Protecting consumers, promoting value, safeguarding the future 1

Media briefing – final determinations

26 November 2009

Water and environmental quality has improved – more than 100 Blue Flag beaches in England and Wales, and fish in the Thames again

Customer service is significantly better than 17 years ago – only 6,620 properties (0.03%) are now at risk of low water pressure, compared with 344,259 (1.6%) properties in 1990-91

Leakage has fallen by 35% since peak in 1994-95

Network is functioning better – more companies have stable serviceability than ever before

£85 billion has been invested (today’s prices) and the companies are more efficient – bills are 30% lower than they would have been

What has been achieved so far

Protecting consumers, promoting value, safeguarding the future 2

Key changes from draft determinations

Protecting consumers, promoting value, safeguarding the future 3

Additional capex to deliver national environment programme, for example extra investment to meet EU bathing water standards

Additional capex to deliver additional outputs, for example almost £250 million extra investment to address sewer flooding problems

Changes brought about by new information – industrial demand, business rates, pensions

Reassessment of relative efficiency

Average household bill to decrease by £3 to £340

£22.2 billion of investment in services and the environment

£34 less than the companies wanted

Our proposals deliver what customers want – safe, reliable water supplies at a reasonable cost, both now and in the future

This keeps money in customers’ pockets, but allows efficient, well-run companies to invest in the right place at the right time for the right price

Final determinations 2010-15

Protecting consumers, promoting value, safeguarding the future 4

Average annual price limits – weighted industry average (smoothed)

Protecting consumers, promoting value, safeguarding the future 5

5.6

2.32.5

1.4

0.7

2.5

-0.60.3

1.6

0.6 0.4 0.5

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2010-11 2011-12 2012-13 2013-14 2014-15 Annual average

Companies’ final business plans Our final determinations

Avera

ge a

nnual pri

ce lim

it (

%)

Factors driving change in average bills 2009-10 (£343) to 2014-15 (£340)

Protecting consumers, promoting value, safeguarding the future 6

-25

-20

-15

-10

-5

0

5

10

15

20

£25

Revenue Opex Capital maintenance

Improve-ments

TotalEfficiency Cost of capital

TaxSecurity of supply

-£3-£7-£13£21£9£1£7-£14-£7

Past

Future

Drinking water quality

Environment

Service levels

What the companies are investing in – some examples

Protecting consumers, promoting value, safeguarding the future 7

£22.1 billion

How money will be invested in 2010-15

Protecting consumers, promoting value, safeguarding the future 8

…and customers won’t be any worse off

£12.9 billionMaintaining and replacing assets, from pipes to treatment works

£0.9 billionDelivering big projects, like large sewers

£1.1 billionImproving service levels to customers, like reducing pressure problems and sewer flooding

£4.6 billionImproving drinking water and the environment

£2.7 billionMaking sure there is enough water, and capacity to treat sewage

£22.1 billion

Increase in operating expenditure from 2008-09 to 2014-15

Protecting consumers, promoting value, safeguarding the future 9

Operating expenditure arising from enhanced

service, for example running new meters 40%

Pensions 24%

Energy 4%

Rates 25%

Other -2% Traffic management act 2%

Environment Agency abstraction charges 1%

Reclassified work 6%

The ‘other’ category is negative because it includes spend to save outputs

£400 million

More than £1 billion to maintain and improve water supplies

Maintaining and improving more than 10,000 km of water mains – further than London to Cape Town

Cleaning mains pipe supplying more than 1 million people in north-west region to help reduce discoloured water

Allowed £171 million more to balance water supply and demand than at draft determination

Safe, reliable supplies

Protecting consumers, promoting value, safeguarding the future 10

Events like serious flooding can cause havoc with water supplies – almost 10 million people will benefit from investment to reduce the risk of extreme circumstances such as flooding interrupting supplies

In the past decade, the number of properties at risk of sewer flooding has fallen by about 75% – 20,000 fewer properties are at high risk of sewer flooding

Almost £1.1 billion of investment over next five years to further reduce the problem – up from £910 million at draft determinations

This will help resolve flooding issues for more than 6,300 more customers

Protecting consumers

Protecting consumers, promoting value, safeguarding the future 11

Improve 140 water treatment works and 55 sewage treatment work to maintain and improve environment and drinking water quality

More than 100 schemes to work with farmers and landowners to control pollution and reduce treatment costs

Improvements to more than 3,000 km of rivers to meet EU standards

Improve water quality in more than 55 wetlands and bathing waters

Environment

Protecting consumers, promoting value, safeguarding the future 12

By 2015, increasing metering, reducing leakage and meeting water efficiency targets will save more than 100 billion litres of water a year – enough to supply Liverpool, Bristol and Brighton for more than a year

Severn Trent is investing to reduce leakage by about 47 million litres a day, a 9% fall in leakage levels

Over the next five years, the companies will reduce their overall leakage levels by 3% – about 97 million litres a day or 177,025 million litres over the five-year period

Investment in renewable energy sources to generate about300 GWh of extra energy a year – enough electricity to power about 90,000 homes

Half of all households will have a meter by 2015 – 57% in water scarce areas (92% in Southern’s water-stressed region)

Saving water and using energy wisely

Protecting consumers, promoting value, safeguarding the future 13

Cost of capital is 4.5%

Less than the companies asked for

Should allow an efficiently-run company to secure the necessary finances to carry out its investment programme

Access to debt finance is more limited for a small company

We have included a small company cost of debt of 0.1% for the two largest water only companies and 0.4% for all others

Finance

Protecting consumers, promoting value, safeguarding the future 14

Regulatory tools to limit risk

Protecting consumers, promoting value, safeguarding the future 15

Five-yearly price review

RPI and COPI indexation

Change protocol

Logging up and down

CIS capex symmetry

Revenue correction mechanism

Interim determinations

Substantial effect clause

Notified items

Looking forward

Protecting consumers, promoting value, safeguarding the future 16

If is for the companies to deliver their outputs

Scope for companies to innovate

Referrals to the Competition Commission must be made by 26 January 2010 – if a company is successful, first year price limits will stand and changes will be applied to the next four years’ limits

Bills ‘on the mats’ in April 2010

Need resilient infrastructure – ageing network is 338,000 km long, equal to nearly 14 times around the equator

Rise in single households, which use more water. Need to be more water efficient

Changing climate could bring more droughts and floods

Building on flood plains increases burden on drainage systems

Growing UK population – predicted to reach72 million by 2033

The future challenge – sustainability

Protecting consumers, promoting value, safeguarding the future 17