IB 13/13: Ofwat announces additional funding requirement

Ofwat today published its methodology for the 2014 price review and also confirms that it will be seeking increased licence fees from the appointed water companies to help fund the 2014 price review, before reducing fees in 2015.

The assessment of company plans is part of the substantial changes Ofwat is making to how it regulates the water companies. These changes have already started to secure a long-term culture change in the sector and will encourage water companies to put customers at the heart of their businesses, while delivering environmental benefits and securing significant ongoing infrastructure investment.

Ofwat believes these changes are essential. They build on the recommendations of the 2011 Gray Review and they will bring major benefits for customers, the environment and the economy. Independent analysis of the changes suggests the economic benefits from changes to retail controls and encouraging water trading alone could be over £2 billion, as well as substantial cost and financing efficiencies from the five yearly review.

Intense effort on the delivery programme has confirmed that initial estimates did not account for the scale of change in this review process, compared to previous reviews, nor for the extent of assurance required to guarantee the successful delivery of the review. This will include the appointment of a delivery partner to work alongside Ofwat staff for the peak workload periods from now until the end of 2014.

Ofwat will raise an extra fee in the current year of £3.2 million to fund this work. This equates to less than 0.03% of the industry turnover. Furthermore, Ofwat will actively engage with the water companies to seek their agreement to a one-off higher licence fee in 2014/15. This would see the licence fee increase, on a one-off basis, to £26.6 million. This is still less than 0.25% of the industry’s turnover. The total increase in the licence fee for 2014/15 is up to £7.5m. Ofwat is grateful to the companies for their initial positive engagement on the issue.

Ofwat’s budget will reduce in 2015-16, once the price review process is complete.

Ofwat will carefully review, through its Audit Committee and Board, how the full resource requirements were not forecast earlier in the budgeting and planning cycle and identify lessons to improve future forecasting and budgeting.

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Notes to editors:

 

  1. The Water Services Regulation Authority (Ofwat) is the economic regulator of water and sewerage companies in England and Wales. It exercises its powers in a way that it judges will protect the interests of consumers, promote economy and efficiency and safeguard future water and sewerage services by allowing efficient companies to carry out their functions properly, and finance them.
  2. The supplementary special licence fee to be raised in the current year will be in the region of £3.2 million which is 0.03% of turnover of the industry. This, along with unused licence fees from previous years, will meet resource needs for the current year at a total licence fee of 0.23% of industry turnover.
  3. Ofwat is seeking an agreement in principle from water companies to a one-off higher licence fee in 2014/15. This will still be in the region of 0.25% of the industry turnover compared to the 0.23% this year. Agreement in principle will be followed by a necessary licence change process to enable the higher fee to be raised next year. Ofwat will confirm its final budget for 2014-15 in February 2014 and will, as normal, publish an indicative budget and calculate indicative licence fees in December 2014.
  4. An increase in the licence fee for 2013/14 would be the first increase in the licence fee for four years. Between 2009 – 2013 the licence fee went down in real terms.
  5. Media enquiries to Ofwat Press Office on:
    Benedict Fisher 0121 644 7642 / [email protected]
    Harbinder Babra 0121 644 7616 / [email protected]