Draft Business Plan. Part A (extract) Summary of Company Strategy

Transcription

1 Draft Business Plan Part A (extract) Summary of Company Strategy Note: The full version of Part A of the Draft Business Plan will be published by 11 August 2008.

2 NORTHUMBRIAN WATER LIMITED: OPERATING AREAS North East operating area Northumbrian Water provides water and sewerage services to 2.6 million people in the North East of England. The major population centres of Tyneside, Wearside and Teesside are in our area but we also serve large rural areas in Northumberland and County Durham. Essex & Suffolk operating areas Essex & Suffolk Water provides water services to two separate supply areas. We serve a population of 0.3 million in our Suffolk area. This area is mainly rural with the biggest towns being Great Yarmouth and Lowestoft. Our Essex area, which currently has a population of 1.5 million, is part rural and part urban with the main areas of population being in Chelmsford, Southend and the London Boroughs of Barking and Dagenham, Havering and Redbridge. _ Page 2 of 8

3 HEADLINES OF COMPANY STRATEGY WHAT CUSTOMERS CAN EXPECT FROM APRIL 2010 TO MARCH 2015 WHAT WE WILL DELIVER We will provide safe drinking water, improvements to the environment and better customer service. This will include: improving the customer experience when they need to contact us further reducing discoloured water complaints in the North East improving satisfaction with the taste & odour of drinking water securing water supplies in Essex as the population grows further improving river and bathing water quality in the North East reducing flooding from sewers in the North East protecting operational assets from flooding reducing energy use and carbon emissions to combat climate change Our objectives reflect what our customers have said to us and are consistent with the longer term goals and aspirations in our Strategic Direction Statements. COSTS OF DELIVERY We have assumed challenging efficiency targets and identified the most effective ways of meeting our objectives. This will ensure customers bills are no higher than they need to be. However, there are some cost increases beyond our control, with energy prices the most significant of these. There are also likely to be increased costs from new legislation such as the Traffic Management Act and the possible adoption of private sewers. The costs of these are currently uncertain and have not yet been included in our plans. We will invest 1.3 billion in water and sewerage services over the next five years, 22% more than in This significant increase in investment is needed to reduce sewer flooding, manage the security of water supplies in Essex and continue to deliver appropriate levels of asset maintenance despite the lower requirements for investment in mandatory drinking water and environmental improvements. The current volatile financial climate makes it difficult to assess the return on capital. In our Draft Business Plan, we have assumed a cost of capital of 4.7% real, post tax, somewhat lower than at the last price review (5.1% real, post tax), partially offsetting the impact on bills of increased investment and higher operating costs. We will review our assessment for the Final Business Plan. IMPACT ON PRICES AND THE OUTCOME FOR CUSTOMERS Our plan results in average annual increases in household prices (not including inflation) of: North East: 0.7% (total increase, water plus sewerage) Essex & Suffolk: 2.8% (water only) Our decision not to use the full price increases allowed by Ofwat for the three years to demonstrated our commitment to increase bills only where necessary. This has resulted in bills being 2% lower in making the increases in future years appear larger. Essex & Suffolk customers will see greater average increases in water prices mainly because investment levels are significantly higher there compared to the North East. This is primarily because of investment to sustain adequate water supplies. Our plan provides significant benefits for our customers, with prices, we believe, most will continue to find affordable and value for money. The Board fully endorses this plan which will allow us to continue to deliver top class services in the North East of England and in Essex & Suffolk. _ Page 3 of 8

4 INTRODUCTION PR09 DRAFT BUSINESS PLAN SUMMARY OF COMPANY STRATEGY This is the summary of Part A of Northumbrian Water s Draft Business Plan. The Draft Business Plan is an important document in the water industry price review 2009 (PR09). PR09 is the process by which Ofwat will set limits on the prices companies can charge their customers for the five years from 1 April Our strategy covers our operations in both the North East and Essex & Suffolk. This summary provides a brief overview of our plans for the period Your views on the proposals in our Draft Business Plan will help fine-tune our strategy as we develop our final plan. We welcome your input and details of how this can be submitted will be provided when the full version of Part A is published by 11 August DEVELOPING OUR PLANS We have undertaken comprehensive customer research to understand the value our customers place on the various aspects of service they receive. We have also liaised closely and successfully with the Consumer Council for Water, the Drinking Water Inspectorate, the Environment Agency and Natural England regarding our plans. As a result, we believe there is broad support for our strategy. As well as meeting the needs expressed by our customers, our plans address a number of specific challenges: investing in services whilst also keeping bills at affordable levels maintaining water supplies in Essex as the population grows reducing carbon emissions to help prevent the damaging effects of climate change ensuring our assets are protected from flooding caused by climate change resolving significant levels of property flooding from sewers maintaining a stable financial position We will seek to manage our operations in ways that conserve and enhance the environment and we will factor sustainability into our planning and actions in all areas. Our plans for take us towards the longer term goals and aspirations set out in our Strategic Direction Statements, published in November 2007, which can be found on our websites and WHAT WE WILL DELIVER The table opposite provides a summary of what we aim to deliver in Items relate to both the North East and Essex & Suffolk unless specified otherwise. _ Page 4 of 8

