MD182

TO ALL MANAGING DIRECTORS OF
WATER AND SEWERAGE COMPANIES
AND WATER ONLY COMPANIES

On 30 July 2002 I announced a proposal to modify all companies' licences to extend the notice period required for termination of an appointment as a water (and sewerage) undertaker to 25 years from 10 years.

The consultation on this proposal ended on 24 September 2002. Companies welcomed the proposal as an important step in reducing regulatory uncertainty and all have now consented to the making of the licence modification.

WaterVoice also responded on behalf of customers. Seven of the ten WaterVoice Committees supported the proposal, on the basis that it would provide greater regulatory stability, assist companies' long-term planning, deliver a lower cost of capital and better reflect the lives of the assets of the industry. They also noted that the change would not affect Ofwat's ability to take action against poor performers. WaterVoice Wales and WaterVoice Wessex did not support the proposal and WaterVoice South West was unconvinced. This was primarily because they believed there was insufficient evidence that the current 10 year notice period is creating regulatory uncertainty and affecting the cost and availability of long-term finance to the detriment of customers.

Only one other response was received. This raised some general concerns about regulation of the industry.

I have considered carefully all of the responses to the consultation. I remain of the view that the change will contribute towards a more stable regulatory environment and ensure that companies are able to continue to access the capital markets on reasonable terms. I believe that the change will be to the long-term benefit of customers, companies and their investors. I will therefore make the modification immediately.

PHILIP FLETCHER