Water companies pushes for price increases

The UK’s leading water companies on Monday pressed the industry regulator for price increases to fund billions of pounds of investment in their ageing networks.

United Utilities, a water provider in north-west England, outlined plans to ask Ofwat to approve an annual 2.7 per cent tariff increase above inflation between 2010 and 2015 to fund its £4bn capital expenditure plan.

The company, which supplies water and sewage services to 2.9m people and businesses, on Monday published its draft business plan for the 2010-15 period.

The plan is among those submitted to Ofwat as part of the 2009 water price review process, and will be used as a basis for disucssions on future water prices.

Thames Water, which supplies 8m people, said its water bills would need to rise by 3 per cent in order to fund £6.5bn in improvement works. Northumbrian Water last month said it planned to raise charges annually by 1.3 per cent above inflation to carry out its intended £1.3bn in investments. South West Water also plans increases.

There was better news for consumers from Severn Trent which plans to spend £3.2bn on updating its infrastructure but does not expect to have to increase bills above inflation during the five-year period.

Severn Trent said its plans assume a 4.94 per cent cost of capital which is consistent with its current credit rating.

Higher water bills are the latest financial hit for hard-pressed consumers already dealing with rising fuel and food costs.

In its draft business plan, United said it expected the £4bn capex programme would need a further £2bn in borrowings between 2010 and 2015. The spending requirements were already fully funded, but the group said recently that its debt was becoming more expensive due to the credit crunch.

During the five-year period United said it intended to spend about £1.6bn on its water service and £2.4bn on the wastewater service. A further £2bn had been allocated to meeting regulatory quality standards, enhancing service to customers and maintaining the balance in supply and demand.

The company said the draft budget would include addressing issues such as climate change and improving standards of quality. “It also includes investment for issues first identified in previous price reviews, such as a programme to deal with unsatisfactory intermittent discharges.”

Financing of the £4bn expenditure programme would require an average “real fully post-tax” return of 4.7 per cent.

In the last pricing review in 2004, Ofwat assumed a 5.1 per cent cost of capital. United’s latest draft business plan mooted a lower return to cover the funding of the capex programme, reflecting the drop in the cost of funding available. However, it said it would assess the financial markets again when it submitted its final plan to Ofwat in spring 2009.

The higher tariffs charged to households would help United raise its efficiency, with the aim of an annual 1.5 per cent improvement in underlying efficiency, “although operating expenditure is likely to increase overall due to cost pressures in areas such as power and rates”.

The utility said it was also targeting an average 3 per cent improvement in the efficiency its capital investment programme.

Though it wanted to raise prices by 2.7 per cent, it expected that average household water bills would rise only 2.1 per cent in real terms on average each year.

“We believe this is consistent with the aim set out in our 2007 strategic direction statement that bills, on average, should rise no faster than medium-term household income growth.”

Water bills rose by an average of 4.2 per cent a year above inflation between 2005 and 2010, which was the period governed by the last price review.

Analysts at Merrill Lynch said two weeks ago that United was unlikely to succeed in securing the price increases.

In early June, the group reported a 5 per cent drop in full-year pre-tax profits to £478m, but a 17 per cent rise in underlying earnings from continuing operations to £476m.

Higher water bills were the main reason for the increase in underlying profits, and for the rise in revenues from £1.99bn to £2.36bn. The group proposed a final dividend of 31.47p, bringing the total pay-out for the year to 46.67p compared with 44.93p last time.

Shares in United Utilities opened in London slightly firmer, adding 4p to 697½p.