5 SUMMARY OF WHAT WE WILL DELIVER Customer satisfaction Further improvements to satisfaction with service and value for money A significant reduction in billing complaints A significant increase in the number of customer enquiries dealt with at the first point of contact Further development of payment methods including online payment facilities Water Quality Reliable, safe water supplies, addressing risks through the Water Safety Plan approach Targeted pipe replacement to meet the new standard for lead in drinking water Small schemes to address deteriorating raw water quality (Essex & Suffolk only) Further reductions in the risk of discoloured water (North East only) Improvements in the taste and odour of drinking water Improved liaison with farmers and land managers to protect sources used to supply drinking water Meeting future water needs Near to universal metering in Essex by 2020 (60% by 2015) and Suffolk by 2023 (69% by 2015) Encouragement to customers to save water, prioritised according to water resource position Low leakage levels maintained in Essex & Suffolk, requiring significant mains renewal in Essex Reductions in leakage in the North East to achieve the revised economic level of leakage Major resource development for Essex (the Abberton scheme) Action to maintain the supply/demand balance in the Berwick and Fowberry water supply zone Increases in water system capacity required to meet population growth and relocation Keeping the water flowing Reductions to planned interruptions Maintain current level of unplanned interruptions of over six hours duration Maintain current low levels of properties at risk of low water pressure Dealing with increasing flows in the sewerage system (North East only) Develop an integrated long term drainage plan Major programme to address flooding from sewers Additional cleaning of sewers to reduce flooding from blockages Increases to sewerage system capacity to cope with new development and population movement Levels of sewer replacement increased to sustainable levels Increased real time monitoring and management of the sewerage system to aid planning Improving the water environment 100% compliance with treatment discharge consents by 2015 (North East only) Further significant reduction in pollution incidents by 2015 (North East only) Reduce sewage litter by customer campaigns and reducing system spills (North East only) Further improvements to river & bathing water quality (North East only) Undertake investigations into the impact of certain water abstractions on the environment Encouraging biodiversity and catchment management Continue to encourage biodiversity on all our sites Development of our partnership initiative Branch Out to help build habitat resilience Continuation of our involvement with the Tees Colour Peatscapes project Sustainable operation and resilience Development and implementation of a carbon reduction plan covering all our operations Production of 20% of our energy from self-generated renewable resources by 2015 Investment to protect our assets from flooding risk Update our assessment of operational resilience in the light of changing circumstances _ Page 5 of 8

6 COSTS OF DELIVERY Operating costs We aim to deliver the objectives in the preceding table efficiently and effectively, to ensure customers bills are no higher than they need to be. We intend to reduce base operating costs over the 2010 to 2015 period by 1% per annum for the water service and 2% per annum for the sewerage service. These challenging efficiency savings will help offset above inflation increases in some of our costs. The most significant increases are beyond the company s control, such as those for energy prices and abstraction charges. There are also likely to be increased costs from new legislation such as the Traffic Management Act, the Carbon Reduction Commitment and the possible adoption of private sewers. The costs of these are currently uncertain and have not yet been included in our plans. We will review this position for the Final Business Plan. Some increases to operating costs are required as a result of our plans, such as the costs of reading additional meters and undertaking additional sewer cleaning. Overall, the net effect of cost increases and efficiency savings result in a 4% increase in total operating costs from to , excluding inflation. Capital investment To meet our objectives we will need to invest a total of 1.3 billion (net of contributions) over the next five years, 22% more than in this period. The pie charts below show where the money will be invested in (AMP5) compared with (AMP4). This significant increase in investment is needed to reduce sewer flooding, manage the security of water supplies in Essex and continue to deliver appropriate levels of asset maintenance despite the lower requirements for investment in mandatory drinking water and environmental improvements. Investment comparison AMP4 and AMP5 AMP 4 AMP 5 Capital Maintenance Quality & Service Enhancements Growth Capital Maintenance Quality & Service Enhancements Growth Our asset maintenance programme reflects the minimum sustainable level required to maintain services. It is well founded on robust asset planning processes in line with the framework agreed with regulators. Reasons for the increased level of asset maintenance include: continued water main renewals required to manage burst rates and iron compliance (more of this is now classed as maintenance following completion of the Section 19 quality programme) more work to maintain water treatment works and treated water service reservoirs is essential to ensure we continue to provide a safe and reliable water supply _ Page 6 of 8

