4.
Companies’ business plans
4.1
Companies’ business plan proposals
Our assessments and analysis started with each company’s business plan proposals. These provided us with the information we need to make our decisions. They include each company’s views, in detail, on the price limits it believes it needs to fund its proposed activities for the period 2005-10. The plan sets out the company’s strategy for the five-year period and the outputs it plans to achieve for the price limits it is seeking. Table 9 compares companies’ proposed average price limits with our price limits. Price limits proposed in the final business plans were on average 6.2% per year. The increases ranged from 4.3% each year for Yorkshire to 8.7% per year for South West for the water and sewerage companies. The water only companies’ business plan proposals ranged from 0.7% each year for Tendring Hundred to 7.7% for Sutton & East Surrey. All companies sought increases to their price limits over the five-year period. Across the industry, the business plans showed that companies were seeking average bill increases of 29% over the next five years, including a rise of 12% in the first year, 2005-06. The individual company plans spanned a wide range of proposed increases in average bills over the five years; the highest from Southern at 45% and the lowest from Anglian at 17%. Overall, our determinations represent a reduction to price limits of around 2.0% per year compared with companies’ final business plan proposals. In general terms we are content with the strategies proposed by companies. However, we consider that their plans underestimated the scope for further improvements in efficiency and, in some areas, overestimated the costs of carrying out their strategies. We have also made different assumptions about the scale and timing of delivery of the outputs. Taken together, the slightly lower volume of outputs and our challenges to their costs mean that we are able to have lower price limits than those proposed in companies’ business plans. Our price limits for D r Cymru, Yorkshire, Bournemouth & West Hampshire, and South Staffordshire are close to the proposals they included in their business plans. In the cases of United Utilities, Bristol, Folkestone & Dover, Portsmouth, Sutton & East Surrey and Three Valleys, our scrutiny of their plans has led to significant reductions compared with the price limits they proposed for the reasons set out above. The extent to which each of the reasons above is relevant varies from company to company.
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Table 9
Comparison of price limits with business plans by company
Average1 annual price limits 2005-06 to 2009-10 (%)
Company
Business plan
Final determination
Difference
Water and sewerage companies Anglian D r Cymru Northumbrian Severn Trent South West Southern Thames United Utilities Wessex Yorkshire WaSC average (weighted) Water only companies Bournemouth & W Hampshire Bristol Cambridge Dee Valley Folkestone & Dover Mid Kent Portsmouth South East South Staffordshire Sutton & East Surrey Tendring Hundred Three Valleys WoC average (weighted) Industry average (weighted)
1
4.6 5.9 5.0 5.6 8.7 7.7 6.7 7.8 6.5 4.3 6.3
2.4 5.4 3.0 4.5 6.9 5.6 4.1 4.5 5.2 3.9 4.3
-2.2 -0.5 -2.0 -1.1 -1.8 -2.1 -2.6 -3.3 -1.3 -0.4 -2.0
3.2 6.2 4.3 1.9 8.3 4.3 3.7 5.8 3.8 7.7 0.7 6.7 5.5 6.2
3.1 3.2 2.4 0.8 4.8 3.3 0.7 3.7 3.2 2.7 -0.5 3.5 3.1 4.2
-0.1 -3.0 -1.9 -1.1 -3.5 -1.0 -3.0 -2.1 -0.6 -5.0 -1.2 -3.2 -2.4 -2.0
The average for the price limits is the geometric average of the annual price limits.
We scrutinised each company’s business plan thoroughly. We examined closely: their financial assumptions; the revenues they said they needed; the quality, environmental and customer service improvements they intended making; and the costs and timing of these. We examined their proposals to invest in the maintenance of their assets and their approach to arriving at their decisions. We also examined their proposals to improve efficiency against their performance to date. In arriving at our determinations, we have carefully considered the arguments and evidence provided in the plans, and the companies’ representations following our draft determinations. Where companies have commissioned studies to support their proposals we have taken the findings into account. In our original timetable for the price review, all of the final business plans should have been submitted by 7 April 2004. Late arrival of Ministers’ principal guidance meant that in practice
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business plans were submitted throughout the month of April. This led to a more demanding timetable for both the companies in preparing their plans, and us in scrutinising them. Despite the time constraints, the companies’ plans were, by and large, of good quality. Companies’ final business plans were developed and refined from their draft ones. We asked the companies to submit their draft plans in August 2003. These provided us, the companies’ customers and other stakeholders with an opportunity to see what effect on customers’ bills differing programmes of work could have. It also helped us to understand at an early stage each company’s priorities and approach. We met each company to discuss its draft business plan proposals. We scrutinised and challenged elements which appeared to us unjustified, unclear or inconsistent. This process has helped make this price review more transparent than previous reviews. The final plans incorporated companies’ reflections on our feedback. Some companies’ proposals changed significantly between draft and final plans both up and down, although the average was only marginally higher. In their draft business plans the companies’ preferred approach would have led to average price limits of 6% each year, rather than 6.2%. Following on from the publication of our draft determinations in August 2004, each of the companies has provided us with written representations. These gave us each company’s views on our proposals. We also met each company, in September and October, to discuss their representations in detail. In some cases they have provided us with new information and comments on our approach that have led to changes to our price limits between the draft and final determinations.
4.2
The role of the reporters
Reporters are independent professionals, usually consulting engineers, appointed by each water company with our approval. The reporters’ task is to examine and test the water companies’ business plans and their business planning processes. They are supported by the companies’ financial auditors where appropriate. Reporters worked closely with the companies during the formulation of their business plans to check that they complied with our reporting requirements and guidelines. They exposed, examined and challenged the companies’ material assumptions, including the financial ones, underpinning the plans. They paid particular attention to the companies’ allocations of projected expenditure between the different purpose categories, particularly for the quality programme and capital maintenance. Reporters provided us with a report for each of the companies, giving their professional opinions of the plans. These reports helped us to compare information between companies to establish robust assumptions about relative efficiencies and serviceability to customers, and achieve consistency of business planning information between the water companies. We appointed a team from Babtie Group (consulting engineers) to carry out an external review of the reporter process for the draft business plans. They confirmed that the reporters had scrutinised the detail and the commentary in the companies’ draft business plans, and could identify and comment on the key issues and assumptions for each company. We met each of the reporters to enable them to confirm and expand upon the key points made in their reports. These discussions contributed to our understanding of the final business plans and to our judgements about our determinations. The reporters also provided a commentary on each company’s representation following on from our draft determinations. Their commentaries focused on new information provided by the companies to support their representations.
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