Financing the private water and sewerage Companies of England and Wales

Household charges

of the water companies of England and Wales

Last update Thursday 11 November 2010

The aggregate 5 year projections of expenditure, on which the 2010-15 final price determinations are based, are given in Appendix 3, on pages 152 and 153 of the Ofwat report “Future water and sewerage charges 2010-15: Final determinations”. The total revenue for each company is given but totaled under only 5 sub-headings and only as 5 year aggregates. For South West Water the total revenue provided for the 5 years is shown to be £2082 million comprising allowances for “Operating costs”, £720 million; “Infrastructure renewals charge”, £138 million; “Depreciation”, £496 million; “Return on capital”, £618 million and “Taxation”, £110 million. The report, on page 115, also indicates that “depreciation” and “infrastructure renewals” are considered to be “capital charges. It is assumed therefore that these charges can be combined to give a total of £634 as “capital expenditure”. Likewise, “Return on capital” is not an expense, but is assumed to represent the intended “profit” and can be combined with “Taxation” to give a total of £728 million as the “Profit before tax”. These figures, at 2007-08 prices, are shown in the first line of this table -

Total
revenue
Operating
costs
Capital
expenditure
Profit
before tax
South West £2,082M £720M £634M £728M (35.0%)
Charge per household £483     £167     £147     £169     (35.0%)

On the second line, the figure of £483 is the Ofwat expected average household bill for 2014-15 and was derived from Table 7 on page 29 of "Future water and sewerage charges 2010-15: Final determinations". The remaining figures on that line are in the same ratio to the corresponding figures on the first line. The figure £167 therefore represents the charge to “operating cost” in a South West Water household bill of £483 and likewise with £147 for “capital expenditure” and £169 for “profit before tax”. The above calculations repeated for the remaining water and sewerage companies of England and Wales gives the figures as follows.

Average
bill
Operating
costs
Capital
expenditure
Profit
before tax
South West £483 £167 £147 £169     (35.0%)
Wessex £424 £150 £134 £140     (33.1%)
Southern £393 £126 £158 £109     (27.9%)
Dwr Cymru £374 £148 £113 £113     (30.3%)
United Utilities £364 £124 £124 £116     (31.8%)
Anglian £362 £145 £107 £110     (30.3%)
Yorkshire £332 £128 £95 £109     (32.8%)
Thames £313 £126 £97 £89     (28.6%)
Northumbria £312 £122 £91 £99     (28.9%)
Severn Trent £291 £194 £92 £84     (28.9%)
Industry average £340 £131 £108 £101     (29.8%)

There is no clue in these figures regarding the 40% above average household bills that are endured by customers of South West Water. Certainly the figures do not support the assertion that the excess is due to capital expenditure on the installation of new coastal sewage treatment works. In fact, almost half of the excess is accounted for by the South West Water “profit before tax” alone which costs the average South West Water customer £169 against the industry average of “only” £101.

The integrity of Ofwat, as regulator, can be judged from their frequent references to customer surveys which generally tell us that water customers may not like the high prices but are at least satisfied they are getting value for money. Needless to say, these opinions are not informed by the figures given above and presumably would be revised if it were known that even the least profitable company is allocated a profit only a fraction short of 30%.

Not that Appendix 3 of “Future water and sewerage charges 2010-15: Final determinations”, the source of the figures given above, is very informative. The budgetary allowances for “operating costs” and “depreciation” are presumable agreed with the companies in considerably more detail than given here (and, no doubt, with annual budgets rather than 5 year aggregates) as an essential to any semblance of effective regulation. This detailed information should also be in the public domain, in fairness to all water and sewerage customers of England and Wales, and in particular to inform the debate on the subsidies for South West Water proposed by Walker. Even more importantly, it is essential that the Gray enquiry and those responsible for the proposed White Paper are fully informed if there is to be a sensible resolution of the long standing problem of excessive charges by these monopolies with their inordinately high and unwarranted profits.