Bristol Water – An introduction for the Competition Commission

Document Sample
Bristol Water – An introduction for the Competition Commission Powered By Docstoc
					Bristol Water –
An introduction for the Competition Commission
23rd February 2010




                                                 1
Bristol Water - overview

• Serving water needs for over
  1 million people and businesses
    – Being a “WoC”never privatised
    – 160 years of experience
    – High customer satisfaction,
         • first in Ofwat satisfaction survey
           year to date



   A
• “ bit of everything”to deal with
    – Many and varied challenges
    – 2nd oldest assets in the country




                                                2
Bristol Water –finding the right balance


• Multiple stakeholders, including
  environmental impacts
• Clear upward pressure on prices
• Recession considered
    – £100m of schemes already deferred
    – New tariffs introduced to help those with
      difficulties
• Legal duties to be complied with
• Current and future customers to consider
    – Linked to long term strategy
• Proposals have been carefully considered
    – Thoroughly market tested and audited


                                                  3
  Bristol Water –issues faced
                                                                                           Age profile of distribution netw orks

                                                                      30%

                                                                      25%
• Key issues for maintaining the service                              20%
  customers want:                                                     15%

                                                                      10%
     – Maintaining assets on a serviceable basis                       5%

     – Dealing with demand growth                                      0%                                                                                                            Bristol Water




                                                                                pre 1880

                                                                                            1881-1900
                                                                                                                                                                                     Bristol Water
                                                                                                                                                                                     Rest of industry




                                                                                                        1901-1920

                                                                                                                       1921-1940


                                                                                                                                     1941-1960


                                                                                                                                                 1961-1980


                                                                                                                                                             1981-2000


                                                                                                                                                                         2001-2020
     – Providing adequate resilience for customers

• What are the problems ?
     – Asset lives have been stretched and analysis                                                                       Population forecasts

       shows higher levels of asset replacement                     1.6
                                                                                                   Actual
       now required                                                 1.5                              P
                                                                                                   AM 4 forecast

                                                                                                                  P
                                                                                                   RSS1 used in WR 08
     – Latest population estimates for the area show                1.4
                                                                                                   RSS3 used in FBP
       30 to 40% growth in next the 20 years           millions     1.3                            ONS 08 latest forecast


     – 643,000 customers are exposed to “single                     1.2


       asset”failure risk                                           1.1


         • Extended outages are unacceptable                        1.0
                                                                                    8


                                                                                                  3


                                                                                                                          8




                                                                                                                                                        8


                                                                                                                                                                     3


                                                                                                                                                                                    8




                                                                                                                                                                                                         8
                                                                         3




                                                                                                                                          3




                                                                                                                                                                                               3
                                                                                                /0


                                                                                                                        /0
                                                                       /9




                                                                                                                                        /1




                                                                                                                                                                   /2


                                                                                                                                                                                  /2


                                                                                                                                                                                             /3
                                                                                  /9




                                                                                                                                                      /1




                                                                                                                                                                                                       /3
                                                                    92




                                                                                              02


                                                                                                                      07


                                                                                                                                     12




                                                                                                                                                                 22


                                                                                                                                                                                27


                                                                                                                                                                                          32


                                                                                                                                                                                                     37
                                                                               97




                                                                                                                                                   17
                                                                  19




                                                                                                                    20


                                                                                                                                   20




                                                                                                                                                                              20


                                                                                                                                                                                        20
                                                                             19


                                                                                            20




                                                                                                                                                 20


                                                                                                                                                               20




                                                                                                                                                                                                   20
                                                                                                                                                                                              4
Bristol Water –why have issues arisen ?
• Asset lives have been stretched to minimise prices
    – Regulatory system unreasonable when increased investment is needed
    – Potential for a downward spiral in service to customers

• Demand: declining industrial demand has been offsetting domestic demand growth
    – Projected to reverse in next period
    – Significant time lag before new resources become available
    – Latest forecasts (population, per capita demand and climate change) more challenging
      than in FBP

• Resilience
    – Only 1 out of 4 schemes accepted in PR04
         • This was used 3 times in first year !
    – Population growth and ageing assets means risk is ever increasing
    – Bill effect to resolve is less than £5 per year by 2015




                                                                                        5
  Bristol Water –immediate investment needs
                                                                               £m over 5 years        PR04   PR09   Ofwat
                                                                                 (2007/8 £s)                         FD
         • Major increase in level of
                                                                            Maintenance                95    136    148
           investment needed >
                 NB Ofwat outputs and classifications are different         Water quality              23     54     31
                                                                            Meeting growth in          8      86     48
                                                                            demand
         • Increase not surprising given low
                                                                            Improved resilience        28     44     17
           historic rate of investment
                                                                            Total capex               154    320    244

             £3,000
                             Water capex per property - cumulative
             £2,500

             £2,000
                                 INDUSTRY AVERAGE
£ per prop




                                 BRISTOL ACTUAL + FD
                                 BRISTOL SoC
             £1,500


             £1,000

              £500


                £0
                             1                    2                   3         4                 5
                                                               AMP period
                                                                                                                    6
Bristol Water –Further important matters


