REG - Water Services Auth - Ofwat 2024 Price Review Final Determinations

Severn TrentAnnouncement

19/12/2024 08:15

For best results when printing this announcement, please click on link below:
https://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20241219:nRSS6612Qa&default-theme=true

RNS Number : 6612Q  Water Services Regulation Authority  19 December 2024

PR24 - press notice

 

For Immediate Release

 

Ofwat approves £104bn upgrade to accelerate delivery of cleaner rivers and
seas and secure long-term drinking water supplies for customers

 

·    Investment set to quadruple - nearly 90% of this will go to meet new
requirements set out by the Environment Agency, Natural Resources Wales and
the Drinking Water Inspectorate

·    Almost £12bn allocated to cutting spills from storm overflows by 45%
by 2030, from 2021 levels - more than £6.5m investment per day over the PR24
period

·    £2bn development funding to kickstart £50bn investment for the
biggest programme of water supply projects in decades. In total, 30 major
infrastructure projects will build greater resilience to drought by providing
enough water to meet the daily needs of around a third of England and Wales'
population

·    Bills set to increase by an average of £31 each year over the next
five years; a doubling of support for customers in need of a helping hand

·    Claw back mechanism to ensure money not spent on investment by
companies is returned to customers through lower bills

 

Substantial, lasting, improvements for customers and the environment are set
to be delivered through a £104bn upgrade for the water sector, Ofwat
announced today (19 December).

 

David Black, Ofwat Chief Executive, said: "Today marks a significant moment.
It provides water companies with an opportunity to regain customers' trust by
using this £104bn upgrade to turn around their environmental record and
improve services to customers.

 

"Water companies now need to rise to this challenge, customers will rightly
expect them to show they can deliver significant improvement over time to
justify the increase in bills. Alongside the step up in investment, we need to
see a transformation in companies' culture and performance. We will monitor
and hold companies to account on their investment programmes and improvements.

 

"We recognise it is a difficult time for many, and we are acutely aware of the
impact that bill increases will have for some customers. That is why it is
vital that companies are stepping up their support for customers who struggle
to pay.

 

"We have robustly examined all funding requests to make sure they provide
value for money and deliver real improvements, while ensuring the sector can
attract the levels of investment it needs to meet environmental requirements.
This has seen us remove £8bn of unjustified costs compared with companies
most recent requests. In addition, our approach to setting a rate of return
has saved customers £2.8bn."

 

The 2024 Price Review (PR24) final determinations will see a quadrupling of
new investment over the next five years, providing companies with the funding
needed to transform performance, ensure supplies for future generations and to
deliver cleaner rivers and seas.

 

Key elements of the investment package, which also reflect the UK and Welsh
Governments' stated priorities for the sector, include:

 

·    £12bn on 2,884 projects reducing spills from storm overflows;

·    £6 billion of upgrades to combat nutrient pollution for around 1,000
sites and catchments;

·    £3.3bn on nature-based solutions and increasing biodiversity;

·    £2bn of development funding to unlock £50bn investment for 30 major
projects designed to secure water supplies including nine new reservoirs and
nine large-scale water transfer schemes;

·    £456m of extra funding on day-to-day allowances to increase the rate
at which water mains are replaced, with 8,445km set to be improved over the
next five years.

 

The increase in investment needs is driven by delivering on the statutory
standards and regulatory requirements set out by the Environment Agency (EA),
Natural Resources Wales and the Drinking Water Inspectorate. These relate to a
range of programmes such as reducing spills from storm overflows, improving
wastewater treatment standards and raising further the quality of drinking
water.

 

To help finance this essential investment programme, bills in England and
Wales will increase by an average of £31 per year (36%) before inflation
between now and 2030. This annual average increase compares with a £39
increase requested by companies in August 2024 (44%).

 

 

Final determinations explained

Ofwat's role

 

Ofwat's role, as economic regulator, is to ensure customers benefit from new
investment, so they are not charged twice for work companies should have
already carried out and that they only pay the efficient costs of new
investment.

 

Ofwat does not determine the level of environmental investment, which is set
out by agencies such as the EA. Ofwat's job is to scrutinise the cost of
proposals in company business plans to make sure all investment is good value
for money, and then to hold companies to account for that investment.

 

Ofwat sets an allowed return that provides a reasonable return for the risks
that investors face for their investment. There are opportunities for
investors to earn enhanced returns where companies deliver great levels of
service to customers and the environment, and the incentive mechanisms ensure
investor returns are lower than the allowed return where performance is poor.

 

In setting the rate of return, Ofwat has to also take account of current
market conditions including recent increases in the cost of finance. This has
seen the allowed return for the sector increase to 4.03% compared with 3.72%
at draft determinations.

 

This reflects a cost of equity of 5.1% and debt of 3.15%, underpinned by a
gearing ratio of 55%. This will allow investors in an efficiently-run company
to earn a reasonable return on their investment.

 

In addition, Ofwat forecasts that companies will need to raise levels of
finance that significantly exceed the levels raised in any previous regulatory
period. Companies have forecast a need for around £7bn of new equity; we
consider that the equity financing requirement is likely to be higher than
this. We have used a figure of £12.7 billion when assessing the
financeability of company plans.

 

Impact on bills

 

The average bill increases by £157 (36%) over the next five years. The
average bill increase in 2025-26 will be £86 (20%), excluding inflation, with
smaller percentage increases in each of the next four years.

 

Ofwat has removed £8bn (7%) of costs from companies' business plans and
reduced the allowed rate of return on investment compared with companies'
requests.

