Dear Stakeholder
Setting water and sewerage price limits - A joint statement
12 August 2003
We are issuing this joint statement now to explain the next stages of the water price review and to enable you to get involved in the decision taking this autumn.
This letter and our statement: - explain what the water price review is;
- set out the decisions to be taken at this stage, and how and when we will take these decisions;
- show you when and where you will find more detailed information;
- show you how and when to contribute your views to our decisions;
- set out some of the questions that you might like to address; and
- explain who we are and how to contact us.
The water price review reaches an important milestone later this month when each water company submits to Ofwat its draft business plan for the period from April 2005. Ofwat will set new price limits for the companies in November 2004. In preparation for this the Secretary of State for Environment, Food and Rural Affairs and the Welsh Assembly Government will be taking key decisions later this year on the quality and environmental improvements which water companies will be required to deliver between 2005 and 2010. And providing guidance on other policy and statutory requirements which may impact on price limits. These decisions will be taken in the light of: - The draft business plans provided by companies in August 2003.
- Advice provided by the quality regulators (Drinking Water Inspectorate, Environment Agency, English Nature and Countryside Council for Wales) and Ofwat, the economic regulator.
- The outcome of customer research being conducted jointly by all parties to this statement and WaterVoice, the Wildlife and Countryside Link and the companies through Water UK.
- Comments received from interested parties in response to this statement.
The decisions will be announced in January 2004.
We welcome your views on the decisions to be taken by 5 November 2003. It would be particularly helpful if comments on the summaries of companies' draft business plans were with us by 10 October 2003. The most straightforward way to contribute your views on the review is by sending them to Ofwat, who will pass on full copies of all the representations that they receive to all of us. If you do not want your views to be shared with all the regulators, please say so.
Alternatively, if you have points addressed particularly to one of us rather than to all, you may choose to send them directly to Ofwat, the Department for Environment, Food and Rural Affairs, the Welsh Assembly Government, the Environment Agency, Drinking Water Inspectorate, English Nature or the Countryside Council for Wales. The joint statement sets out how and when to find more detailed information on particular aspects of the review, and how to contact each of us. You might also choose to comment to your local water or sewerage company on their plans or to your regional WaterVoice Committee who represent water customers' interests.
We hope that you will find the information that will become available over the next few weeks helpful. These are important issues that will affect everyone and we welcome your input to help us make the right decisions on time.
Yours sincerely
Richard Bird
Andrew Brown
Jeni Colbourne | Philip Fletcher
John Lloyd Jones | Bob Macey
Barbara Young |
Setting water and sewerage price limits
An informed debate on the decisions to be taken
A joint statement – 12 August 2003
What the review is
In November 2004 Ofwat will set new price limits(1), for each water and water and sewerage company for the period 2005-10. In March this year, Ofwat set out its framework and approach(2). Each company's price limits need to be sufficient, but no more than sufficient, to fund it to supply water and deal with sewage in a way that meets all its legal obligations now and is sustainable into the future.
Each company will need to:- Run its business day to day to meet all service, quality and environmental compliance obligations;
- Maintain its assets for current and future customers;
- Ensure it achieves a sufficient balance between supply and demand for water and sewerage services;
- Meet future drinking water quality standards; and
- Environmental standards which Ministers decide are needed to meet legal obligations and;
- Make other improvements, for example by reducing the number of homes at risk of sewer flooding.
And, assuming it is efficient, be able to - earn a reasonable return on its capital at least equal to its cost of capital; and
- raise finance on reasonable terms in the capital markets through adequate levels of revenues, profits and cashflows.
Over the last two years, we together with the water companies and WaterVoice, have been preparing the ground for the decisions that Ofwat will take on price limits next year. Our roles in the review and the contact details of our organisations are set out in the table at annex 1.
This statement concentrates on the period leading up to the principal Ministerial guidance in January 2004. A timetable of key events also including the later stages of the review is at annex 2.
This review sets upper limits on the overall level of each company's prices in each of the years from 2005 to 2010. How the overall charges are distributed between customers, and how customers are charged for water, are separate.
Key issues and questions
The draft business plans that companies will produce in August 2003 and the advice from the regulators to Ministers this autumn will expose the key issues that need to be resolved. Each company will produce and publish a summary of its draft business plan by 2 September 2003.
Each draft business plan will present the company's preferred strategy for the next five years and the level of bills the company believes it will need to charge to deliver its chosen strategy to its customers. The plans will also include two reference plans for the larger companies, and for the smaller companies one reference plan, which will include defined packages of improvements to the environment and drinking water quality.
