43IH Sth.staff 5%

RNS Number:5910I
OFWAT
16 August 2001


PN 39/01                                                         16 August 2001

              OFWAT PROPOSES CHANGES TO WATER COMPANIES' LICENCES


Ofwat today proposed changes to ten water companies' licences so that the
regulator can reset price limits if there is a substantial change in a
company's circumstances.


The proposed change introduces two additional circumstances in which a
company's price limits could be reset between five-yearly price reviews. These
are if a company:


  * suffers a substantial adverse effect which could not have been avoided
    by prudent management; or

  * enjoys a substantial favourable effect which is not attributable to
    prudent management.


In both cases, the effect would have to be equivalent to at least 20% of the
company's previous year's turnover.


This means that a company could raise its prices if it was hit, for example,
by a natural disaster. And it would allow customers to enjoy the benefits of
any unexpected windfall through lower prices.


Ten companies have agreed to have the condition inserted into their licences.
They are: Dwr Cymru, Northumbrian Water, Severn Trent Water, Southern Water,
Wessex Water Services, Bristol Water, Cambridge Water, Cholderton & District
Water Company, Dee Valley Water, and South Staffordshire Water.


Ten other companies already have the clause in their licence. The change aims
to ensure a level playing field between the companies. It may also help
companies to secure lower-cost financing by providing greater certainty for
investors.


Later this year Ofwat will consult on further proposals for changes to make
companies' licence conditions more consistent.


Ofwat's Director of Regulatory Finance, Keith Mason, said: "We believe that
having greater consistency between companies' licences and greater certainty
is in the interests of all stakeholders."


Note to Editors


 1. Philip Fletcher, the Director General of Water Services (the Director), is
    the economic regulator of the water and sewerage services in England and
    Wales. His primary duty is to ensure that the functions of the companies
    are carried out and that they are able to finance them. The Director has a
    duty to customers and a duty to facilitate competition. Customers'
    interests are represented by ten independent Customer Service Committees,
    established and maintained by the Director and, at a national level, by
    the Ofwat National Customer Council.

 2. The clause, commonly known as the "shipwreck clause" was, in its original
    form, included in all companies' licences at privatisation. However, it
    only applied when the company suffered an adverse effect. Before the 1994
    Periodic Review all companies (except Cholderton) either had the clause
    removed from their licences, or had this version inserted. Each of the
    companies to which this notice relates (except Cholderton), chose to have
    the clause removed at that time, but have now agreed to have the revised
    clause inserted in their licences. Cholderton retained the original
    version of the clause when it was removed from other companies' licences,
    but has now agreed to have the revised clause inserted in its licence.

 3. The threshold of 20% of turnover is calculated as the Net Present Value
    (NPV) of the change in operating costs measured over a 15 year period, or
    the NPV of the change in capital costs in the period remaining until the
    next price review. NPV is a method for valuing in today's money the total
    of a future stream of cash flows.

 4. The Director wrote to all companies in MD167 ('Modification of conditions
    of appointment: Proposal about Condition B, Part IV (Interim
    Determinations) and other possibilities', 31 January 2001) to consult on
    whether they wished to have the clause inserted in their licence and on
    the general principle of trying to secure greater consistency between
    companies' licence conditions. Two companies, United Utilities Water and
    Portsmouth Water, objected to the inclusion of the clause in their
    licences. A third, Thames Water, said that they might be content to have
    the clause at a later stage.

 5. A copy of the notice of the proposal is attached.



MEDIA ENQUIRIES TO OFWAT PRESS OFFICE: 0121 625 1442/1416/1450

OUT OF HOURS CALLS TO: 08700 555 500 ask for pager Water 509



Ofwat's publications, including press releases, can be found on our website
at: www.ofwat.gov.uk







                     WATER INDUSTRY ACT 1991, SECTION 13

 PROPOSALS BY THE DIRECTOR GENERAL OF WATER SERVICES FOR THE MODIFICATION OF
                       THE CONDITIONS OF APPOINTMENT OF

DWR CYMRU CYFYNGEDIG, NORTHUMBRIAN WATER LTD, SEVERN TRENT WATER LTD, SOUTHERN
 WATER SERVICES LTD, WESSEX WATER SERVICES LTD, BRISTOL WATER PLC, CAMBRIDGE
WATER PLC, DEE VALLEY WATER PLC, SOUTH STAFFORDSHIRE WATER PLC, CHOLDERTON AND
                          DISTRICT WATER COMPANY LTD

THE PROCESS


This Notice seeks responses to the proposed modifications described below. Any
representations or objections must be sent in writing to the Director General
of Water Services (the Director), Centre City Tower, 7 Hill Street,
Birmingham, B5 4UA (fax, 0121-625 3606 or e-mail allan.merry@ofwat.gsi.gov.uk)
to be received by 5.00pm on Monday 17 September 2001. Please quote reference
LEG/31/1/2.


DESCRIPTION OF THE PROPOSED MODIFICATION

Each of Dwr Cymru Cyfyngedig, Northumbrian Water Ltd, Severn Trent Water Ltd,
Southern Water Services Ltd, Wessex Water Services Ltd, Bristol Water plc,
Cambridge Water plc, Dee Valley Water plc, South Staffordshire Water plc,
Cholderton & District Water Company Ltd ("the companies") holds an Appointment
as a water (or water and sewerage) undertaker.

Each water company's licence allows for price limits to be set by the Director
for each year at five-yearly Periodic Reviews. There is also a provision for
price limits to be reset between Periodic Reviews in defined circumstances,
for example, a new legal requirement. The proposal is for the insertion of a
clause into each company's licence, allowing for price limits to be reset
between Periodic Reviews if the regulated business:


  * suffers a substantial adverse effect, which could not have been avoided
    by prudent management action; or

  * enjoys a substantial favourable effect, which is fortuitous and not
    attributable to prudent management action.


In this context, "substantial" is quantified as an effect of at least 20% of
the previous year's turnover (calculated as the Net Present Value (NPV) of the
change in operating costs measured over a 15-year period, or the NPV of the
change in capital costs in the period remaining until the next Periodic
Review). What constitutes "prudent management action" will be assessed by the
Director by reference to the circumstances which were known or which ought
reasonably to have been known to the company at the relevant time.

This clause, commonly known as the "shipwreck clause" was, in its original
form, included in all companies' licences at privatisation. However, it only
applied when the company suffered an adverse effect. Before the 1994 Periodic
Review all companies (except Cholderton & District Water Company) either had
the clause removed from their licences, or had this version inserted. Each of
the companies to which this notice relates (except Cholderton), chose to have
the clause removed at that time, but have now agreed to have the revised
clause inserted in their licences.

Cholderton retained the clause in its original form when it was removed from
other companies' licences. It is proposed that the original clause is replaced
with the revised version which is described in this notice. Cholderton has
agreed to this change.

REASONS FOR MAKING THE MODIFICATIONS

The Director believes that greater consistency between companies' licence
conditions is in the interests of all stakeholders. This modification will
remove one of the inconsistencies between companies.

It has also been suggested that the inclusion of the clause may provide more
certainty for investors in the industry, and could therefore allow companies
to raise money at a lower cost. The Director believes that if the inclusion of
the clause allows companies to access the capital markets on more favourable
terms then making the modification would be in the interests of customers. It
may also allow customers to benefit if a company enjoys a substantial
windfall.







OFFICE OF WATER SERVICES

AUGUST 2001

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