 

This has led to a reduction in bills for most companies, compared with their
most recent proposals; companies proposed bill increases of 44%. For example,
in comparison with proposed 2029-30 bills, Southern Water's bill has been
reduced by £126 (16%), Thames Water by £79 (12%), Hafren Dyfrdwy by £73
(12%) and Wessex Water by £44 (7%).

 

Bills have been set at a level which is fair for current and future customers,
with steps taken by companies to increase support for customers who need it,
meaning more than a doubling in the proportion of customers that will receive
help with their bills from 4% to 9%.

 

Safeguarding customers

 

In parallel, Ofwat has ensured measures are in place to safeguard customers so
money is spent where it needs to be spent; companies are responsible for
delivering their investment programmes, and where companies fail to do so,
funding will be subject to a claw back mechanism which will ensure money not
spent on investment is returned to customers through lower bills.

 

Companies have also not been allowed to charge customers for work that has
already been funded, such as investment to bring storm overflows into
compliance with their existing permits.

 

Targets have been set for companies across 24 key areas of performance. If the
targets are not met, there will be automatic penalties for companies, with
money returned to customers through lower bills. But if companies exceed the
targets, they will be allowed to increase bills in return for the extra
benefit customers have received.

 

Delivering growth

 

Through securing our future water supply, we will boost the economy by
supporting new housing and business development. We will allocate £2bn
development funding to unlock £50bn of investment for the biggest package of
water supply projects in decades.

Over the coming decades, nine new reservoirs will be created, including in
Lincolnshire, Cambridgeshire and Oxfordshire, to create enough additional
capacity to serve the daily needs of 2.5 million households. In total, the 30
major infrastructure projects will provide enough water to meet the daily
needs of around a third of England and Wales' population. This will help us
adapt to climate change, build resilience to drought and leave more water in
the natural environment.

The Ofwat Innovation Fund, which is being doubled to £400m and the
introduction of the £100m Water Efficiency Fund will help address sector-wide
challenges. The Innovation Fund will continue to encourage fresh approaches;
the Water Efficiency Fund will use a range of water efficiency approaches to
stimulate a sustained and measurable reduction in water demand across England
and Wales.

 

Ends

 

Notes to editors

 

1.   Water bills

 

Water and wastewater companies - average bills for 2024-25 and 2029-30

 

 Company                                   2024-25 average bill  Company's most recent bill proposal     Final Determination
                                           2029-30 average bill                      % increase          2029-30 average bill  % increase
 Anglian Water                             491                   649                 32%                 631                   29%
 Dŵr Cymru                                 455                   660                 45%                 645                   42%
 Hafren Dyfrdwy                            392                   629                 61%                 557                   42%
 Northumbrian Water                        422                   524                 24%                 510                   21%
 Severn Trent Water                        398                   612                 54%                 583                   47%
 Southern Water                            420                   768                 83%                 642                   53%
 South West Water                          497                   624                 26%                 610                   23%
 Thames Water                              436                   667                 53%                 588                   35%
 United Utilities                          442                   603                 36%                 585                   32%
 Wessex Water                              508                   658                 30%                 614                   21%
 Yorkshire Water                           430                   627                 46%                 607                   41%
 Water and wastewater companies - average  440                   635                 44%                 597                   36%

 

 

Water-only companies - average bills for 2024-25 and 2029-30

 

 Company                         2024-25 average bill  Company's most recent bill proposal     Final Determination
                                 2029-30 average bill                      % increase          2029-30 average bill  % increase
 Affinity Water                  192                   246                 28%                 241                   26%
 Portsmouth Water                111                   148                 33%                 152                   37%
 South East Water                232                   331                 43%                 287                   24%
 South Staffs Water              161                   188                 17%                 195                   21%
 SES Water                       221                   241                 9%                  215                   -3%
 Water-only companies - average  192                   248                 29%                 234                   22%

 

All figures in both tables above are before inflation.

 

Water companies submitted revised proposals in August 2024. The figures in the
table for these submissions incorporate the proposed rate of return on
investment which was requested in their proposals.

 

We propose to apply a delivery mechanism for Southern Water and Thames Water
so that customers will not pay until we have greater clarity on the timing and
profile of these companies' plans. If the mechanism is triggered, this would
increase average 2029-30 bills by a further £20 and £11, respectively.

 

Southern Water only provided a forecast bill including the delivery mechanism,
so the company's representation is quoted to that effect.

 

Some companies have also revised the calculation of their 2024-25 average bill
since draft determinations so may be different to numbers seen in previous
data tables.

 

The bills shown for each water-only company do not include the cost of
wastewater services. These are provided by the water and wastewater company
which serves its area.

 

2.   Companies are able to appeal Ofwat's decisions by requesting a referral
to the Competition and Markets Authority; the deadline for requesting a
referral is 18 February 2025.

 

3.   A Sector Summary
(https://www.ofwat.gov.uk/publication/pr24-final-determinations-sector-summary/)
document
(https://www.ofwat.gov.uk/publication/pr24-final-determinations-sector-summary/)
provides an overview of the final determinations.

 

4.   A full range of Price Review documents
(https://www.ofwat.gov.uk/regulated-companies/price-review/2024-price-review/final-determinations/)
can be viewed on the Ofwat website.

 

5.   Thames Water - Ofwat has also published today for consultation the
outcome of its investigation into
(https://www.ofwat.gov.uk/ofwat-finds-thames-water-has-broken-dividend-payment-rules/)
dividend payments made by Thames Water
(https://www.ofwat.gov.uk/ofwat-finds-thames-water-has-broken-dividend-payment-rules/)

 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
 or visit
www.rns.com (http://www.rns.com/)
.

RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
.   END  IRSFFMFAAELSEEE