This week will see the water companies announcing their draft business plans for AMP6 (the next regulatory period from 2015 to 2020). It comes at a time of an increasingly hostile political environment. The recent focus on energy bills is spilling over into the water industry with Ed Millband signalling that the water companies will be next in the dock as part of Labour's campaign to tackle the cost of living crisis.
Thames Water recently had its attempt to increase charges for eight million households by £29 each rejected by Ofwat. Thames Water wanted to increase charges to pay for spiralling bad debts from bill dodgers costing it about £88m a year. Instead the plan has spectacularly backfired after Ofwat threatened to launch a counter-investigation into Thames profits.
The regulator is known to believe that water companies in general have been making far greater profits than envisaged because charges rise above the rate of inflation during a time of record low costs of borrowing.
Sonia Brown, Ofwat's chief regulation officer, said that it would carefully scrutinise all the proposals covering 2015 to 2020. "If you take an average bill, we think there can be big savings because the cost of debt and equity is much lower. There is a big opportunity for these bills to go down," Brown said.
Against this backdrop its clear that water companies will have to become much more adroit at explaining why investment needs to increase.
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