Thames Water customer bills are set to rise by the end of AMP6 to pay for the Thames Tideway Tunnel, according to its revised AMP6 Business Plan submitted to Ofwat on Friday.

The Plan shows that the average household bill excluding the TTT would fall from £361 in 2014/15 to £360 in 2019/20. With the TTT included, bills will rise from £364 in 2014/15 to £401 in 2019/20, an average annual 2% increase over the five year period.

Thames pointed out that whilst charges are flat (before TTT) in line with its December 2013 plan, if it performs as efficiently as expected, customers will get a reduction in their bills from 2020 of £12 pa.

While the water company has accepted Ofwat’s proposed 3.7 per cent wholesale WACC as part of its overall package of risk and reward, Thames warned:

“….for the avoidance of doubt, our overall view is that on a standalone basis 3.7 per cent WACC is too low and, over time, could be expected to have an adverse effect on the attractiveness of the industry for investors and put long-term investment at risk.”

“Consequently, we believe that Ofwat’s suggested wholesale allowed return is too low on a standalone basis. Our ability to continue to adopt Ofwat’s guidance as whole is therefore predicated upon Ofwat accepting our submission, as a whole.”

Ofwat set out its views on the appropriate retail margins for household and non-household of 1 per cent and 2.5 per cent respectively, and its view that the appropriate cost of capital is 3.85 per cent for the appointed business and 3.7 per cent for the wholesale business, when the appointed business rate is adjusted for the retail margins

Thames said the submission has been endorsed by its customer challenge group (CCG) and the resulting prices, excluding the Thames Tideway Tunnel, which is the subject of a separate price control, are supported by eight in ten of its customers in its updated customer acceptability testing.

However, when the charges attributable to the TTT are included, the figure falls – with nearly six in ten saying the company’s plans, including building the TTT and the resulting impact on bills are acceptable.

On the Tideway Tunnel expenditure, which Thames included within its overall wholesale wastewater plan in its December 2013 business plan, the water company has taken on board Ofwat’s concerns over the potential to mix TTT expenditure with normal wholesale wastewater expenditure and activities.

Thames has now supported the regulator’s preference for a separate price control for the TTT wholesale costs, including the existing Regulatory Capital Value (RCV) related to the TTT. The company says the advantages of this approach are that it:

• Makes it easier to ensure that the non-TTT wholesale activities are on a comparable basis to those of other companies.
• Makes it easier to ensure that the costs allocated to the TTT are demonstrably efficient.
• Facilitates clear progress reporting and accountability for delivery of the TTT.
• Can be used to secure an appropriate balance of risk between the firm and its customers.
• Means we are incentivised to deliver the project efficiently for the benefit of customers.

Ofwat will issue its draft determination on Thames Water’s business plan on August 29th.

Click here to read the adjusted plan.