Our plans for water

2010 –2015

April 2009

Summary of our final Business Plan submission to Ofwat

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Every five years, water companies in England and Wales prepare their business plans, setting out the main areas in which they intend to invest.

These proposals are reviewed by the economic regulator, Ofwat, which decides by how much bills can rise.

Like other water companies, we submitted our draft Plan last August for the five-year period from 2010 to 2015.

We explained how we aimed to address the priorities of our customers, meet the requirements of new legislation, provide water and wastewater services for our region’s growing population, and accommodate the expected challenges of climate change.

In drafting these proposals, we had consulted widely with customers and stakeholders, including MPs, local authorities and a variety of interest groups. Our draft and final Plan both build on our 25-year Strategic Direction Statement, Taking care of water, which set out our long-term strategy to the year 2035.

We again consulted on our draft five-year Plan. The feedback we have received has been one of several important factors that have guided us in updating our proposals. The result is our final Business Plan, of which this is an executive summary.

Contents 1

Contents

02 Foreword David Owens, CEO03 Thames Water at a glance…04 Setting the scene08 Developing our Plan12 Drivers of change16 Summary of our Plan22 Delivering our Plan24 Financing our Plan27 Next steps28 Appendix30 Glossary

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2 Foreword

The Plan has been designed around the needs and priorities of our customers. It will also deliver the statutory outcomes required by the Environment Agency, Drinking Water Inspectorate and Natural England.

Our company vision is: “If customers had a choice, they would choose Thames Water.” We have ensured that our customers are central to our proposals. Our final Business Plan builds on our Strategic Direction Statement, Taking care of water, published after extensive consultation in December 2007, and on many subsequent discussions with customers and stakeholders.

It also responds to the constructive feedback received from Ofwat, the Consumer Council for Water and others on the draft Plan we published in August 2008, demonstrating that we have listened and taken on board the comments raised.

In producing this final Plan, we have struck a careful balance between the work we must do in order to continue delivering our best-ever levels of service – such as accommodating growth in demand – and the ability and willingness of our customers to pay for the necessary bill increases. In view of the economic downturn, which is affecting both our customers and our business, we have re-examined every aspect of the Plan to ensure that all the work we intend to undertake continues to be essential in the current circumstances.

We have worked very hard to mitigate the effect of this downturn on customers’ bills. However, we have a responsibility to invest sensibly and consistently. Delaying essential work would inevitably lead to a deterioration in service and higher bills at some stage in the future.

In discussion with customer groups, we have received the clear direction that if the work is really needed, then customers are prepared to pay for it to be done – as efficiently as possible. That is our view too, and it is on that basis that we have prepared this Plan. In addition, we have adjusted the balance of risk between customers and the company.

Our shareholders will now bear greater operational, financial and reputational risk in our final Business Plan, to ensure our proposals remain affordable. This is a long-term business and we have a duty to undertake essential investment even when there are difficult economic conditions for our customers.

To deliver our investment programme, we will need to raise an unprecedented level of finance of around £3bn from lenders and investors, in a financial market that is likely to remain both highly volatile and limited in capacity. Securing this funding will depend on our ability to provide returns that reflect the risks taken by those capital providers. Our assessment of the cost of borrowing and adequate returns recognises these requirements.

Over the last two years we have delivered a step-change in both operational performance and efficiency, meeting and beating the targets agreed with our regulators. Our Plan will continue that progress, driving further cost savings throughout the next five years, with the benefits being shared with customers by keeping bills low.

But that alone will not be sufficient to achieve our company vision. That is why we will focus our investment on tackling the root cause of the issues with which our customers are dissatisfied. In doing that, we can reduce the cost of dealing with complaints, provide a better service and release funds to pay for further improvements.

This Plan has been developed by our Executive Management Team, with the full engagement and support of our Board and shareholders. Our recent performance gives us confidence that we can deliver this large and important programme of improvements over the next five years. However, we fully expect to be held accountable by our customers, by our regulators, and by our shareholders for ensuring that we deliver the Plan efficiently in every respect.

David Owens Chief Executive Officer

Foreword David Owens, CEO

This Business Plan is an important milestone for Thames Water, our customers and the 10,000 people who depend on us for employment. It sets out the levels of service we intend to provide between 2010 and 2015, and the improvements that we will deliver during that time – and, at less than£1 a day, our bill will remain below the industry average.

Thames Water at a glance… 3

Thames Water at a glance…

We supply about 2,600m litres >of water per day and treat around 2,800m litres of sewage

77 per cent of our water is >from rivers and 23 per cent from groundwater

95 water treatment works >

Over 31,400 kilometres of water >mains and 68,200 kilometres of sewers

349 sewage treatment works >

99.9 per cent beneficial use of >sewage sludge

169 gigawatt-hours of renewable >energy generated in 2007/08

14 per cent of electricity >self-generated in 2007/08

Achievement of Carbon Trust >Standard in 2008

18 Sites of Special Scientific >Interest and over 120 sites used for recreation and public access

13.6m wastewater customers >

8.5m drinking water customers >

4m customer contacts every year >

1m water meters requiring reading >and maintaining

Water-saving advice and >information provided to more than 2.4m customers

Our key aims

Provide an excellent service >that customers trust

Identify the fairest ways to pay >

Deliver an efficient service at >an affordable price

Ensure we are easy to deal with >and show we care

Promote water efficiency >

Support the communities we serve >

Our key aims

Provide a continuous supply of >clean, safe drinking water

Reduce leakage >

Reduce sewer flooding >

Treat wastewater and prevent >pollution

Minimise odour from sewage works >

Provide a reliable and low-cost service >

Our key aims

Meet tightening environmental >standards

Reduce our contribution to >climate change

Increase energy efficiency >and renewables

Make sustainable use of >natural resources

Recycle and minimise waste >

Customer service Assets Environmental

We are the UK’s largest water and sewerage company, serving London and the Thames Valley.

4 Setting the scene

Setting the scene

Setting the scene 5

The context of our PlanOur vision is: “If customers had a choice, they would choose Thames Water.” This vision is the cornerstone of our Business Plan. In developing it, we have placed customers at the heart of our planning process. To do so, we have undertaken our largest-ever consultation with customers and ensured that their views and priorities are reflected in our proposals.

In August last year we published our draft Plan. It builds on two successive years of best-ever operational performance by the company and is aligned with the approach established in our 25-year Strategic Direction Statement (SDS), Taking care of water.

In preparing our draft Plan and SDS, we were guided by the feedback we received during our extensive programme of research with both customers and stakeholders.

To ensure that our Plan continued to represent their views, we consulted on our draft Plan. We have listened to the responses we received, which in the main were supportive, as well as the conclusions of Ofwat’s customer research.

Ofwat has also provided us with formal written feedback on our Plan and, as part of its new approach to incentivising efficient capital investment (the Capital Incentive Scheme, or CIS), set out its initial views on our investment – called a draft CIS baseline.

We have carefully considered this important feedback when preparing our final Plan.

We must recognise, however, that we operate in a world where many important factors are outside our control. Changing circumstances can, and do, require us to revise our plans.

Since last summer, the economic outlook has changed markedly, and we find ourselves operating in very different conditions. There has been a prolonged period of instability in financial markets, resulting in a sharp increase in the cost of finance. As a consequence, the economy has entered a recession, and we are facing deflation for the first time in the industry’s history.

These events have had a direct impact on our business, and have brought:

further rises in levels of customer >bad debt as tightening household financial circumstances and increasing unemployment challenge our customers’ ability to pay

lower revenues as a result of a sharp >decline in the commercial and metered demand for water, and

an increase in the cost of borrowing >money to finance the necessary investment in our assets.

This has all led to an increase in the risk and uncertainty that we must manage as a business and means we face a challenging final 12 months of this five-year regulatory period, and a difficult operating environment and economic conditions well into the next.

There is a common acceptance that the downturn will result in a number of fundamental shifts in underlying economic activity that will affect our business over the 2010 to 2015 period. Reduced levels of both population growth and new housing development have the direct effect of lowering our growth and revenue forecasts.

Spotlight on customer research

We have involved customers and stakeholders at every stage of the journey in formulating our plans for the future, to ensure that our proposals reflect their views. We carried out research before writing our 25-year strategy, which sets out our priorities in the period up to 2035. We then carried out consultations both prior to, and after, the publication of our draft Business Plan for 2010 to 2015. In total, we have consulted with more than 3,000 individuals and organisations. Our research has employed a range of methods, including consultation to explore customers’ willingness to pay for different levels of service. We have used the results to shape our final Plan.

Independent projections suggest that the increased cost of borrowing will continue well beyond 2010, and that the previously benign market conditions experienced from the late 1990s to late 2007 are unlikely to return. This will mean our cost of finance in the next five years will remain above the levels experienced during the early years of the current Price Review period.

In our final Business Plan, we have responded to the challenges of the economic downturn. This has required us to make some tough choices in order to minimise costs, ensure we invest effectively and efficiently in our assets, and deliver the service improvements our customers have told us they expect, while ensuring that these assets are sufficiently resilient to cope with the challenges of the future. As the provider of an essential service to 13.6 million customers, we cannot only invest in the good times.

We are acutely aware of the impact on customers’ bills, particularly given the current economic circumstances. We have worked very hard to mitigate the effects of our Plan on bills, while continuing to deliver a balanced package of outputs for which our customers are willing to pay.

The key changes we have made to our Plan to reduce the impact on customers’ bills are as follows:

We have taken on increased operational, >reputational and financial risk without detriment to customer service.

We are absorbing operating cost >increases driven by bad debts (above today’s levels) and the removal of small incremental operating cost increases from our Plan, while maintaining our challenging and aggressive efficiency targets.

We are accepting an increased risk >in our projected cost of debt and equity in a demanding and volatile market.

We have reduced the scale of our >planned investment by £1bn, in response to both the economic downturn and to stakeholder feedback.

In addition, we have improved the detail and level of supporting evidence for the proposals contained in our final Plan, extended our application of cost-benefit analysis to ensure our proposals provide the greatest value for money, and more extensively applied risk assessment to support our operating cost and capital investment proposals.

This summary gives an overview of how we have developed our proposals, the changes we have made and the improvements we will deliver between 2010 and 2015.

Our recent performanceSince the last Price Review in 2004, Thames Water has changed significantly. In December 2006, the company was acquired by the Kemble Water consortium.

The new management set out a straightforward ‘back to basics’ approach to our operations, and clear corporate objectives. This resulted in the sale of the commercial and international parts of the business and renewed focus on our core operations in London and the Thames Valley.

Now, some 28 months on, the evidence demonstrates we are delivering on these objectives. We recorded our best-ever performance in 2007/08 across all areas of our business. Among many achievements, we have:

delivered our highest-ever score >in Ofwat’s ‘Overall Performance Assessment’, which compares water companies’ performance on major issues

6 Setting the scene

reduced the risk of sewer flooding for >1,502 customers – 313 above our target

beaten our leakage target for the >last two years since the company changed ownership, and expect to beat it for a third year running

achieved over 99 per cent compliance >at our sewage treatment works for the second year running

reduced the number of burst mains by >seven per cent and collapsed sewers by 12 per cent

achieved our best-ever drinking water >quality compliance of 99.98 per cent

voluntarily improved our compensation >payments to customers for service failures such as missed appointments

We will report further improvements in performance when we submit our 2009 June Return to Ofwat later this year. This will include another best-ever Overall Performance Assessment.

In 2007/08, we increased our level of capital investment to £953m. We plan to invest a further £1.8bn by the start of the next five-year period in 2010, to ensure we achieve the commitments given during the last Price Review.

We are already one of the most efficient wastewater companies, as shown in comparisons made by Ofwat. However, we are also working to sustainably reduce operating costs for our water service where possible, to bring them in line with the best in the industry, and expect to further improve our efficiency between 2010 and 2015.

These achievements have given us a solid platform from which to approach the next five-year period. However, the recent turmoil in financial markets and subsequent economic downturn mean we face a very challenging phase leading up to the end of the current five-year period in spring 2010, and beyond this.

Since submitting our draft Plan, changes to the economic landscape have caused real increases in operating costs, which are largely outside our control. These include further rises in the level of customer bad debt and energy costs, and have led us to increase our net operating expenditure for 2008/09 and forecast for 2009/10.

Despite these exceptionally challenging times, we will deliver a further £43m in sustainable operating cost savings by the end of the 2010 – 2015 period. These savings in our base operating costs will, however, be offset by factors outside our control, such as the revaluation of business rates and expenses associated with implementing the Traffic Management Act. As a result, our overall operating costs will unavoidably increase during the next five years.

We will reach spring 2010 having recovered substantially less revenue than projected at the last Price Review. This is a result of a variety of factors, notably a fall in commercial water usage, more people opting for water meters, a reduction in the number of new homes built, and a sustained period of low water consumption following the drought of 2006.

As a consequence, we will recover £200m less revenue than assumed in the 2004 Price Review. This shortfall will be borne by shareholders, not customers.

Spotlight on mains replacement

In the last year alone, our work to replace ageing water mains has reduced leakage by over 35 million litres per day – enough to supply more than 200,000 people. The huge programme, covering many areas of London, is part of our work to cut leakage and reduce the need for future repairs. Over half of the capital’s water mains network has been in use for more than a century. Our work involves replacing the original cast iron mains with new plastic pipes that are more durable and flexible. We aim to carry on these improvements in the next five years, replacing a total of nearly 1,500km of mains.

