Water industry regulator Ofwat has accepted a proposal by Severn Trent Water to limit the scope of the firm’s response to the Draft Determination to a small number of critical issues.

Liv Garfield, Chief Executive of Severn Trent Water, wrote Ofwat on 19^th September to suggest  a way in which the company might approach its response to the recent Ofwat Draft Determinations.

Ms Garfield said the company appreciated that Ofwat has “all 14 "slow track" DOs to complete in only a matter of weeks” and that a number of significant issues remain to be finalised, during the final stage of the price review process.

Severn Trent has suggested that in view of the tight timescale, it should focus on a relatively small number of critically important issues, rather than a broad range. The letter states:

“Given the time available and the fact that we have a small number of issues that are absolutely critical to us, documented below, we have come to the conclusion that focusing our representations on a relatively small number of material issues to Severn Trent, rather than challenge across a wide range of individual issues, allows sufficient air time for our critical issues and demonstrates our commitment to a constructive dialogue. “

The key issues  include:

• The Elan Valley Aqueduct (EVA): Birmingham resilience - where Severn Trent has undertaken the additional work required by Ofwat in the DD to justify the inclusion of the revised cost of the scheme, including the additional Board assurance.
• The EVA: community risk schemes - where the work undertaken with the Health and Safety Laboratory to revise ST’s cost benefit assessments, reassess risk and possible solutions provides a robust case for proceeding with the schemes. Severn Trent have re-looked at the cost of the schemes as part of its review and will propose completing them at a lower cost than in the revised plan.
• Household Retail - the approach to assessing bad debt does not adequately factor in the underlying bill levels, which leads to a result which seems counter to customer expectations (Le. there is a disincentive in having a low bill level). Severn Trent’s plan included £25m for increases in bad debt, £10m of which related to increasing bad debt levels due to increases in the nominal bill.
• Outcome Delivery Incentives - the change to targets has taken precedence over local customer engagement and priorities, and applied without alignment to tote x allowances.

Severn Trent Water believes the approach of challenging on such a wide range of issues would potentially undermine the constructive dialogue both sides have sought to maintain to date.The water company  would like to proceed on the basis of not challenging on all these areas and instead focusing on the critical issues.

The letter states:

“We propose that the Ofwat and Severn Trent teams cease to work on the issues we are not proposing to make representations on (e.g. through the query and representation process), and we accept the position as set out in the DD on these issues. If Ofwat were at a later stage to decide to make industry-wide policy changes, which could result in changes to the Severn Trent determination, we would request a suitable time frame in which to respond to any such changes. “

Liv Garfileld concludes by saying “this is not something we have proposed lightly, but have listened to the consistent Ofwat feedback that we need to view the business plan "in the round".

In response, Giles Stevenson, Portfolio Director at Ofwat said in a letter dated 23^rd September that the regulator welcomed Severn Trent’s overall approach of focused representations which would help make the most effective use of resources for both teams – although there were no guarantees associated with the outcome of Ofwat’s assessment.

On that basis, Ofwat has agreed to  limit its attention to the select issues identified by Severn Ttrent Water.

However Giles Stevenson cautioned that Ofwat will consider all representations before making a final determination – and this could result in changes to the draft determination position. He also flagged up the possibility for further changes arising from both broader policy issues and Ofwat’s on-going quality assurance process.

It will be interesting to see whether the regulator will now adopt the same approach if it receives similar proposals from the other water companies.