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Consultation of the Company’s Business Proposal for PR04 and Efficiency

Mr Penna Managing Director South Staffs Water Company distributed an extract from Ofwat’s Unit Costs and Relative Efficiency 2001-02 Report. He explained Ofwats model for calculating efficiency. The Company had the second lowest charges in the Country because its strategy is to make its assets last rather than build new. As a result capital investment is low and the impact on customer bills is minimised. Continuing the use of old assets results in capital expenditure being low but creates higher operating costs. When looking at operating efficiency Ofwat take no account of Capital investment policy or practice. As a consequence the Company has been placed in ‘average efficiency’ (Band C) for 2001/2. For the base year, 2002/03, the Company needs to strive for a minimum of Band B. The Company are lobbying Ofwat to bring to their attention the belief that their models are flawed and that accounting allocation creates further distortion.

Mr Penna gave a presentation utilising extracts of the presentation provided to Bill Emery at Ofwat.He explained that the Company provided the best value for money of any water Company . This was demonstrated by considering the Company’s performance within the OPA alongside the Company’s average bill.
He explained that the Company had already spent in excess of the provision provided for on leakage and that, for the future, the Company was looking for an early increase in mains rehabilitation. To date the Company had received favorable feedback from Ofwat. Impact for the required increase in mains renewals is an additional £4 on customers bills, however, due to the offset against Water Quality Schemes and future efficiency targets the Company envisaged bills would remain broadly stable over the period 2005 – 10 (assuming no change in external obligations).The Company has saved more on operating costs than the Ofwat target but returns are below Ofwat’s target because the actual depreciation allowed on our assets was significantly greater than provided. That the Company’s leakage costs has increased £2.2m per year, climate change levy £.5m, debt and collection charges £.7m and Insurance £1m. This is an increase in costs of £4.4m in addition to the efficiencies the Company has had to make.
Reports prepared by Ofwat suggest that future efficiencies on the Company may be between 1.5% and 3% each year. This would equate to additional savings of £2m over the 5 years.

Mr Penna informed the committee that Company’s presentation to Ofwat was understood.
The Chairman Councillor Phil Bateman summarised the Committee’s position at the next price review the Company should attempt to continue its balance of low bills and high customer services

RESOLUTION
After discussion it was resolved that the Customer Consultative Committee offered full and complete support for the Company’s business plan proposals. It was noted in particular the urgent need to enhance underground mains investments and the Company’s considerable concerns for a level playing field efficiency assessment. The committee is pleased that, in aggregate, the impact on customers for the period 2005-10 will be small, whilst maintaining the continued high standards to customers.