IB 20/13: Ofwat confirms process for challenging Thames application for bill increases

Ofwat has today announced the process for challenging Thames Water’s request for an interim increase in customers’ bills for next year. The requested increase could add a further 8% – or around £29 – to an annual average household bill.

Ofwat is assessing Thames’s application to determine whether increases are justified. The regulator is examining Thames’ evidence of increased costs and has considered what counter-claims it should investigate on customers’ behalf. Counter-claims are an established part of the regulatory regime, and could reduce the level of any bill increases by deducting gains made by Thames over the current regulatory period.

Ofwat can make counter-claims where the company has not delivered outputs for which customers have been paying. Ofwat is giving notice to Thames that it is making three such counter-claims relating to:

  • underspend on sewer flooding;
  • a significant slippage in part of Thames’ investment programme for sewage treatment; and
  • not adequately maintaining parts of its wastewater network.

Ofwat is also looking at whether Thames has benefited from wider economic circumstances beyond its control, and whether it can deduct these gains through an established regulatory process called the ‘substantial favourable effect’ mechanism. As Thames is the only company to have applied for an additional increase in bills before the next price review, Ofwat will only examine whether there is a case for clawing back gains through this mechanism from Thames.

Ofwat’s Chief Regulation Officer Sonia Brown said:

“We have been clear that we would challenge Thames’ proposed bill increase. So we are looking to see if there are areas where we can claim money back for customers.”

The regulator will publish its draft decision on the application for an interim increase in mid-October. There will then be a short, technical consultation period, followed by a final decision in early November. Any permitted revisions to price limits would apply to customers’ bills from April 2014.

As part of the five-yearly price review process Thames and the other 18 regulated water companies, will submit their business plans for 2015 to 2020 in December. Ofwat has made changes to the way it regulates in future to make companies more efficient and customer-focused, as well as ensuring more sustainable water use. Ofwat is due to make a final decision on the future prices companies can charge by January 2015, with new bills coming into effect in April 2015.

-ends-

Notes to editors:

  1. 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 value and safeguard future water and sewerage services by allowing efficient companies to carry out their functions properly, and finance them.
  2. Thames Water announced its application to further increase bills in August. See https://www.ofwat.gov.uk/mediacentre/ibulletins/prs_ib1413tmsidok
  3. Thames say increases in its costs are because of:
    • increases in bad debt costs above what was allowed in 2009 price limits, specifically additional bad debt due to the economic downturn;
    • the impact of the transfer of private sewers;
    • Thames tideway land purchase costs above what was allowed in 2009 price limits; and
    • increases in Environment Agency charges above what was allowed in 2009 price limits.

    Ofwat acknowledges that the costs of Thames Tideway tunnel are unique to Thames Water, and could legitimately be part of an interim application to increase price limits, subject to efficiency challenge.

  4. In 2009 Ofwat set price limits on prices for the period 2010-15. Thames said that it has experienced changes to certain specific costs that were not taken account of by Ofwat, when price limits were set. The regulator’s 2009 decision means Thames already has an allowance to increase its charges by 1.4% above inflation in 2014-15. Thames has indicated that this application would add around a further 8% – around £29 – to the average household bill for next year. The current average Thames household bill is around £354.
  5. If it is established that there is a case for a ‘substantial favourable effect’, Ofwat will then provide an update on that process.
  6. Media enquiries to Ofwat Press Office on: