Bristol Water has highlighted its concerns about a number of proposals in Ofwat’s PR19 draft methodology consultation.

In a detailed response to the consultation, the water company said it agreed with the majority (46) of the proposals, and disagreed or strongly disagreed on 13 proposals.

Bristol Water has addressed each proposed performance target separately but said that the combined effect of the individual elements and the resulting increase in financing risk - and therefore its ability to finance the business adequately - is an issue it would like to discuss further with Ofwat.

The response says that the methodology consultation document includes proposals that potentially change the structure of the regulatory model by placing increased weighting on performance incentives within the allowed revenues.

Bristol Water has suggested that further analysis is needed on the potential implications for customers of the combined impact of the proposed financial and non-financial targets, commenting:said:

“ it will not be in our customers’ interest to bear higher costs in the long-term (in future price reviews) as a result of short-term over-ambition and higher levels of risk.”

The utility has also expressed concern over Ofwat’s proposals on leakage reduction. Bristol Water is already a strong performer within the industry on leakage, performing better than the upper quartile in the current price review period and already targeting a 12% reduction from 2015 to 2020.

The response says:

“The relative marginal cost of leakage improvements increase the closer a company is to the frontier level of performance. The proposed imposition of a universal target of a 15% reduction in leakage may result in the customers of high performing companies paying disproportionately higher costs for further improvements. “

Bristol Water has suggested that an alternative approach to achieve an overall 15% reduction in leakage across the industry would be to set individual leakage targets for each company based on how far their current performance is from the industry average level, with those further behind the average being set a more challenging target than 15% and those performing better than the average being set lower targets.

According to the utility, this approach is likely to produce the same aggregate level of leakage reduction and improve industry performance at much lower overall costs to customers.

Commenting generally on performance and efficiency targets, the response says that setting performance targets at upper quartile levels at the start of the period “may not be in the best long-term interests of our customers.”

Bristol Water plans to consult with customers on the timing of delivery of the performance commitment targets and the efficiency areas “appropriate to the level of performance required by customers during the next price review period.”

The response says this is more consistent with Ofwat’s historic approach and precedent which has “rightly recognised that regulated companies, especially those in capital intensive industries like water, need time to implement innovations and make improvements in an efficient and effective manner.”

Bristol Water has also expressed strong disagreement about the proposal to place greater reliance on subjective assessments of market conditions through Total Market Returns (TMR) in determining the cost of equity for the next price review period.

Echoing concerns about Ofwat’s approach to total market returns in a KPMG report commissioned by Affinity Water, Anglian Water and Northumbrian Water published earlier this week, the response says this represents a departure from previously established Ofwat approach.

Bristol Water said:

“TMR has proven in the past to be a particularly difficult component of the WACC to forecast, and therefore a long-term historical review has been consistently adopted by regulators to minimise subjectivity and address margin of error in estimation - an approach which continues to be supported by considerable body of academic literature.”

“We believe retaining such an approach would more appropriately account for the level of risks involved, which form part of the reasonable expectations of equity providers.”

“We urge Ofwat to reconsider their approach and to take into account the precedent set by the CMA in its redetermination on this issue for Bristol Water in 2015.”

The water company has also requested that Ofwat provides further details of how it will adjust WACC and financeability tests for the transition from RPI to CPIH as early in the price control process as  possible.

Click here to read Bristol Water's response