Water companies' current services need to be maintained. Companies will also be asked to deliver improvements in drinking water quality and the environment. Other changes, such as in taxation, may also increase companies' costs. There will be some offsetting savings from further improvements in efficiency both in the current period and in the future. However these are not expected to outweigh the upward pressures on costs across the industry as a whole. Where company costs are confirmed as higher than in the past they will have to be financed through increases in customers' bills. The position will vary from company to company.
Decisions on the review need to be taken against this background.
We want to know what you think about the key issues. In putting your views you may find it helpful to consider the some or all of the following questions, whether generally or for particular companies. In answering these questions you may find it useful to look at companies' draft business plans and the other information that will be available through the autumn (listed at annex 1).
Question 1 Which aspects of water companies' services are more and less important to you? Taking account of the implications for customers' bills which aspects (if any) would you like to see improved?
Question 2 Do you agree or disagree with the proposals recommended as the companies' preferred option in their draft business plans? Are there any particular areas where you agree or disagree? Are there any major omissions?
Question 3 What measures should companies take to:- Maintain their assets (eg pipelines, sewage treatment works).
- Maintain and improve drinking water quality.
- Protect and improve the water environment and habitats.
- Maintain and improve other services, including preventing the flooding of homes by sewage.
- Maintain and improve security of water supply.
How quickly should these improvements be made? How should desirable improvements be prioritised against each other?
Question 4 How should the requirements placed on water companies take account of the interactions with others, outside the water industry, on water resources and quality (eg diffuse pollution, urban flooding risk management)?
Question 5 Do companies' business plans, in your view, represent fairly the necessary implications for customers' bills of alternative programmes?
Question 6 Taking account of what water companies are required to deliver to meet EU and national legislation, and what is practical, what increases in customers' bills, if any, would be acceptable in order to deliver the services and improvements that you would like to see?
When and where you will find more detailed information
| If your interest is | You will find information in | When |
| Issues specific to each company and its proposals. | Each company's summary of its draft business plan. To be published by each company. | By 2 September 2003. |
| The impact of these proposals on customers' bills for all the companies. | Ofwat's press notice summarising the draft business plans. | 3 September 2003. |
| All or many aspects of the review, and issues affecting all companies. | Ofwat's document setting out the issues arising from companies' plans. | 16 October 2003. |
| Government policies affecting the water industry. | The initial guidance from the Secretary of State and from the Welsh Assembly Government.(4) | Already published in January 2003 and March 2003. |
| How Ofwat will go about setting the price limits in 2004? | The framework and approach Ofwat will take to setting price limits.(5) | Already published March 2003. |
| How water companies will be addressing water supply issues? | The Environment Agency's water resources planning guidelines.(6) | Already published January 2003. |
| Drinking water quality. | Drinking Water Inspectorate will publish a summary of the proposals for drinking water quality improvements. | September 2003. |
| Local schemes to protect and improve drinking water quality. | Details of all schemes receiving Drinking Water Inspectorate support will be published. | November 2003. |
| Measures to protect and improve the water environment and habitats. | The Environment Agency, English Nature and the Countryside Council for Wales' report on the proposed environment improvement plan. | 12 September 2003.
|
| Water resources and security of supply | The Environment Agency's report to Ministers on water company water resources plans. | November 2003. |
| Long term Government policies on water | Directing the flow(7), strategy for water over the next 20 years. | Already published November 2002. |
All these documents are or will be available on the websites of each organisation or by contacting the addresses listed in annex 1.
Annex 1 - Who we are, our website addresses and how to contact us
Regulators | Role in the price setting process | Contact details |
| Ofwat leads the review and will set price limits taking into account views and advice from others. In March 2003, Ofwat set out its framework and approach to the review. | |
| The Drinking Water Inspectorate provide advice to the Government on drinking water quality, identifying with water companies the programmes needed to deliver agreed policies. | Milo Purcell
Head of Asset Management,
Drinking Water Inspectorate
2/F4, Ashdown House, 123 Victoria Street, London SW1 6DE
Tel: 020 7944 5993; Fax: 020 7944 5969
milo.purcell@defra.gsi.gov.uk |
| The Environment Agency is the Government's chief advisor on water quality and water resources. It advises on the need and opportunities to protect the water environment. It also ensures that companies have good plans in place to provide enough water, taking account of the needs of other water users and the water environment. | |
| English Nature is the Government agency that champions the conservation of wildlife and geology throughout England. It advises Government and others on policies for or affecting nature conservation, and works in partnership with the Environment Agency to identify work required for the protection of Natura 2000 and Sites of Special Scientific Interest in England. | |
| The Countryside Council for Wales is the statutory advisor to the Welsh Assembly Government on sustaining natural beauty, protecting wildlife, and providing opportunity for outdoor enjoyment, throughout Wales and its inshore waters. It works in partnership with the Environment Agency to identify work required for the protection of Natura 2000 and Sites of Special Scientific Interest in Wales. | |
| The Department for Environment Food and Rural Affairs is responsible in England for conveying Government policies that may affect the obligations of companies and hence price limits.
Its initial guidance was published in January 2003. | Stephen Ryman, WSR4, Defra, Zone 3/H27. Ashdown House, 123 Victoria Street, London, SW1E 6DE
Tel: 020 7944 5290; Fax: 020 7944 5398 [note: telephone code change on 27 September 2003 from 020 7944 5290 to 020 7082 8330]
stephen.ryman@defra.gsi.gov.uk |
| The Welsh Assembly Government is responsible in Wales for policies that may affect the obligations of companies and hence price limits. The Assembly Government published its initial guidance in March 2003.
. | |
If you want to contact your regional WaterVoice you will find addresses on their website www.watervoice.org.uk or from Andrew Marsh on 0121 625 3637.
If you want to contact your water or sewerage company you will find the address on www.water.org.uk website or from Karen Jordan on 0207 344 1844.
Annex 2 - The key events through the autumn and beyond 2003
| August 2003 to January 2004 |
| August 2003 | Draft business plans | Each water company will produce a draft business plan for the period 2005 to 2010. Each company will publish a summary of its plan by 2 September.
Companies will also submit draft water resources plans to the Environment Agency (these form part of their draft business plans). |
| 3 September | Ofwat press notice | Summarising the draft business plans. |
| 22 September 2003 | Environment report | The Environment Agency, English Nature and the Countryside Council for Wales publish their report on the proposed environment improvement plan. |
| 16 October | Ofwat issues paper | Ofwat will publish a paper setting out the issues emerging from companies' draft business plans that will need to be decided before plans are finalised in 2004. In the light of this, Ofwat will advise Ministers. |
| November 2003 | Water resources report to Ministers | The Environment Agency will publish a report setting out the issues emerging from companies' draft water resources plans. |
| November 2003 | DWI publishes supported drinking water quality programme | Details of all schemes receiving DWI support will be published on the DWI website. |
| December 2003 | Customer survey | We, together with the water companies, WaterVoice and the Wildlife and Countryside Link, will jointly publish the results of a survey of domestic customers' views. |
| December 2003 | Ofwat advice to Ministers | Ofwat will publish the advice that they have given to Ministers on the implications for price limits of Government decisions on policies affecting the water industry. |
| January 2004 | Principal Ministerial guidance | The Secretary of State for Environment, Food and Rural Affairs will publish her principal guidance to inform companies and Ofwat on the drinking water and environment improvements that will apply in the review period and other Government policies and legal requirements that may affect the obligations of companies and price limits. The Welsh Assembly Government will publish similar guidance in relation to Wales. |
| After January 2004 |
| March 2004 | Ofwat guidance | Ofwat issues any final guidance to companies ahead of business plans. |
| April 2004 | Final business plans | Companies submit their final business plans.
Companies also submit their final water resources plans to the Agency. |
| June 2004 | Reports on Final Water Resources Plans | Environment Agency reports to Ministers on Final Water Resources Plans. |
| July 2004 | Draft price limits | Ofwat publish draft determinations of the price limits for companies. |
| September 2004 | Final Ministerial guidance. | Ministers have the opportunity to fine-tune their principal guidance. |
| November 2004 | Final price limits | Ofwat publishes final price limits. |
| April 2005 | New price limits | New price limits come into effect. |
(1) The price limits restrict the annual average increase in customers' bills to the rate of inflation plus or minus a specified factor.
(2) 'Periodic review 2004 – Setting water and sewerage price limits for 2005 –2010: framework and approach', Ofwat March 2003.
(4) Initial guidance from the Secretary of State to the Director General of Water Services, '2004 periodic review of price water limits', January 2003, Defra, available on the Defra website and 'Initial guidance from the Welsh Assembly Government to the Director General of Water Services on the 2004 periodic review of the water price limits', March 2003, available on the Welsh Assembly Government website.
(5) See note 2 above.
(6) Water Resources Planning Guidelines, Environment Agency.
(7) Directing the flow, Defra, available on Defra website.
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Price review 2004