Setting the scene 7

8 Developing our Plan

Developing our Plan

Developing our Plan 9

Our strategic objectivesIn forming our Plan, we have aimed to provide the services our customers have said they want, at an affordable price, with an appropriate balance of risk between us and our customers.

We believe that, despite the change in the economic climate, our overall objectives should remain largely unaltered, and we have clear evidence that customers remain in agreement with our proposals. This is shown both by the feedback we have received and Ofwat’s own research, which indicates that customers continue to broadly support the proposals and consider them to be value for money.

Our objectives can be seen on the right.

Secure service levelsWe use risk assessments in our operations, to ensure we continue to reliably provide the service our customers expect, and balance supply with forecast growth in demand.

Be responsiveWe aim to address the priorities of our customers. For example, we intend to reduce sewer flooding, tackle localised issues affecting the appearance of our tap water, and improve our customer service.

Act sustainablyWe must plan for the effects of climate change and reduce carbon emissions. We will promote metering and efficient use of water, reduce leakage and invest in sustainable sewage sludge disposal. We continue to be committed to our Biodiversity Action Plan and conservation, access and recreation responsibilities.

Ensure value for moneyFor example, we plan further innovations which will bring operational and capital efficiencies, and will address affordability issues for those customers least able to pay their bills.

Spotlight on flooding

Sewer flooding was the issue that attracted the highest number of comments in our consultation on our draft Plan. Customers feel there is no place for this in the 21st century and that we should carry out further work to reduce the risk to homes and gardens. Our proposals include investment to alleviate more than 3,500 homes in our region from the risk of flooding. This is part of our long-term objective to virtually eliminate the problem. We also propose carrying out improvements to protect a number of our key sites from surface water flooding, in the light of increasing evidence of climate change.

10 Developing our Plan

Our customers’ and stakeholders’ prioritiesWe have developed our Plan to meet the priorities of our customers and stakeholders. To ensure our proposals properly represent their views, we have undertaken two years of intensive research, involving customers, MPs, local authorities, non-governmental organisations and other groups. We have continued to work closely with our quality regulators (the Environment Agency, Drinking Water Inspectorate and Natural England) and with the Consumer Council for Water and Ofwat.

We began our research before writing a draft 25-year strategy – our Strategic Direction Statement (SDS) – in order to ensure our medium- and long-term proposals were in line with the issues that stakeholders wanted us to address. We consulted on this draft document before finalising our strategy. We then carried out further research on the package of proposals included in our draft Business Plan, which was based on the medium-term plans set out in our SDS. We also sought comments on our draft Plan, published in August 2008.

Our final Plan remains consistent with the goals we outlined in our SDS, although the pace of delivery in some areas – such as leakage and sewer flooding – has been adjusted in response to changing circumstances.

Our plans, and the associated level of bills, are supported by our research with customers and stakeholders. We have received a clear message that they expect us to undertake essential investment now, are willing to pay for this and do not want to see essential investment deferred at the risk of reducing our levels of service and storing up problems for the future.

The latest phase of this research – our consultation on our draft Plan – took place in autumn 2008. In spite of the fact that economic conditions had already deteriorated, we still received support for our proposals. The Appendix (pages 28 to 29) summarises the responses we have received and how we have responded in our final Plan.

Ofwat undertook its own customer research on our draft Plan in November 2008. This also found that the majority of respondents in our region accepted our Plan and 86 per cent of those questioned wanted no change to the package of outputs proposed.

The customer concerns received in response to our consultation include ensuring clean and safe drinking water, safe disposal of sewage to the environment and no deterioration in levels of service.

Developing our Plan 11

The feedback also indicated that the issue of greatest concern, particularly to domestic customers, was sewer flooding. Respondents called for the necessary resources to be targeted at preventing this problem, which they said should not be tolerated in a modern society.

Other topics raised included the urgent need to reduce leakage, the requirement to improve water conservation, and a call to extend metering as quickly as possible in order to reduce demand and help customers save money. Customers also called for more public education and awareness-raising to reduce water consumption through the use of water butts and similar measures.

Our customers wanted us to continue to meet these challenges despite worsening economic conditions, and wanted to be sure that we could deliver our plans and improve the service we provide.

For further details about the comments made on our draft Plan, and how we have responded, see the Appendix on pages 28 to 29.

In addition, we have consulted with the Drinking Water Inspectorate, which has given its written support for all of the drinking water quality schemes, and the Environment Agency, which has also supported our environmental quality schemes.

We have also met with a range of key stakeholders, including the Consumer Council for Water, Natural England and many of our local MPs.

We have taken the final decisions on our Plan in order to achieve the best balance across our strategic objectives, in line with our customers’ willingness to pay for these activities.

Spotlight on water meters

In our research, many customers and stakeholders have said they support metering as the fairest way to pay. Around 25 per cent of our domestic customers have water meters. Our Plan proposes increasing this level to 41 per cent, by installing more than 480,000 new meters over the five-year period. We aim to initially focus our meter installation work in those areas with the greatest potential deficit between supply and demand.

12 Drivers of change

Drivers of change

Spotlight on reducing odour

At a number of sites, homes have been built much closer to our sewage treatment works than was originally the case, causing potential odour problems. We want to reduce odour levels in such areas, in line with the wishes expressed by many customers in our research. Our Plan proposes investing at nine of our sewage treatment works to address this issue. We will also discuss the implications with planning authorities before new homes are built.

Drivers of change 13

The main changes between our draft and final Business PlansThe starting point for developing our final Business Plan was the draft version published last August. We have since updated our investment plans, operating costs, financing assumptions and delivery plans to reflect new information, improved analysis, and feedback from customers, stakeholders and regulators.

We have continued to scrutinise and challenge our Plan, with the following objectives:

Investing in our assetsWe aim to be the company that delivers its services at the lowest possible cost. We have refocused our capital procurement strategy to efficiently secure the services of contractors, and have already initiated our competitive tendering process for this work. This will help address the challenges posed by the volume of construction projects planned for London and the South-East.

Operating our assetsWe plan to become the most efficient company in the water industry.

To achieve this we have set ourselves aggressive efficiency targets, derived from robust bottom-up assessment of expected costs, verified with reference to published studies and external benchmarks. We plan to deliver the majority of our efficiencies early in the five-year period so that customers benefit.

Financing our PlanOur goal is to maintain our highly efficient financing structure.

Our Plan recognises that we must manage risk in a way that enables us to maintain our strong investment-grade credit rating in order to secure access to finance.

14 Drivers of change

In addition, we have responded to clarification of new requirements from regulators and taken into account Ofwat’s latest guidance – for example, on climate change.

The main drivers for the changes we have made to our plans are:

Internal challengeWe have improved the quality of evidence supporting the design and costings of our proposals, and subjected these to further iterative challenge and scrutiny by our Executive Management Team and Board.

Responding to feedbackWe have received and responded to feedback on our plans from customers, the Consumer Council for Water, and our quality regulators: the Environment Agency, Drinking Water Inspectorate and Natural England. Ofwat has given us formal written feedback on our plans and, as part of its new approach to incentivising efficient capital investment (the Capital Incentive Scheme, or CIS), set out its initial views on our investment – called a draft CIS baseline. We have considered this and responded positively.

Development of approach to riskTo minimise the effect of increasing operating costs on bills, we have adapted our plans so that we will bear an increased level of risk relative to our draft Plan.

We have applied rigorous risk-based assessments to the potential range of our capital and operating costs. Our approach has been to adopt either a central estimate or a lower, more challenging, cost. We have verified these costs by consulting external benchmarks and with reference to companies in other sectors.

Economic downturnWe have reduced our demand and supply assumptions, and revised financial market assumptions in light of the impacts of the economic downturn. These revisions are based on work undertaken by independent experts.

In response to these challenges, and in line with our customers’ willingness to pay, we have reduced our investment, operating and financial assumptions to the minimum level consistent with delivery of progress on essential improvements in our service and the effective management of risk.

Spotlight on water supplies

In research, our customers consistently identify having a clean and reliable source of drinking water as their main priority. Our Plan includes measures to improve our ‘security of supply’, a measurement which assesses our ability to meet long-term demand for water, even during prolonged dry spells. We also intend to invest in new water resources to provide an extra 28 million litres of water per day.

Drivers of change 15

Our final Business Plan strikes the right balance between the benefits and costs for customers, and the risks to us in achieving the Plan.

Ofwat responseWe have only been able to make the significant reductions to our investment plan by taking tough decisions. This has increased the level of risk we will have to bear from 2010 to 2015. We have accepted Ofwat’s challenges levelled at non-cost beneficial projects, and complied with their request to remove £350m of climate change-driven investment, on the basis that Ofwat will develop an adapted change mechanism to reflect the additional funding required to meet the updated climate change scenarios. We believe this is the right approach in the current economic climate, in order to ensure we can provide the service our customers want at an affordable price.

Our draft Business Plan received positive feedback from Ofwat, who ranked us third in the industry in terms of their CIS assessment of our planned capital expenditure. We recognise that this was a good result, but have challenged ourselves to refine our investment plans further.

We strongly believe that our much-improved asset planning approach responds to challenges Ofwat made to our draft Plan and provides strong justification for our capital maintenance expenditure.

We expect all of the confirmed new legal obligations we face to be reflected in our final price limits, and believe that the scale of additional risk we are prepared to face over the next five years to minimise bill impacts will be recognised by Ofwat when it sets the scale of our efficiency challenge.

In recognition of the rigorous scrutiny and challenge we have applied to our proposals, we firmly believe that our final Business Plan will achieve a CIS baseline resulting in a ratio of 100 or better.

16 Summary of our Plan

Summary of our Plan

Summary of our Plan 17

Overview of our five-year planWe plan to invest £5.5bn between 2010 and 2015, and will require £3.2bn of operating expenditure over the period to deliver this Plan. This will require us to raise £3bn of debt during the next five years.

A breakdown of the primary building blocks of our capital expenditure is shown in Figure 1 below. Almost 60 per cent of our planned expenditure is required to maintain our current service levels, including accommodating expected growth in our region, albeit at a lower level than envisaged before the economic downturn. A further 30 per cent is required

to meet new statutory obligations and the London Tideway Tunnels projects. These projects, required by the Government, will substantially reduce pollution entering the River Thames, especially during storms. Expenditure on service improvements (predominantly sewer flooding and odour reduction) accounts for around 10 per cent of our planned capital expenditure. This is consistent with our customers’ priorities.

Our analysis shows we can achieve efficiencies of between 3 and 12 per cent on our capital programme over the next five-year period, with a central estimate of 8 per cent. This saving is valued at £387m over the period, which we have included in our Plan.

Spotlight on sewer maintenance

Fat, oil and grease cause more than half of the 65,000 blockages that occur annually in our sewer network. The problem can cause sewers to back up, flooding homes and gardens. In some cases, sewage can also pollute watercourses. We are aiming to better educate customers – particularly in the commercial sector – so that they do not dispose of this material via the sewer system. Our Plan proposes targeting 30 hotspots throughout our region to minimise the likelihood of blockages occurring.

Maintaining existing assets

Complying withnew requirements

Changes inservice levels

Efficiency Total

1, 032

1,158

431

741

792

963

343

285

Waste EfficiencyFive-year total for AMP5

WaterTidewayTunnels projects

Waste

WaterWaste

Waste

Water

Water

-387

5,497

Ca

pit

al

ex

pe

nd

itu

re (

£m

)

Investment to hold service levelsfor new and existing customers

Investment to meetnew requirements

Investment toimprove service

Efficiency

Accommodatingcustomer growth

138

Figure 1: Breakdown of capital expenditure

18 Summary of our Plan

A breakdown of the outputs we plan to deliver and total planned expenditure over the years 2010 to 2015, split for our water and our sewerage service, is summarised in Tables 1 and 2 to the right.

We will maintain our focus on sustainable development, our Biodiversity Action Plan and providing community access.

We believe our Business Plan represents the right balance between investment to maintain and improve service, customers’ willingness to pay and an assessment of the affordability of our proposals.

Key changes to capital expenditure In response to forecast reductions in expected demand, we have decreased our programmes to replace Victorian water mains and to install new meters in domestic properties. We have also deferred delivery of the proposed Upper Thames Reservoir by up to five years, and have therefore removed costs associated with its development from our Plan.

In acknowledgement of the fact that the Government has yet to issue its updated climate change scenarios, we have taken out of our Plan a significant proportion of investment driven by climate change. However, we have retained the first two years of our proposed climate change investment so that we can maintain progress in tackling leakage in London and ensure that we do not expose our customers to unnecessary risks to their security of supply.

We firmly believe that the revised climate change scenarios, when published, will support the requirement for substantial additional investment. When this is proven, we will need to be funded for the programme on the same basis as if it had been included in our Final Determination, ie including operating and financing costs.

We have retained the construction costs of the Lee Tunnel, but, given ongoing uncertainty, and in agreement with Ofwat, have removed those relating to the Thames Tunnel and kept only the costs of its design, development and land acquisition within the Plan.

We have achieved reductions to our investment plans through close scrutiny and a clear focus on the lowest level of investment required to produce the desired benefits. We have extended the scope of our risk assessment and applied it to a wider range of issues in our proposals.

We have critically reviewed our capital maintenance plans and sludge strategy. Improvements in our cost-benefit analysis have also reduced the scale of our sewer flooding programme, while our capital maintenance plan is now covered more extensively by application of risk-based strategies.

Key changes to operating costsOur everyday operations include abstracting, treating and pumping water, collecting, treating and disposing of sewage, answering customers’ calls and letters, all of which costs about £1.5m per day. We forecast our net operating costs, taking account of planned efficiencies and additional costs, will be £686m per year by the end of 2014/15.

Spotlight on sewage treatment

We remove and treat wastewater for 13.6 million customers across London and the Thames Valley. In the next five years, we propose upgrading sewage treatment works to cope with sewage from more than 765,000 new customers. We also plan improvements to the quality of local watercourses, and new sludge treatment technology that will increase the amount of renewable energy our sites generate.

Summary of our Plan 19

Sewerage service Expenditure (£m)

Key components of the Plan and principal activities/outputs Capex Opex

Quality Complying with new obligations

88 environmental quality improvements267km of rivers/tideway by length improved 114km of rivers protected from deterioration Redevelopment of Deephams Sewage Treatment Works to meet new consents Compliance with enhanced security requirements

741 32.9

Growth Accommodating customer growth

765,000 population growth220,000 new connections, of which 54,600 require investment 450 tds/d additional sludge treatment capacity

687 14.7

Capital maintenance Renewing existing assets

Maintain stable serviceability30 blockage hotspots targeted 81 sites included within refurbishment programme263km of sewers rehabilitated7,440km of sewers surveyed

1,074 -1.7

Service enhancement Changes to customer service

440 net reduction of properties at risk of sewer flooding3,529 properties alleviated from sewer flooding9 treatment works with enhanced odour reduction50 critical sites enhanced for resilience to flooding

268 7.7

Total 2,770 53.6

Large Projects London Tideway Tunnels (Lee Tunnel to be completed by 2014/15; Thames Tunnel development and land costs only)

963 0.4

Note: Prices include planned efficiency improvements, and are net of grants, contributions and input price inflation

Table 2: Summary of our plans for the sewerage service

Water service Expenditure (£m)

Key components of the Plan and principal activities/outputs Capex Opex

Quality Complying with new obligations

14 sites for improvement64,550 lead pipes replacedCompliance with enhanced security requirements

125 32.4

GrowthAccommodating customer growth

4 per cent leakage reduction400km of mains replaced 487,721 meters installed, 41 per cent penetration28m litres per day of new water resources

Note: Investment and outputs stated above reflect the deferred decision on mitigating

for the impacts of climate change

390 56.4

Capital maintenance Renewing existing assets

Maintain stable serviceability662km of distribution mains replaced 75 sites included within refurbishment programme First time capital maintenance at enhanced treatment process plants

936 -53.4

Service enhancement Changes to customer service

Reduced interruptions of supply through enhanced monitoring and control, and further mains replacement (435km)Reduced risk from trunk mains bursts17 critical sites enhanced for resilience to flooding

311 4.7

Total 1,762 40.1

Large Projects Upper Thames Reservoir (minimum expenditure) 1 0.0

Note: Prices include planned efficiency improvements, and are net of grants, contributions and input price inflation

Table 1: Summary of our plans for the water service

20 Summary of our Plan

The key building blocks of our operating costs are presented to the right in Figure 2.

Since submitting our draft Business Plan, the economic downturn has prompted real rises in our operating costs, which are largely outside our control. As a result, our overall operating costs are forecast to increase by £108m across the five years. This increase will be very challenging to manage and represents the minimum increment consistent with the effective delivery of our obligations.

Operating costs are a key component of customer bills. In order to limit their impact on bills in the next five years, we have rigorously challenged our operating costs and accepted a greater than central estimate of risk in our final Plan. To achieve this, we have adopted a risk-based assessment of the expected range of outturn costs. This modification of our approach to risk has led us to exclude a further £60m of potential funding from our final Plan.

We have:

planned to absorb the operating cost >increases likely to result from predicted higher levels of bad debt and from an increased pension fund deficit, but only above that already reflected in our Plan

removed, at our risk, a significant number >of so-called ‘operating cost increments’ not faced in the current five-year period, such as the costs of carrying out wastewater monitoring previously done by the Environment Agency, and our proposed social tariff

revised downwards the operating >cost of our planned desalination plant in east London, taking a greater cost risk, and

proposed a ‘cap and collar’ approach >to power costs, meaning we carry a notable price risk while ensuring that potential ‘windfall gains’ which would occur if prices returned to pre-2007 levels would be returned to our customers.

These changes from our draft Plan represent a material risk to operating costs in the period 2010 to 2015. This leaves limited scope for us to outperform our operating cost figures and, along with our planned efficiencies, means our shareholders face increased risk.

Impact of changes on affordabilityThroughout the development of our 25-year Strategic Direction Statement, our draft and our final Plan, we have aimed to understand our customers’ priorities and their willingness to pay for our proposals.

All of our customer research has revealed a consistent view that we should not let our current service levels deteriorate, and that we should deliver service improvements in the areas of sewer flooding, leakage and odour from sewage treatment works.

In June 2008, we conducted a ‘contingent valuation’ survey, in which we presented the proposals in our Business Plan to a representative sample of customers, to assess their support and willingness to pay for the Plan as a whole. Our approach has been peer reviewed by a noted expert in the field, Professor Ken Willis, of Newcastle University. The survey found that respondents were willing to pay an average of between £53 and £68 per household per year, above the level needed to maintain the current service.

Despite the economic downturn, our own research and that of Ofwat – both conducted last November – provide evidence that customers support our Plan and consider the proposals to be good value for money.

Our research has also confirmed strong support for our proposed package of affordability proposals, which will provide a safety net for our most disadvantaged customers. This includes willingness to pay for a new social tariff.

Table 3, to the right, shows the effect on customers’ bills of the changes we have made to the Plan, while Table 4 shows the impact on bills of the various price drivers.

The real increases in our operating, capital and financing costs driven by the prolonged period of financial market instability and the sharp dip in economic outlook would have required customer bills to rise by around 35 per cent to meet the costs of our draft Plan.

The changes we have made to our Business Plan to mitigate the effects of the downturn have enabled us to constrain the costs of our final Plan to the same level of bill impact as we included in our draft Plan, and restrict the required overall bill increase to 17.2 per cent. This level of increase is supported by the ‘willingness to pay’ range derived by our customer research.

We appreciate that the average household bill increase in the first year is higher than in subsequent years, even after our mitigation efforts. This is partially due to the revenue shortfall in the previous five-year period, which customers have benefitted from at shareholders’ expense, but also due to rising operating costs as a result of our increasing capital programme. We will continue to discuss this increase with Ofwat and the Consumer Council for Water over the coming months.