• Increased investment requires financing and will affect financial ratios
    –   [comment removed]

    – Obligation for investment grade credit rating

• Opex costs are increasing beyond the 2008/9 “          ,
                                               base year” for example:
    – Bad debts lagging the recession
    – New obligations and growth adding to costs                   4.0
                                                                   3.5
                                                                             Bad debt cost
                                                                   3.0
• Scope for efficiencies becoming more limited



                                                      £ millions
                                                                   2.5
    – 20 years of incentive based regulation                       2.0

    – High level of fixed costs                                    1.5
                                                                   1.0
                                                                   0.5
                                                                   0.0




                                                                                                                                )
                                                                                                   /7


                                                                                                            /8


                                                                                                                     /9
                                                                        /4


                                                                                 /5


                                                                                          /6




                                                                                                                              (F
                                                                                                 06


                                                                                                          07


                                                                                                                   08
                                                                      03


                                                                               04


                                                                                        05




                                                                                                                            0
                                                                    20


                                                                             20


                                                                                      20


                                                                                               20


                                                                                                        20


                                                                                                                 20


                                                                                                                          /1
                                                                                                                        09
                                                                                                                      20
                                                                                                                          7
Impact of proposals on prices

• Average annual household bills (2009/10 £s):
   – 2009/10 actual        £157
   – 2014/5 Ofwat FD       £168        -                  + 7%
   – 2014/5 BW SoC         £198        -                  + 26%
• Comparison with Wessex Water (water only element)
                                                                                           s
    – Wessex have higher charges but allowed more capex so inconsistent to consider Bristol’
      charges need restraining on affordable criteria

                                     BW            BW          Wessex           Comment
                                    (SoC)       (Ofwat FD)     (Ofwat
                                                                FD)
         Average bill 2009/10        £157          £157         £202
                                                                            BW (SoC) bills in
         Average bill 2014/5         £198          £168         £224         2015 lower than
                                                                           Wessex bills in 2010
                                                                           yet Wessex allowed
         Capex per property for
                                                                            74% more capex
         2010 -2015                  £637          £485         £843

                                                                                                  8
What have Ofwat done ?
                                                                                    Ofw at to SoC differences


• Excluded £30m of schemes –mainly resilience                                  35
                                                                                     CIS & cost of
   – regarded as discretionary but minor price effect                                capital
                                                                               30    Opex
• Required remaining outputs from the FBP but -                                      differences
                                                                                     Capex
   – reduced allowed capex from £290m to £244m                                 25
                                                                                     differences
                                                                                     Ofw at FD
   – reduced allowed opex from £262m to £227m




                                                         K Factor (compound)
                                                                               20
• Imposed a £9m CIS penalty using a flawed
  methodology
                                                                               15

• Invalidly adjusted depreciation charges
                                                                               10
• Set a cost of capital that is too low to finance the
  business
                                                                               5

• Excluded Notified Items for material foreseeable
  uncertainties such as tax changes                                            0
                                                                                     2020/11          2014/15




                                                                                                                9
Consequences of the FD


                                       s
• The overall package that is Ofwat’ FD cannot be financed, because:
   – Its allowed cost of capital is too low in comparison to nominal debt costs
   – Its tests for financeability have been conducted before application of CIS penalties
                                                      s
   – Its tests have not been applied to Bristol Water’ balance sheet
• Further, the FD excludes £35m of opex
     –   [comment removed]

                                   s
• The FD is inconsistent with Ofwat’ financeability duty




                                                                                        10
                           s
   Summary of Bristol Water’ position

                                               Customer reaction to the proposals in our plan
• Bristol Water has worked hard to
  minimise the price increases needed from:    Our latest survey shows strong support for our proposals –

   – The need for increased maintenance        Bill increase of more than £4 per month and see wider
                                               improvements to service                                               14%
   – The need to meet demand growth
                                               Bill increases of £4 per month and have service maintained and
   – The need to provide better resilience     in some areas improved (as set out in our plan)
                                                                                                                     44%


                                               Bill increases by the minimum of £2 per month but possibly            18%
• The proposals were widely consulted on       see service deteriorate
  and tested with customers                    None of these –presumed as wanting less than £2 per month             17%
                                               increase regardless of the impact on service

• The increases represent less than £1 per        t
                                               Don’ know                                                             6%
  week for an average household                This survey is based on a fully representative sample of 867 of household
                                               customers questioned on the facts set out in this plan in February and March
                                               2009.
• The proposals are in the best interests of
                                               The top customer priorities for investment are:
  customers as a whole, now and in the         reduce leakage, provide more resilience, fewer discolouration events and
  future                                       fewer interruptions




                                                                                                                11
Other matters
• Practicalities of the re-determination and Statement of Case
   – Set out for a 5 year review
   – Can only be applied over 4 years
   – Affects a range of matters such as meter optants numbers, bad debts, investment
      programme delivery, etc

• Effectively cannot raise debt during the referral
   – Bristol Water will need to limit capex to stay cash neutral
   – Impact on programme delivery and asset performance

• Audited accounts –timing issues
     –   [comments removed]




                                                                                       12