovation fund and build the infrastructure of ten years hence in the next five years. We have got to move forward at pace,” he said.
Draft determinations closed last month, and the final determinations are due in December for the business plans for the next five years, which set out ambitious investment targets coupled with bill reductions.
This review has been widely received as the toughest yet with 14 out of 17 water companies, including Southern Water, having to resubmit their business plans and the potential to see companies appealing to the CMA.
McAulay said he wants the business to get started with its round seven spend in January and has contractors ready to move forward with the next year of AMP projects.
The water regulator is expected to publish final determinations for all water companies on 11 December 2019.
Ofwat’s PR19 is centred around four main themes – affordable bills, great customer service, resilience in the round and innovation.
PR19 sets the price, service and incentive package that the water companies must deliver during the five-year period from 2020.
As part of the price review each water company has set out a business plan detailing what it intends to deliver and what it proposes to charge customers.
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