Summary of our Plan 21

Maintaining service and existing assets

Base Customergrowth

Complying withnew requirements

Changes inservice levels

Efficiency Total

2,788

132

135

25

87

112

91

48

14

Impact of capital investment EfficiencyNew

activitiesImpact of capital investment

Energy

-282

3,150

Op

era

tio

na

l e

xp

en

dit

ure

(£

m)

Investment to hold service levelsfor new and existing customers

Investment to meetnew requirements

Investment toimprove service

Efficiency

New activities

Impact of capital investmentImpact

of capital investment and carbon mitigation

External increases net of other costs

Five-year total based on 2007/08 base

Five-year total for AMP5

Figure 2: Breakdown of operating costs

Note: Costs are £m, over five years, and exclude additional pensions costs

Table 3: Proposed average household bills for each of the five years from 2010 to 2015

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

£283 £313 £317 £322 £328 £331

Table 4: Proposed increases to average household bills

Price driver £ increase

Service improvements (drinking water quality, environmental improvements, service levels) 32

Maintaining and enhancing security of supply 18

Maintaining existing assets -7

Efficiency Past savings -5

Future savings -18

Financial drivers Changes in operating costs 17

Changes in revenue 16

Changes in cost of capital 2

Changes in taxation -7

Total £48

Note: Bills are quoted in 2007/08 prices

22 Delivering our Plan

Delivering our Plan

Delivering our Plan 23

Our procurement strategy Our Business Plan includes our largest-ever capital investment programme. The proposed level of expenditure in each of the five years is shown in Figure 3 below.

To ensure its efficient and effective delivery, we have already completed the majority of required enabling work. This has included refocusing our capital procurement strategy for the next five years, in order to secure the construction resources we need and to address the challenges arising from the volume of activity planned in London and the South-East.

We have revised our capital procurement strategy to:

avoid the slow delivery seen at the >beginning of the current five-year period

help mitigate the rising costs, driven by >the high number of major infrastructure projects locally, including Thameslink, Crossrail, the London 2012 Olympic and Paralympic Games and Heathrow East Terminal, and

deliver further efficiencies. >

In March 2009 we initiated our competitive tendering process, with the aim of awarding contracts in January 2010. This will avoid a dip in activity in the early part of the next five-year period.

To enable a more focused and productive client/provider relationship, we plan to engage a small number of locally-based service providers. This will improve performance management and delivery, which will continue our capital efficiencies.

To allow contractors to manage and optimise their programmes of work, we will award bundled packages of low to moderate complexity. This will realise efficiencies, which will be shared with Thames Water and, ultimately, our customers.

For more complex projects, such as larger treatment works, we will undertake individual procurement, allowing us more detailed involvement in projects with higher risk. During the current five-year period, we have developed four complex Tideway sewage treatment projects (valued at £580m), which are currently out to tender. We have now included these projects in our final Plan at the tendered cost.

In addition, we have reviewed the effect of the London 2012 Olympic and Paralympic Games on our ability to effectively operate in the capital during the run-up to the Games. We are confident, with the information currently available, that we can accommodate this event, at no extra cost to customers, by accepting greater operating risk, which we will control through improved asset management planning.

Our customer service strategyWe have begun to transform our customer contact operations. This has involved introducing new technology to enable us to more effectively utilise our call centre staff and to connect customers with those employees most qualified to help. We aim to achieve best-in-class call centre performance.

We have also brought renewed focus to this area as a result of research into customers’ views on our service and processes. We will strive to demonstrate to customers that we care about providing excellent service, and aim to ensure that we are easy to deal with, and that we prove ourselves worthy of customers’ trust.

In addition, we have improved compensation payments for service failures such as missed appointments or not responding to written enquiries within allotted timescales.

Our people strategyOur people strategy is already tackling the need to recruit, train, develop and retain competent and capable staff. We are planning to recruit to address the demographic challenges we face.

As part of this, we have instituted an employee engagement programme. This is designed to ensure managers and their teams fully understand their role in helping us deliver the commitments we make to our customers.

2010/11

1500

1250

1000

750

500

250

0

2011/12 2012/13 2013/14 2014/15

Ca

pit

al

ex

pe

nd

itu

re (

£m

)

Figure 3: Profile of capital expenditure for 2010 to 2015

24 Financing our Plan

Financing our Plan

Financing our Plan 25

Paying for the Plan Our Plan will deliver the infrastructure and service levels required by our customers. This will entail a capital programme of a scale beyond any previously embarked upon by a water company in a single regulatory period.

Economic conditions will be more challenging than assumed at the last Price Review in 2004, and we now face a higher relative risk on our larger capital expenditure programme. Our final Business Plan proposes a weighted average cost of capital (WACC) of 5.25 per cent in 2010 – 2015. The WACC for the next five years contains significant cost challenges but also passes on to customers the competitive debt terms for the embedded debt raised in the early part of the 2005 – 2010 period.

In proposing our WACC requirement of 5.25 per cent, we have set ourselves the challenge, by our structured approach to risk management, to outperform our calculated cost of equity by 0.65 per cent. By carefully monitoring and exploiting market opportunities, we plan to outperform our calculated cost of debt by 0.5 per cent between April 2010 and September 2011: the period during which we believe the conditions in the capital markets will remain at their most challenging.

Our true cost of capital, before setting this challenge, would be at least 5.55 per cent.

To fund the Plan, we will have a borrowing requirement of approximately £3bn over the 2010 – 2015 period, including the refinancing of maturing debt.

Impact of deflationThe prospect of deflation affecting revenues and our asset base, and the consequences for servicing existing debt and raising new debt, have become sector-wide issues. From our perspective, a large proportion of our costs are fixed and cannot be reduced in line with the forecast deflation. This creates additional risk for shareholders and will reduce expected dividend levels.

The consequences of deflation becoming a medium- to long-term phenomenon, irrespective of capital structure, would go beyond a potential reduction in dividend payments. It would affect the ability of all companies to finance their functions and capital programmes, and would ultimately require appropriate regulatory mechanisms.

Cost of capitalSince August 2008, the cost of credit has substantially increased and we have witnessed material changes in the cost and nature of financing opportunities available to the water sector. To finance our functions and secure the funding necessary to deliver our capital programme, we believe a real post-tax WACC of 5.25 per cent is required.

Our cost of capital is based on the updated industry position outlined in economic consultancy NERA’s independent report for the sector. This is supplemented with detailed evidence on how our underlying business risks compare with other water and sewerage companies, in particular due to the size of our capital programme.

Our final Plan presents evidence on a range of Thames Water-specific factors which demonstrate that we are sufficiently different from the industry average and that we will require a WACC above the industry range mid-point.

Other companies in previous periods may have faced similarly high levels of capital investment. But we believe the overall scale of our capital programme, at a time of significant economic volatility, is unprecedented.

