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Water bills for Northumbrian Water customers will rise next year if an initial decision made by Ofwat is confirmed following public consultation. The water regulator has scrutinised the case put forward by the company for an increased price limit. Subject to consultation, Ofwat proposes to allow Northumbrian Water to increase its water and sewerage charges for the remaining year of the current price review period, from 1 April 2004 to 31 March 2005. Director General of Water Services, Philip Fletcher, said: "After looking very closely at the company's claim, we have concluded that we need to raise its price limits. The extra costs they face are substantial enough to require an increase in bills. "I regret the need for an increase, but I have a responsibility to ensure that efficient water companies can finance the services they provide to customers. "In deciding by how much its price limit should increase, I have, where relevant, taken into account reductions in costs to the companies since the last price review. "I will carefully consider comments from customers, companies and other stakeholders on these draft proposals before I make my final decisions." Under Ofwat's proposed change, the average water and sewerage bill for Northumbrian customers would be £242, an increase of £22. This figure comprises Northumbrian region water and sewerage bills and Essex and Suffolk region water bills only. But customers would continue to benefit in real terms from price reductions that were introduced in April 2000. Even after the proposed increase, Northumbrian customers would pay on average £38 less in their bills in April 2004, before inflation, than they were paying five years ago. The increase in April 2004 will reduce any subsequent increase to customers' bills sought by Northumbrian Water for the period 2005-10 when Ofwat sets price limits for the whole industry in England and Wales next year. Each year water companies can ask Ofwat to look again at their price limits if they face new costs or lower income that were not allowed for when price limits were last set. Northumbrian Water requested extra revenue because it faces increased costs due to:
Ofwat has also taken account of savings made by the company. It will now cost less than assumed in 1999 to carry out the revised work programme for meeting new lead standards. The increase in the price limit proposed for Northumbrian Water also includes a proportion under the 'substantial effect' clause of its licence. Northumbrian Water has demonstrated that a reduction in demand for water from what was forecast in 1999 has led to lower revenue which has had a substantial effect on its business. The substantial effect clause allows the company to ask the Director to consider the effect of this and whether it is appropriate to raise price limits as a result. Ofwat considers that Northumbrian Water should be entitled to increase its income in 2004-05 to enable it to earn the level of return and achieve the interest cover in 2004-05 that was forecast in 1999. This is substantially less than reimbursing the company for the entire revenue shortfall it has experienced since April 2000. Ofwat will be consulting on changes to this particular licence provision in connection with the coming periodic review. This is to ensure that in future it only applies where a really significant threat to the future financing of the company exists. The consultation on the draft decisions runs until 26 November. Ofwat expects to announce a final decision on 11 December. Notes to Editors 1. The Director General of Water Services is the economic regulator of the water and sewerage companies in England and Wales. He exercises his powers in a way that he judges will allow them to carry out their functions properly, and finance them. WaterVoice represents customers' interests. 2. Price limits were set on 25 November 1999 for all the water and sewerage companies in England and Wales. They came into effect from 1 April 2000. Copies of 'Final Determinations: Future water and sewerage charges 2000-05' are available on Ofwat's website: www.ofwat.gov.uk and from Ofwat's library (0121 625 1373). 3. Letters to Northumbrian Water explaining Ofwat's decisions will be available on our website: www.ofwat.gov.uk 4. Price limits are set using the formula RPI+K, where K is the number by which the company can change its charges to customers above, or below, the level of inflation. The price limits for Northumbrian Water are: PRICE LIMITS %
COMPARISON OF AVERAGE BILLS
5. Condition B of their licences allows companies to apply for an adjustment of their price limits for certain relevant changes in circumstances affecting costs that, in total, over a number of years, exceed 10 per cent of their turnover. Ofwat can also serve a counter notice if the regulator has evidence that companies have been allowed to raise money for work that may no longer be needed. 6. After the 1999 final determinations, Ofwat named three areas that allowed companies to apply for interim determinations. They were: · changes in expenditure (including losses of revenue) attributable to the greater take-up of free meters than assumed; · the consequences (debt-recovery costs and bad debt) of removal of companies' right to disconnect domestic customers for non-payment; and · the cost of a new scheme to protect vulnerable customers with measured bills, against significantly-increased water bills, because they have three or more children under 16 in the household, or a member of the household suffers from a designated medical condition. 7. Licence Condition B14.3 allows a company to ask the Director General to consider whether a circumstance has occurred which has a substantial adverse effect on the Appointed Business. For Ofwat to consider the request the company must show that: · the Net Present Value of the losses calculated over 15 years exceeds 20 per cent of turnover of the appointed business; and · these losses could not have been avoided by prudent management action.
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