Setting Price limits for PR09. Mark Worsfold 25 November 2010

Transcription

1 Setting Price limits for PR09 Mark Worsfold 25 November Water today, water tomorrow

2 Ofwat s strategy Water today, water tomorrow

3 Regulatory framework Quality regulators Ofwat Investors Companies Customers Water today, water tomorrow

4 Setting price limits for Water today, water tomorrow

5 Communicating with stakeholders Company meetings SDS Pre-DBP Post-DBP Pre-FBP Representations Dec 07 Aug 08 Apr 09 July 09 Nov 09 Strategic direction statements Draft business plans Final business plans DD FD Stakeholder senior co-ordinator meetings monthly Stakeholder Chief Executive meetings every two to three months Ministerial briefing at key stages Water today, water tomorrow

6 Approach to setting price limits Output requirements Operating expenditure Revenue requirement ( ) Expenditure to finance capital expenditure programme Revenue base (bill payers) Return on capital Price limits Tax Protecting consumers, promoting value, safeguarding the future

7 Industry water and sewerage past and future opex ( prices) 4,500 4, final determination 1999 business plan 2004 business plan 2009 final business plan 2009 final determination million 3,500 Total opex adjusted for exceptionals and atypicals 1999 final determination 2004 final determination 2009 draft determination 3,000 2,500 2, Financial year to 31 March Protecting consumers, promoting value, safeguarding the future

8 Additional operating expenditure 0.4 billion Operating expenditure arising from enhanced service 40% Pensions 24% Energy 4% Transfers from capital expenditure 6% Rates 25% Other -2% Traffic management act 2% EA abstraction charges 1% The other category is negative because it includes spend to save outputs Protecting consumers, promoting value, safeguarding the future

9 Actual and projected net capital investment by purpose category Investment in billion RCV billion FD FBP Price review period 0 Enhanced service level Supply/demand balance Quality enhancement Capital maintenance RCV Protecting consumers, promoting value, safeguarding the future

10 Cost of capital FD WaSCs FD WoCs Cost of equity (post-tax) 7.1% 7.1% Cost of debt (gross of tax shield) 3.6% 4.0% Gearing (debt:rcv) 57.5% 52.5% WACC gross of tax shield (vanilla) WACC post-tax 5.1% 4.5% 5.5% 4.9% Protecting consumers, promoting value, safeguarding the future

11 FD Industry average K 0.5%pa (from -0.2 at DD) Average bills down 3 by the end of the period ( 14 at DD) companies wanted bills to go up by 9% ( 31) 22.1bn capex (up by 1bn on DD) Ofwat Protecting consumers, promoting value and safeguarding the future

12 Bills profile Annual average bill Average bills from 1989 to 2015 (today s prices) Charging year Ofwat Protecting consumers, promoting value and safeguarding the future

13 % acceptable water % unacceptable water Consumer research results Acceptability responses to Q19 water service Source Understanding customers views PR09 quantitative research into customers priorities company reports (England) BWH-WSX BWH-SRN BRL CAM DVW ESK-ANG ESK-TMS FLK PRT SEW-SRN SEW-TMS % SST SES-TMS THD TVN-TMS Protecting consumers, promoting value, safeguarding the future

14 PR09 consumer research Bristol Water VFM responses to Q28a and Q28b water service Source: Understanding customers views PR09 quantitative research into customers priorities company reports (England) % Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Good VFM Poor VFM Maintenance Supply and demand Drinking water quality Water aesthetics Pressure and interruptions Customer service Resilience Abstraction Water service Protecting consumers, promoting value, safeguarding the future

15 FTSE 100 5% 3 Dec % 17% 16% 9%

16 Post-FD Companies had 60 days to make decision on whether to accept the price limits: Balance risks and costs of referral with potential benefits Understanding the external risks Not an easy decision and best not rushed Bristol Water only company to go CC had 6 months to decide CC set BRL wholly new price limits did not just decide on components Ofwat Protecting consumers, promoting value and safeguarding the future

17 Next steps We have set price limits now the companies have to deliver! We monitor performance through an annual return We take action where we see performance declining or where things are not being done We deal with requests to change price limits We plan what to do in 5 years time! Ofwat Protecting consumers, promoting value and safeguarding the future

18 Key Documents Framework and Approach for price setting: Setting price limits for : Framework and approach Final determinations : Future water and sewerage charges : final determinations Service and delivery report : Financial performance report : Ofwat Protecting consumers, promoting value and safeguarding the future