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Ofwat's final methodology pushes water firms to deliver more

Water regulator Ofwat is challenging water companies in England and Wales to deliver more of what matters to customers in the coming decade, by being ever more resilient, efficient and innovative in the services they provide.

The call comes in Ofwat’s final methodology, published today (December 13), for its forthcoming price review, which will set limits on the prices that customers will pay for water between 2020 and 2025.

As part of the methodology, Ofwat has also published an initial view of the cost of capital – based on market evidence – of 2.4% (in RPI terms), which would be a record low for a regulated utility. Ofwat estimates that this reduced cost of capital could result in an average saving per customer of £15-£25 a year from 2020 onwards.

Ofwat wants water companies to go the extra mile in terms of the services they provide to their customers in the years ahead. Help for vulnerable customers will, for the first time, be an explicit part of a price review and water companies will be required to devise and deliver plans to identify and help customers in vulnerable circumstances; Ofwat will report publicly on these plans.

The regulator is also challenging water companies to improve the resilience of their services. Companies need to plan long term and develop smart solutions to address the pressures of a growing population and climate change. This starts with addressing leakage. Companies are being asked to stretch themselves further than ever before to save 170 billion litres of water a year; enough to meet the yearly needs of 3.1 million people.

Water companies must submit to Ofwat by September 2018, a business plan outlining in detail how they will deliver on these challenges.

 Ofwat chief executive Cathryn Ross said: “Today, we unveil our blueprint for how we will push water companies to deliver more for customers through to 2025. The next decade will see profound changes in customers’ expectations and we are pushing the water sector to be at the very forefront of that.

“The methodology we’ve published today outlines how we will use our price review to get the very best for customers, through higher quality of service and support for those who need it most, all with scope for lower bills. We’ve said many times already that this will be a tough price review for companies. We will cut the financing costs they can recover from customers and, with this lower guaranteed return, they will need to more efficient and innovative than ever before. I’ve no doubt that the sector can step up and meet the challenges we’ve laid before them today.”

The Consumer Council for Water (CCWater) has welcomed Ofwat’s tighter squeeze on companies’ financing costs which will help to keep bills down in the future. And it has warned against water companies “being able to give to customers with one hand while taking from them with the other in the 2019 Price Review”.

CCWater said a decision by Ofwat not to keep a cap on the financial rewards companies can reap from beating their performance targets could open the door to bill instability.

Tony Smith, chief executive of CCWater, said: “This is positive news for customers. Ofwat has been over generous to water companies in the past at the expense of customers – a point we have repeated publicly many times and has been echoed by the National Audit Office and the Public Accounts Committee. This lower cost of financing is an important step in keeping future water bills as low as possible.

“However, we are concerned that the regulator has decided to remove the cap on the financial rewards companies can receive for meeting their performance targets. This could hand companies an opportunity to claw back some of the money they would be unable to get through lower financing costs and it could lead to bill increases which many customers view as rewards for doing the day job.”

CCWater said it will look closely at the detail of Ofwat’s final methodology and continue to push companies to deliver business plans that customers consider to be acceptable and value for money.

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