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(Alliance News) - The UK water-sector regulator on Thursday put forward a spending proposal which AJ Bell Investment Director Russ Mould viewed as firm but negotiable.
The Water Services Regulatory Authority, know as Ofwat, said household water bills will increase on average by GBP19 annually in England and Wales, in addition to inflation, over the next five years.
"Note, this is a draft decision and there is scope for firms to push for a bit more generosity before the final verdict in December," Mould said.
This increase to average customer bills was a third less than what was sought by the water companies.
Ofwat outlined plans for a GBP88 billion spending package by UK water utilities, intended on delivering cleaner rivers and seas, as well as better services for customers.
"The cost of this investment will initially be funded by shareholders or through borrowing, with these costs then recovered through customers' bills," Ofwat said.
From this overall package, GBP35 billion has been allocated towards improving customer service, river and bathing water quality, reducing pollution, and mitigating the impact of climate change, reflecting a trebling of investment seen in this area over the 2020 to 2025 period.
The plan specifically permits GBP10 billion of investment to upgrade 2,500 storm overflows to meet a target of reducing spills by 44% from 2021 levels. This includes the 21% reduction which the regulator has required water companies to deliver by 2025 at their own expense, and builds upon Ofwat's 2023 approval of a GBP2.2 billion accelerated investment plan.
Furthermore, GBP1.4 billion will be spent on storm overflows delivered through catchment and nature-based solutions, while GBP6 billion is allocated towards upgrading 1,500 wastewater treatment works to improve river water quality.
Another GBP6 billion will progress the development of 9 new reservoirs and 7 large-scale water transfer schemes to secure water supplies.
Ofwat Chief Executive David Black said: "Let me be very clear to water companies. We will be closely scrutinising the delivery of their plans and will hold them to account to deliver real improvements to the environment and for customers and on their investment programmes."
AJ Bell Investment Director Russ Mould commented that "Ofwat certainly hasn't taken an easy line with water companies," and noted the significant investment required for firms to meet their legal requirements.
Ofwat said it will oblige water companies to adhere to eight new performance targets punishable by automatic penalties if firms fail to meet such commitments.
Included in this is the target of cutting greenhouse gas emissions by 14%, reducing average spills to 16 per year by 2029, and lowering the cases of serious pollution instances to zero.
The total expenditure of the proposition is GBP16 billion less than plans suggested by water companies. Ofwat said it analysed these and removed or reduced costs that were insufficiently justified, inefficient, or already funded.
Following intervention by the regulator, average bills will in total rise by GBP94 over the next five years, as opposed to GBP144.
"Any negotiation requires give and take and, while the increase in bills... is less than most names in the sector were looking for, the market reaction suggests this isn't a bad outcome from the perspective of its listed constituents," said Mould.
Pennon Group PLC shares were up 9.4% to 677.21 pence each in London on Thursday afternoon. United Utilities PLC was up 3.4% to 1,102.27p, Severn Trent PLC up 4.2% to 2,726.00.
In response to Thursday's announcement, both Pennon and United Utilities said they look forward to engaging in constructive dialogue before final determination in December.
Separately, Pennon Chief Financial Officer Steve Buck will step down immediately for personal reasons, Pennon said.
His successor Laura Flowerdew, currently serving as customer & digital officer, previously was CFO of Bristol Water PLC, which was acquired by Pennon in 2021.
Meanwhile, Severn Trent said: "Storm overflow spills remain an area of significant focus for our industry. We have the most ambitious improvement plan in the sector, and our teams are in the field every day delivering interventions in our network which will improve 900 storm overflows this year alone. The work we have completed so far gives us confidence that we will be able to halve our spills rate by 2030."
Thames Water Utilities Ltd, which isn't listed, on Wednesday had said the price determination by Ofwat would be key to its ability to secure necessary financing.
By Elijah Dale, Alliance News reporter
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