Our submission on the cost of capital sets out the minimum return required in order to fund a programme of this scale. If we were set a lower WACC than 5.25 per cent, given the lack of headroom on our ratings agency ratios, we anticipate this would result in a downgrade to our credit rating and remove our ability to access efficient sources of capital. Ultimately we would be unable to finance our functions or deliver the required investment programme we need in order to provide the service that our customers want.

Using the ratios provided by Ofwat at the last Price Review on this final Business Plan, the Ofwat model shows that we would require an additional financing uplift of around £50m during the five-year period to meet our ratios. However, in the absence of updated ratios from Ofwat and given the impact this would have on our customers, we have elected not to include this.

Our analysis has focused on what the necessary cost of capital is for Thames Water, reflecting company-specific risk factors, although we recognise that Ofwat intends to set a cost of capital for the industry as a whole for 2010 – 2015.

26 Financing our Plan

Spotlight on saving water

In our research, many customers and stakeholders agreed on the need to better educate people about how to save water. They also said we should do more to make it easier to conserve supplies in and around the home – for example, by using water butts. Water efficiency is a key area of our proposals. These include promoting an extended range of water-saving products, and further research into new forms of recycling. We will also continue our efforts to promote the importance of saving water to our younger consumers, as with our recently-launched ‘Wise up to water’ website.

Capital structure and fundingOur capital structure, and the stable regulatory regime, offer us a robust platform to finance necessary investment, support strong investment-grade credit ratings and provide both security and transparency to the institutions that lend us money.

We have developed our financing plan to be both stable and sustainable, and to allow our current credit ratings to be maintained. It is consistent with our licence requirements and with Ofwat’s view that a strong investment-grade credit rating provides adequate certainty so that we can borrow sufficient amounts to fund our investment.

We have discussed our business and financing plan with the credit rating agencies and, in these challenging economic times, will continue to maintain a close dialogue with them.

We must maintain a sufficient level of certainty that we can borrow enough funds to finance our extensive capital programme, and face increasingly prescriptive requirements from Ofwat in terms of the amount and nature of our investment. We will therefore have limited flexibility over the timing of new debt financing.

While we were able to issue an additional £50m of index-linked debt by way of a private placement in December 2008, the index-linked debt market remains effectively closed, which further impacts our ability to maintain our credit rating.

Risk sharingOur objective is to produce a Business Plan that mitigates the effect of the economic downturn on customer bills. Despite the increase in WACC we are seeking, we therefore intend to absorb substantially more financial risk in the Plan to ensure that our proposals remain affordable.

Next steps 27

Next steps

Ofwat will announce its initial views on our final Plan, and those of other water and sewerage companies, in its Draft Determination in late July 2009.

We will then liaise with the regulator during a period of formal representation in August and September.

Ofwat will publish its Final Determination in late November 2009. This will form the basis for new price levels, which will take effect from 1 April 2010.

This document is an executive summary of our final Business Plan. A full copy of the Plan is available on our website, www.thameswater.co.uk, or can be requested in writing from the address on the back cover.

The full document contains further detail on each of the sections in this summary.

It also contains the following data tables, detailing the costs and outputs of our Plan:

price limits, bills, water sales and supply/ >demand balance

water and sewerage services – current >performance and planned outputs, key activity and expenditure projections and a summary justification of our investment proposals

efficiency improvements >

financial projections >

28 Appendix

Appendix

Issues and concerns What we intend to do

Maintain existing high drinking water quality standards and replace old >lead pipework.

Maintain and improve the quality of drinking water and work with local >and health authorities to increase lead pipe replacement.

Make mains replacement and fixing leaks a high priority. Accelerate >the programme, introduce faster response rates and avoid the need for sudden increases in pipe replacement in the future.

Reduce the disruption caused by leakage repairs. >

Leakage reduction and mains replacement remain key elements of >our Plan, but we have extended the work over a longer period. This is in response to changes in expected demand, the delay in new climate change forecasts and to limit the impact on bills.

Minimise disruption by working with Transport for London and the >London boroughs to keep traffic moving during our work.

Take a more proactive approach to water efficiency. >

Do more to make water recycling and re-use possible for every home, >not just in new developments.

Water efficiency is an important part of our proposals, but we have >extended the work over a longer period. This is in response to changes in expected demand, the delay in new climate change forecasts and to limit the impact on bills.

Promote an extended range of water efficient products. >

Extend research, eg community-scale recycling; rainwater harvesting; >indirect potable water re-use pilot plant.

Activities to raise awareness of the need to conserve water, including >in schools.

Finding new sources of water should not take priority over reducing >leakage or encouraging the re-use and recycling of existing resources.

There was both support for, and opposition to, the proposed reservoir >in Oxfordshire.

Leakage activity is our main approach for balancing supply and demand >for the next five years. A number of small-scale groundwater schemes are planned where this not appropriate.

Current information shows a regional resource, such as the proposed >reservoir, is not likely to be required until 2026 for Swindon, Oxfordshire and London.

Issues and concerns What we intend to do

Improve river water quality. >

Support for the London Tideway Tunnels to ensure environmental >improvements.

Concerns over funding for the Tideway Tunnels, and whether they >would represent value for money.

Include all schemes proposed by the Environment Agency for river >quality improvement.

The Tideway Tunnel improvements are required by the Government. >We are applying for funding for the Lee Tunnel now and will discuss the funding of the Thames Tunnel with Ofwat once there is greater clarity of future requirements and costs.

Co-ordinate with local and regional government to ensure that >infrastructure is developed in line with future housing and other development.

Further refine plans to meet growth in our region. We have also considered >the impact of the economic downturn on housing development.

Continue to work with regional and local planners to understand growth >needs and confirm the best location for development.

Concerns about whether current performance can be maintained >and if planned investment would be enough to solve problems and build new infrastructure.

Sewer flooding attributed to need for further maintenance, repairs >and renewal.

Our investment is planned to maintain our assets in a serviceable >condition. We have planned to meet all new environmental and water quality requirements and growth within our area.

Significantly reduce the number of properties at risk of sewer flooding in the >next five years. Over the long term, we plan to virtually eliminate this problem.

There should be greater use of sludge as an environmentally-friendly >source of energy and as a fertiliser.

Invest in additional treatment capacity to dispose of sewage sludge >as a sustainable fertiliser and generate more renewable energy.

Water supply

Sewerage and sewage treatment

We published our draft Plan in August 2008 and held a 12-week public consultation between 15 August and 6 November. We have considered the responses and factored these into our final Plan. The table below sets out the main views expressed, and how we have responded in our proposals.

Appendix 29

Issues and concerns What we intend to do

Sewer flooding is the greatest issue of concern, has major implications >for customers and for public health, and needs to be prioritised.

Continue to focus on reducing the number of properties at risk of >internal flooding.

