Revenue Projections. 22 April 2009 Section B8 Page (i)

Transcription

1 B8 Revenue Projections Key Points... 1 Introduction... 1 B8 1 Northumbrian Water Tariffs... 1 B8 1.1 Introduction... 1 B8 2 Revenue Forecasts in B B8 2.1 General Discussion... 1 B8 2.2 AMP4 Revenues... 1 B8 2.3 Difference in AMP5 Forecast Revenue Between Draft and Final Business Plans... 1 B8 3 Application of Price Limits... 2 B8 4 Proposal to Merge Essex and Suffolk Tariffs... 2 B8 5 Revenue Correction Mechanism... 2 Further Table Commentaries... 2 Reporting Requirements... 5 Page (i)

2 15 April 2009 Section B8 Page (ii)

3 Key Points We have reviewed the seven key points listed by the Company and consider that they are reflective of the Company s commentary and our understanding, following audit. Introduction The Company comments on the difficulty in using the reservoir revenue forecast model, particularly applied to three different tariff structures. The Company notes the model creates potential for error and will not accurately forecast revenue, even if no input errors are made. B8 1 Northumbrian Water Tariffs B8 1.1 Introduction The Company is proposing to merge the tariff structure for Essex and Suffolk and explains its rationale for this proposal, which has been discussed with us at audit. As part of our B-8 audits we reviewed the inputs to the non-tariff basket, and nontariff revenue, as the tariff basket model is derived principally from the water resource plan projections. This is in line with the reporting requirements. B8 2 Revenue Forecasts in B8.1 B8 2.1 General Discussion The Company raises a few difficulties encountered with the model, notably the circular (or iterative) nature of the revenue and K calculations if one tries to inflate one particular tariff with RPI only (industrial water). The details of the non-tariff basket calculations are discussed in our commentary on Tables C7. B8 2.2 AMP4 Revenues Figure 1 in the Company s commentary shows clearly the effects on revenue following the Company s decision not to apply its PR04 Price Limits in the final two years of AMP4. It also shows the effect that the current economic downturn has had on revenue projections for the latter part of AMP4. B8 2.3 Difference in AMP5 Forecast Revenue between Draft and Final Business Plans The Company sets out and explains the differences in forecast revenue for 2010/11 when compared to those included in the DBP. This is partly due to lower forecasts and partly to specific reductions, on which the Company has commented. We discussed these changes with the Company and consider that they are reasonable. Page 1 of 5

4 The explanations for reductions in Household, Measured Non-Household and Industrial Water are consistent with those set out in Section B5, and on which we comment in detail in our text on that section. B8 3 Application of Price Limits Proposals to Apply Separate Price Limits This section does not form part of the reporting requirements for Section B8. We note the Company s justification that higher investment in the South should result in a steeper increase in bills, as there is no reason why northern customers should subsidise southern assets and services. The Company has set out its analysis for separate price increases between North and South, but we did not audit the analysis as it does not affect the setting of price limits. B8 4 Proposal to Merge Essex and Suffolk Tariffs This section does not form part of the reporting requirements for Section B8. B8 5 Revenue Correction Mechanism This section does not form part of the reporting requirements for Section B8. Further Table Commentaries The Company has used this section to discuss revenue reported in lines 8, 10, 11, 12, 14, and 29 of Tables B8.1. The Company has responded to Ofwat s comments on the DBP in relation to nontariff basket revenues in Table B8.1 differing in 2008/09 and 2009/10 from those reported for 2007/08. The Company states that it has used its latest data available as this provides its most accurate forecasts and we consider this to be reasonable. The total other revenues reported in the data entry lines of Table B8.1 is 4.383m for This compares with 5.629m reported for This is a reduction of 22% and is reflective of the revenue downturns that have been identified since the DBP. We asked the Company to produce five years of non tariff revenue for analysis for the same accounts that were being included in the Tables B8.1 figures. The Company responded that this would be an onerous task, as the account codes change over time, and the basket of non tariff revenues changes to include and exclude different account codes. We accepted this and asked for a comparison of the account codes used today, with their historic reported revenues. We also asked the Company to state what fraction of the total non tariff revenue those account codes represented at the time, to give us an idea of the materiality of any missing account codes. Page 2 of 5

5 The existing account codes contain over 89% of the revenues reported in the June Returns under non tariff revenues for the last 5 years, and so we considered them to be sufficient for our purposes. We converted the amounts to 07/08 and show the movements below: Figure B Non Tariff Revenue Analysis 7,000,000 6,000,000 5,000,000 (07-08) 4,000,000 3,000,000 2,000,000 Account Codes in analysis Reported JR / PR Figure 1,000, Forecast Year The chart shows a decreasing trend in non-tariff revenue, and the projected figures for (and therefore in the rest of Table B8) are consistent with this trend. We challenged the significant line-item drops which were: Table B Page 3 of 5

6 We considered these explanations to be satisfactory and the projection of a total of 4.383m non-tariff revenues for 08/09 to be in line with the movements between 07/08 and 08/09 for the lines selected in the table above. Page 4 of 5

7 Reporting Requirements The Reporter shall scrutinise and provide an opinion of the basis the Company has used to forecast revenue streams for non-tariff basket revenue that are input on this table, highlighting any assumptions that the Company has made, along with any supporting evidence. At the DBP the Company used the 08/09 budget as a means of forecasting non-tariff basket revenue. We did not consider this a robust method, and challenged it during the audit. The Company was able to supply us with historic accounts information, and June Returns non tariff income data which convinced us that its approach did, in the event, produce a credible forecast. For the FBP the Company has responded to Ofwat s comments on the DBP in relation to non-tariff basket revenues in Table B8.1 differing in 2008/09 and 2009/10 from those reported for 2007/08. The Company states that it has used its latest data available as this provides its most accurate forecasts and we consider this to be reasonable. Page 5 of 5