7 asset replacement required at six major coastal and estuarial sewage treatment works for the first time to ensure continuing compliance with discharge standards an increase in sewer rehabilitation so we can continue to maintain the structural condition of the sewerage network The increase in investment to meet growth in demand is influenced by two main factors: schemes to manage security of water supplies in Essex including the major Abberton resource scheme, mains renewals to help manage leakage and metering sewer flooding alleviation in the North East It is important that the company is able to raise the funds it requires to finance future investment. A key financial assumption in this respect is the cost of capital and the current volatile financial climate makes it difficult to assess what this should be. In our Draft Business Plan, we have assumed a cost of capital of 4.7% real, post tax, somewhat lower than at the last price review (5.1% real, post tax), partially offsetting the impact on bills of increased investment and higher operating costs. We will review our assessment for the Final Business Plan in the light of the latest information available at that time. We will retain an optimal level of gearing (amount of debt compared to regulatory value) in line with the assumption Ofwat makes in setting price limits. Gearing of 60% has been assumed in the Draft Business Plan. IMPACT ON PRICES AND CUSTOMERS BILLS Overall prices We have modelled the impact of our proposals for on prices and customers bills. Price limits are expressed as a percentage above or below inflation. This is called the K factor. Ofwat sets separate indicative price limits for the water and sewerage services. The water price limit applies to both the North East and Essex & Suffolk. The overall average annual price limit required by our plan is +1.3% comprising + 2.1% for the water service and + 0.1% for the sewerage service. Our policy of charging customers no more than is necessary was demonstrated by our decision not to use the full price limit allowed by Ofwat for , and This has resulted in bills being 2% lower than they otherwise would have been in and has the effect of making the price increases in AMP5 appear larger. Application of price limits The overall price limit for the water service denotes the average increase to prices in the North East and Essex & Suffolk. When setting tariffs, it is necessary to consider whether there are reasons why the price limit should be applied differentially to reflect any significant variations in costs in each charging area. This is to ensure customers bills continue to reflect broadly the cost of providing the services they receive. For example, it would not be fair to expect customers in the North East to pay for improvements to service benefiting customers in Essex & Suffolk only. Our plans include significantly more water investment in Essex & Suffolk than in the North East. This is mostly due to investment in mains renewal to manage leakage and in the Abberton water resource scheme mentioned earlier. We are, therefore, proposing to apply the water K factors to reflect differences in investment between the two areas. This results in average annual increases in water prices (not including inflation) of +1.5% for North East customers and +2.8% for Essex & Suffolk customers. Water bills for our customers in Suffolk are currently higher than those in Essex. This position is broadly reflective of the costs of supplying the two areas in the past. However, in the future _ Page 7 of 8

8 there will be a rebalancing of costs between Essex and Suffolk primarily due to investment to secure water supplies to Essex. In this circumstance we no longer consider it appropriate to maintain higher charges in Suffolk. Our proposal is to harmonise charges in Essex and Suffolk in the period. CCWater has indicated that it supports, in principle, our approach to the application of price limits described above. The sewerage service K factor applies to the North East only and so the issue of the differential application of K factors does not arise. Customers bills Our proposals result in average household bills as shown in the table. Average household bills ( prices) (actual) (forecast) (forecast) North East (water and sewerage) Essex & Suffolk (water) In the fifteen year period to we will have invested some 4 billion in improving our assets. As the table shows, despite this investment, forecast bills in the North East for are slightly lower, in real terms, than those in Forecast bills in Essex & Suffolk for are around 12% higher than those in and mainly due to the investment needed to address security of supply. Note: The price limits and bills for are based on Ofwat s financial model. Although we have had limited time to validate the model we believe them to be broadly correct. THE OUTCOME FOR CUSTOMERS We have produced an integrated, well founded plan. It provides significant benefits for customers and will be delivered for small overall price increases. It is based on the views our customers have expressed and addresses all of the challenges we have identified. We believe it represents excellent value for money and will allow us to continue to deliver top class services in the North East and in Essex & Suffolk. The plan has been endorsed by the Board of Northumbrian Water Limited. _ Page 8 of 8