Thames Water’s request for an interim price increase of £29 which potentially would come into effect in 2014/15 has raised some interesting questions about the figures in the utility’s recently published Draft Business Plan and the Business Plan process itself.

Published at the end of April, the Draft Business Plan states that Thames Water currently estimates an average bill of £370 by 2019/2020. With a current average bill of £354, if the utility is granted the increase the bill would rise to £383 by 2014/15 i.e. five years ahead of the estimate in its Plan.

The water companies’ licences allow them to apply for an adjustment to their price limits for material changes to specific items that have a total impact on the company amounting to at least 10% of the company's turnover. Thames Water’s latest financial results report revenues of £1.8 billion, suggesting unspecified costs in the region of £180 million.

The request for an increase cannot have come as any great surprise to regulator Ofwat. The Plan, which was published in April, specifically flagged up the possibility that next year’s bills could be affected by costs “which could not have been accurately predicted” when bills were last set in 2009. Thames is now making its case to Ofwat to recover a proportion of these costs, which have so far not been included in customers’ bills, and asking if they could be recovered over more than one year

What is interesting is how much this will have been taken into account by the independent Customer Challenge Group charged with scrutinising the Plan to check the detail of Thames’ proposals and how much advance notice the CCG would have received about the proposed price increase. No information appears to be available in any detail about the extent to which they were kept informed of the increase or how its sits within the stakeholder engagement process itself..An eight-week consultation on the proposals closed on 25 June 2013.

So how will Ofwat address Thames' price increase request and Draft Business plan?

Ofwat is expected to make a final decision on the price increase application by November 2013. The regulator has told the water companies that it will not be providing views on companies’ plans before they are submitted on 2nd December.

What is not clear at this stage is how much information will be made publicly available by the regulator on how it comes to these decisions and to what extent they will be addressed jointly or separately when they assess both Thames’ request for a price increase and its Draft Business Plan.

However, in a paper covering a Government and regulators briefing session: questions and answers on the final methodology for PR14 and expectations for companies’ business plans published by the regulator on 8^th August, in response to the question:

“We are concerned that there may be certain parts of business plans which are not very visible to the CCGs,”,

Ofwat stated:

“It is important to force companies to be transparent now. For example, a regulator is writing to the companies requesting the information they need.”

Whether Ofwat’s desire for transparency and wider stakeholder engagement extends to its own role in the Price Review process remains to be seen. The regulator is currently in a period of clarification until 30 September 2013, during which time it is available to meet bilaterally with the water companies to clarify any issues they have.

Ofwat has said that during this time If it identifies an industry-wide issue as part of this then “we will inform everyone” but that “other than that the conversations will remain private.” No indication has been given as to who “everyone” is.

In a statement commenting on Thames Water’s request yesterday, outgoing Ofwat Chief Executive Regina Finn confined herself to saying that the regulator would “challenge these proposals and question the company strongly on their reasons. Proposed increases will only be allowed if they are fully justified."

Price increase requests from othe companies in the pipeline?

The other interesting question is whether any of the other water companies – who face similar challenges in terms of the costs of private sewer transfer and increasing levels of bad debt – will make a similar move or whether they are waiting on the sidelines to see how Thames Water fares.

The item that sets Thames apart in this context is the land purchase cost of the proposed Tideway Tunnel. At this stage no-one can say with any certainty whether this really will be a one-off increase or whether there will be any further unanticipated “mission creep” in the final cost for the Tideway Tunnel. Currently projected at £4.1 billion, the scheme was originally costed at £3.6 billion when Thames Water first announced its plans.

Thames says in its Draft Business Plan that “any balanced appraisal” of the plan has to start with an explanation of the Thames Tideway Tunnel – which will  see “all of the necessary costs …. borne by wastewater customers in the Thames Water area. It also states

“The estimated cost of building the Thames Tideway Tunnel is £4.1 billion (excluding inflation). The exact impact on bills is not yet known, but will increase as the work progresses. The project is estimated to add a maximum of £70 to £80 to the average annual wastewater bill paid by our customers by the early 2020s.”

Thames is now coming in for widespread criticism throughout the national media and while the utility could make a respectable case to justify the increase it is seeking, it currently appears to be losing the battle to argue its corner strongly.

Two days ago Thames Water published a list of corrections to what it described as inaccurate statements presented in a paper by the Centre Forum think tank entitled “Money down the Drain: getting a better deal for consumers from the water industry” published on 17^th July. A Thames spokesman commented:

“Many aspects of this report are misleading and extremely damaging. We are seeking a meeting with Centre Forum to discuss their report.  In the meantime, this point-by-point rebuttal sets the record straight.

.. but still one of the lowest average bills in the country

The planned increases notwithstanding, Thames Water’s current average bill is still one of the lowest in the UK – at £354 per year, the second lowest of the major water and sewerage companies in England and Wales. Thames is also having to address the significant and ongoing challenges of its ageing Victorian infrastructure, the growing impacts of climate change and extremes of drought and flood within a very short space of time, supplying water and wastewater services to a heavily urbanised region and increased pressure on resources as a result of population growth.