THD FBP assessment by gabyion




2007-08 prices                   2009-10    2010-11    2011-12    2012-13    2013-14     2014-15
K (%)                                         11.3        2.7        1.3        0.1        -0.6
Average household bill (£)        162.47     180.37     185.20     187.05     186.99      185.29

Average unmeasured bill (£)       197.73     229.21     236.61     240.07      241.23      240.15
Average measured bill (£)         141.81     156.23     160.24     162.41      162.43      161.61
Difference (£)                    55.92      72.98      76.37      77.66        78.80      78.54

1     Summary of Views

1.1   We consider that Tendring Hundred Water’s (THD) Final Business Plan (FBP) broadly
      reflects customers’ priorities and expectations in terms of the proposed investment
      programme. This is evidenced in the joint national stakeholder research in which 80% of
      customers felt that providing safe, reliable, clean drinking water was the most important
      service. The company’s 2008 willingness to pay survey also identified guaranteed water
      quality and improved water efficiency as priorities. THD propose to achieve this through
      investing in mains replacement, an extensive metering programme and constructing a new
      treated water reservoir and pumping station at Dovercourt.

1.2   While we generally support THD’s FBP, there are some proposals we do not support, and
      some proposals where we expect Ofwat to undertake further scrutiny. Overall, we
      consider that there is still scope to reduce the impact on customers’ bills by removing
      some proposals and delaying some investment.

1.3   CCWater support the company’s proposals to:

              install a new treated water reservoir and pumping station at Dovercourt;
              introduce automatic meter reading (AMR) in Clacton;
              trial a social tariff aimed at low income households, but wish to know more about
               its mechanics before giving it our full support;
              increase compensation payouts for service failures to £50.00;
              maintain leakage at or below the sustainable economic level; and
              replace 30km of trunk mains at high risk of failure and associated communication

1.4   CCWater does not support the company’s proposals to:

              increase the average water bill by £17.90 in the first year of the five-year period;
              meter 90% of domestic properties by 2015. With declining consumption and
               surplus supply we consider that metering at this pace is not required particularly in
               this economic climate;
              classify a number of risks and uncertainties as Notified Items. We believe that the
               company should carry these as business risks, especially customer debt; and
              consider trickle-flow devices as part of a debt management strategy.

2     Prices

2.1   The FBP lacks clarity around costs. We are concerned that expenditure is the same for
       the next five years as it was for the last five years, yet prices are rising when they fell
       between 2005 and 2010. In the FBP the company states that costs have risen above
       current levels due to rising bad debt, increased business rates and pension costs, but how
       these costs impact on customers’ bills is unclear.

                             Tendring Hundred Water – Page 1 of 4
2.2   The company is proposing to increase its average water bill by 14.05% above inflation
      (£22.82) over the five years to 2014-15, which remains relatively unchanged from the
      14.11% increase above inflation (£22.88) proposed in the company’s Draft Business Plan
      (DBP). We are disappointed that the company has not reacted to the worsening economic
      conditions by removing some proposals and delaying some investment over the five-year
      period. This could reduce bills to a level that customers would be willing to pay without
      it impacting adversely on the company’s overall priorities for investment.

2.3   98% of THD’s customers indicated that they preferred bills to change steadily every year
      throughout the five-year period. Therefore, the price increase of £17.90 (11%) proposed
      in 2010-11 will not be acceptable to many customers. We are also concerned about the
      gradual rise in bills up to 2012-13, followed by a small reduction and then a final year
      decline in prices of £1.70 in 2014-15. While we do not necessarily wish to see an overall
      increase in the final water bill due to smoothing the pricing profile, we would prefer
      investment to be spread more evenly over the period.

3     Investment Proposals

3.1   THD propose a net contribution of £18.64m on capital investment in the following areas:

            £7.35m on infrastructure;
            £6.33m on non-infrastructure;
            £3.61m on metering;
            £1.23m on service enhancement; and
            £120,000 on housing growth.

      We are pleased to note that the overall investment is 13% lower than the DBP. We look to
      Ofwat to assess whether these costs are justified.

      Capital Maintenance

3.2   We note that serviceability of THD’s infrastructure is “stable” and as a result the company
      has been able to reduce costs while maintaining service by removing the Haven Gateway
      development from the five-year plan and deferring the replacement of part of the trunk
      main to Harwich. Instead the company is focusing on an extensive metering programme,
      replacing mains and constructing a new reservoir. We support the company’s proposals to
      replace 30km of old mains, replace 5,700 old copper communication pipes and install a
      new treated water reservoir and pumping station at Dovercourt, which will increase the
      security of supply for around 12,000 properties.

