Is Ofwat taking a tougher approach?
Thames Water’s request for a £29 increase in household bills to cover costs not included in the last price review has been rejected by the industry regulator Ofwat. The request for an increase was fiercely opposed by some London MPs (such as Simon Hughes and Sadiq Khan). NPI previously asked why, if customers have to stump up to buy it, the asset shouldn’t be owned (but not managed) by the public of London through the Mayor and Assembly.
Is this rejection an indication that Ofwat is taking a tougher line given the prominence of cost of living concerns? And how will water companies respond?
The request covered several different elements of cost including increases in bad debts, the transfer of private sewers, land purchases in relation to the ‘super sewer’, and higher environmental charges. Thames also included two items which were reducing costs: changes in its sewer flooding work and higher proceeds from selling land.
Ofwat disagreed with Thames Water over the costs the latter had put forward. In several cases, Ofwat did not consider the costs to have been incurred efficiently or prudently. The regulator had issued a Notice in relation to Thames Water to broaden the scope of costs that were considered (something Thames Water disagreed with). The result was that Ofwat considered Thames Water’s costs to have increased by less than the company had argued. The company now has two months to decide whether to appeal to the Competition Commission.
This rejection is not unprecedented, but is rather unusual. We have identified 17 cases since privatisation in which water companies have applied for an additional price increase within the period of a five year price review (this is no doubt not comprehensive, but hopefully captures the majority). This includes what Ofwat terms Substantial Effects Determinations, which are for unforeseen changes to revenues or costs. Only four were rejected or withdrawn by the company; the rest led to an increase in prices (though not necessarily as high as the company originally wanted). There shouldn’t be too much read into this: it is not necessarily an example of a soft regulator, but instead may reflect that companies only apply for such increases when they are confident of succeeding. Ofwat’s use of a Notice to include other conditions that are reducing costs for Thames Water could be a sign of a tougher approach from the regulator.
While the rejection of the price increase will be welcomed by Thames Water customers, there is not much cause for celebration otherwise. Thames can still increase bills in 2014-15 by RPI plus 1.4%. With RPI expected to be in the region of 3% in 2014, this is still a reasonable increase if incomes remain stagnant.
The next price review for the period 2015-2020 is currently underway, and it is being trailed as a rather tough review for the water companies. This Ofwat speech estimates that the average bill could fall from £360 to £330 – although that is before inflation is included. This is again unusual but not unprecedented. Bills were cut at the 1999 price review and did not return to their previous level again until the mid-2000s.
But if Ofwat may be playing it tougher, so too may Thames Water. In the same week, the company announced that water metering would become compulsory. For larger households, or those with high needs, this can threaten a big rise in bills. Metering needn’t necessarily be a bad thing – it all depends on the tariff structures – but if this is announcements is indeed Thames Water also playing tough, then it places both utility companies and regulators at the heart of the cost of living debate.