Long-term objective to virtually eliminate high-risk sewer flooding by 2035. >

Support for protecting sites against flooding, and the recommendations >of the Pitt Review.

Plans could be more specific about contingency planning for flooding >and environmental issues.

Protect our critical sites against extreme weather events and surface >water flooding.

Monitor our supply system to identify early signs of bursts on high-risk >water mains, and invest where necessary before flooding occurs.

Odour from our sewage works is a serious issue for those subject to it. >

Some of the costs of investment to reduce odour should be borne by >housing developers and the local authorities.

Reduce odour at nine priority sites where this is a problem. >

Identify potential developments that could be affected by odours >and contact the planning authority voicing our concerns.

Some respondents said they thought we were not really concerned >about our customers, and that it was sometimes difficult to get a response when things went wrong.

Ensuring and maintaining good service and fair prices are essential. >

We have already reduced customer complaints by 40 per cent, and we >aim to continue to improve customer service, ensuring customers do not need to make repeated calls, and get their issue resolved quickly, effectively and efficiently.

Service levels

Issues and concerns What we intend to do

Fears that parts of the current Plan might not be realised due to >heavy reliance on capital funding and the level of investment may need to be reviewed.

Ensure expenditure is dictated by our service requirements and customers’ >priorities.

Ensure that the financing implications on customer bills are minimised. >

Maintain commitment to our Biodiversity Action Plan and conservation, >access and recreation responsibilities.

Sustainability

Issues and concerns What we intend to do

Metering was explicitly supported and regarded as a fair way to pay, >but there were concerns about potential price increases.

Metering remains central to our Plan. We propose a series of measures >to help customers save water, and a social tariff to help bills remain affordable for customers least able to pay.

Concern that domestic customers are not getting value for money, >and that a better explanation of water pricing is needed.

We are keen to ensure that customers understand how their prices are >set and have explained the improvements they have said they are willing to pay for, and how their money is spent.

Support for the concept of a fair price for all. >

Support for the idea of social tariffs to ease the burden on lower-income >households and help prevent water poverty for those genuinely in need.

Proposed social tariff, targeted at the 5 per cent of customers least >able to pay.

Affordability and bills

Issues and concerns What we intend to do

Need for efficient operating, management of contractors, and monitoring >of operating costs.

Customers said the quality of work was as important as the price paid, >that cheap contracts were a false economy and that overly competitive tendering was liable to create a ‘claims culture’ among contractors.

Delivering projects efficiently is fundamental to our Plan, to minimise >bills, meet Ofwat’s efficiency challenges and to provide a return to our shareholders.

Maximise competition by offering a smaller number of large work >packages. Only contractors with proven competence in similar projects will be allowed to tender.

Prevent a ‘claims culture’ among contractors by creating long-term >relationships with them. Five-year contracts allow us to manage performance more effectively.

Dealing with uncertainty

30 Glossary

Glossary

Bad debt A debt that cannot be recovered from a customer. In the water industry, this generally occurs when customers do not pay their water and/or sewerage bills.

Baseline (Draft CIS)The permitted level of capital expenditure granted by Ofwat following review of a company’s Business Plan. Ofwat announces a draft baseline after the submission of the draft Business Plan, and a final baseline following submission of the final Business Plan. See Capital

expenditure incentive scheme.

Capital expenditure (capex)The costs of providing new or refurbished assets, or replacing old assets. Examples include replacing water mains, building sewers and constructing treatment plants.

Capital expenditure incentive scheme (CIS)This is an Ofwat system of incentives for each company to contain costs and outperform the regulatory settlement, once price limits have been set. The greatest rewards are available for the leading companies, ie those that have made more challenging expenditure assumptions.

Consumer Council for Water (CCWater)CCWater represents the interests of water and sewerage customers in England and Wales.

Cost-benefit analysisMeasurement in a common unit (usually monetary) to assess the balance between costs and benefits of a proposed project.

Drinking Water Inspectorate (DWI)A division of government department Defra, responsible for enforcing drinking water quality standards in England and Wales.

Environment Agency (EA)The environmental regulator – this is a non-departmental public body, sponsored by Defra.

June ReturnAll water companies are required to make this annual submission of information to Ofwat, covering their activities in the previous financial year.

London Tideway TunnelsThese engineering projects will capture millions of tonnes of storm sewage, preventing it from entering the River Thames. This wastewater will be stored and then transported to Beckton Sewage Treatment Works for treatment. The London Tideway Tunnels scheme comprises two separate and independent projects: the Lee Tunnel and the Thames Tunnel.

Natural England A non-departmental public body established by the government to ensure that England’s natural environment is protected and improved.

Operating expenditure (opex)The costs to operate our assets and deliver services to our customers. Examples include power, salaries and chemicals.

Overall Performance AssessmentA comparative overview of company performance, made by Ofwat. It is calculated each year and covers measures of water supply, sewerage service, customer service and environmental performance.

The OPA provides an incentive to companies to maintain and, where necessary, improve services, as it links standards of service provided to the prices customers pay.

Regulatory Capital ValueThe value of the capital/asset base of a water company, used by Ofwat in setting price limits. It is based on the market value of the company at the time of initial price setting (in 1989), with the addition of net new capital expenditure, as assumed at the time of initial price setting, and including new obligations imposed since 1989.

ServiceabilityWater companies are required to maintain their assets – such as pipes, pumping stations and treatment works – so that they can provide services to customers over the long term.

‘Serviceability’ defines the capability of these assets to deliver a specified level of service to customers now and in the future. Ofwat sets price limits at a level it believes allows for sufficient maintenance work to enable this.

It is rated on the following scale (best to worst): improving, stable, marginal or deteriorating.

Strategic Direction Statement (SDS)Our strategic plans for the coming 25 years (2010 to 2035), covering issues such as leakage, climate change, water efficiency and customer service. Our SDS is entitled Taking care of water.

Traffic Management ActThis Act, detailing streetworks regulations, was passed in 2004. It became law in April 2008, meaning that all parties interested in occupying streets or highways now need to follow specified guidelines. This affects our operations, particularly our work to replace ageing water mains.

Weighted Average Cost of Capital (WACC)The WACC is the minimum return that a company must earn on its existing asset base to satisfy its creditors, owners and other providers of capital.

Willingness To Pay (WTP)‘Willingness To Pay’ is the maximum amount that an individual would pay to obtain something.

Notes

Notes

Thames Water Utilities Limited Customer Centre PO Box 286 Swindon SN38 1TU

For further copies of this report, please contact us at the above address or visit our website to download the document.

Published April 2009

www.thameswater.co.uk/fiveyearplan

Designed by The Team (www.theteam.co.uk)

Thames Water Utilities Limited

Registered office: Clearwater Court, Vastern Road, Reading,

Berkshire RG1 8DB

Registered no: 2366661 (registered in England and Wales)