3.3   We support THD’s commitment to improve the reliability of its water networks now and in
      the future, but look to Ofwat to verify the assumptions underlying the company’s
      assessment of its capital maintenance needs.

      Supply Demand Issues

3.4   The company propose that 12,000 properties will be metered over the 2010-15 period.
      This would involve 2,256 meter optants and 9,744 properties under the selective
      programme, the result of which will increase domestic metering from circa 70% at present
      to 90% by 2015. We believe that the pace of delivery is too fast given that the company
      does not forecast a supply deficit in the medium term and the selective programme will
      cost £1.71m to deliver. This proposal will increase the burden on customer bills in the
      short term. We, therefore, consider that the selective programme should be scaled down

                            Tendring Hundred Water – Page 2 of 4
3.5   Given that the company does not forecast a supply deficit over the five-year period, we
      support THD’s proposals to maintain a Security of Supply Index score of 100% and maintain
      leakage at current levels.

3.6   We note that THD would support the introduction of trickle-flow devices to manage
      customers that it believes can afford to pay but don’t. We do not support the
      introduction of trickle-flow devices because of public health considerations.

      Environmental Programme

3.7   We note that the company states that it will manage all water abstractions and will
      reduce its carbon footprint where possible. There is an absence of information on the
      costs for delivering this, the potential impact on customers’ bills, and how the company
      plans to contribute to the delivery of the Government’s target to reduce greenhouse gas
      emissions by 26% by 2020. This is very disappointing.

      Drinking Water Quality Programme

3.8   We note the company’s statement that there has been a marked increase in clopyralid (a
      pesticide) and metaldehyde (a pesticide within slug pellets) in the water drawn from the
      reservoir at Ardleigh. The company propose to address this by catchment management
      initiatives as treatment is currently ineffective, but as yet the company has not provided
      clear justification for any investment proposals. We look to the Drinking Water
      Inspectorate (DWI) and Ofwat to assess and, where necessary, challenge the company’s

      Customer Service Issues

3.9   We commend the company on the following aspects of its plans for improving service to

            no properties at risk of receiving low pressure;
            improved feedback to customers on new meter installations; and
            increased compensation payments for service failures to a minimum value of

3.10 We support the company’s proposals to fit AMR to all replacement meters in the Clacton
     area (20,000 properties). This will deliver benefits in relation to tariff development and
     leakage control, and will remove the need for estimated bills. These in turn will reduce
     the number of contacts and/or complaints THD receives about metered bills. AMR will
     ultimately contribute to lower operating costs and a reduction in carbon emissions, both
     of which we support. However, we suggest this project is delayed to 2011-12 in order to
     help reduce the spike in bills in 2010-11.

3.11 We note THD’s intention to trial a social tariff for low income customers in Clacton
     alongside the automated metering programme. When surveyed in November 2008 by the
     company, 85% of customers were in support of the tariff. Before we could give our
     support to this, we would need to know what level of discount the company is proposing,
     how the tariff will be funded and by whom.

3.12 We remain concerned that by introducing an automated telephone service the company
     expect abandoned calls to increase from 0.8% to 5.0%. We believe that this reflects
     customers dislike of having their calls answered automatically. We, therefore, ask the
     company to specifically monitor overall customer satisfaction with the new service, and
     for the results to be regularly discussed with us.

                          Tendring Hundred Water – Page 3 of 4
3.13 We note that in order to separate out the notional retail business for accounting purposes
     under the competition regime, THD propose to modernise its financial reporting system
     during the five-year period. No specific costs have been given for this work, apart from
     an overall cost of £1.32m on IT systems and equipment. We would like to understand how
     much of this investment relates to the development of competition and how much might
     have other, wider, uses. We look to Ofwat to challenge both the derivation and scale of
     the costs.

4     Consumer Research

4.1   It is evident that THD has considered customers’ views in the FBP. However, we are
      disappointed that the section on consumer views, including the diagram of willingness to
      pay, that was in the DBP is now missing. Whilst we note that THD’s research identified
      customers’ priorities to be guaranteed water quality and improved water efficiency, and
      this is covered in the FBP, the willingness to pay figures have also been omitted.

5     Readability of the Business Plan

5.1   As with the DBP, the FBP failed to explain clearly why prices will increase in this period.
      Expenditure is the same as in the last period when prices actually went down. Although
      reference is made to increasing costs it is not clear what impact each has on prices.

5.2   Much more use could have been made of maps, tables and charts e.g. a map to show
      Ardleigh, Dovercourt and Clacton. There is also some use of regulatory acronyms and
      continual unnecessary repetition through the public summary of the company’s FBP.

                          Tendring Hundred Water – Page 4 of 4

To top