United Utilities Water PLC has submitted to revisions to its Business Plan covering the 2015-20 AMP6 period to water industry regulator Ofwat.

The initial business plan was submitted on 2 December 2013 and the revisions to the plan follow extensive discussions with Ofwat, the firm’s Customer Challenge Group and its other stakeholders. Ofwat is expected to publish draft determinations on 29 August 2014.

Key highlights of United Utilities’ Plan include:

Average household bills fall by a further 0.6% to 2.3% in real terms over 2015-20 period

• Total expenditure of £6.6bn, including capex of £3.75bn, similar to initial plan
• Comprehensive further evidence provided to support company specific adjustments
• Proposed exclusions from totex modelling: c£960m wastewater and c£215m water
• Retail household cost to serve adjustment of £19m p.a. due to high levels of deprivation
• Plan based on Ofwat’s weighted average cost of capital guidance
• Outcome delivery incentives now include rewards as well as penalties
• Revenue adjustments of c£130m relating to the 2010-15 period

Following Ofwat’s risk and reward guidance, the water company is now proposing an average real terms bill decrease of 2.3% for household customers across the five-year period (excluding the impact of the previously announced special customer discount, which is being applied to 2014/15 bills).

This compares with an average real terms bill decrease of 1.7% in its initial plan, reflecting the combined changes of a lower cost of capital, revised ‘pay as you go’ ratios and expenditure revisions.

For non-household customers, UU is now proposing an average real terms bill decrease of 0.9% in 2015/16, with a total real terms increase of 2.5% by 2019/20 which is similar to the initial plan. Total expenditure

The Business Plan includes total expenditure of £6.6 billion (2012/13 prices), which again overall is similar to the initial plan. Wastewater and water total expenditure (totex) has reduced by around £150 million and £70 million respectively, relating to efficiencies and scope reductions, but has been broadly offset by the acceleration of spend relating to the water service and a revised cost profile relating to the retail service.

Proposed total expenditure of £6.6 billion

The proposed total expenditure of £6.6 billion comprises capital investment (capex), including infrastructure renewals expenditure of £3.75 billion and operating expenditure (opex) of £2.85 billion.

Total operating expenditure in the plan is £2.85 billion - similar to the initial plan. This is split £1.08 billion opex for the water service, £1.12 billion opex for the wastewater service and £0.65 billion of operating expenditure for the retail service.

The Plan also includes initiatives designed to save around £60 million per annum of opex by 2019/20, relative to 2012/13, similar to the initial Plan. UU said this will largely offset the unavoidable cost increases in areas such as rates and power, alongside the addition of private pumping stations and enhancement programme costs.

The proposed £3.75 billion capital investment programme (net of grants and contributions) comprises £1.39 billion for the water service, £2.3 billion for the wastewater service and £0.06 billion for the retail service.

Investment to meet tighter regulatory quality standards, enhance service to customers and maintain the supply/demand balance is forecast at £1.47 billion, with the remainder relating to maintenance. The firm said it had kept capex constrained at £3.75 billion by meeting new environmental obligations via a phased approach, supported by the Environment Agency and the Drinking Water Inspectorate.

£215m Thirlmere reservoir should be excluded from Ofwat's Totex methodology

The water company has asked Ofwat to exclude from the Totex methodology its preferred plan to address a deficit resulting from revocation of its Ennerdale abstraction licence by building a pipeline from its Thirlmere reservoir, with a new water treatment works near Keswick. The proposed spend on this initiative for the 2015-20 period would be £215 million. United Utilities is seeking for a total of £960 million be excluded from Ofwat’s totex modelling methodology and assessed

On return on capital, the utility’s revised plan is based on the weighted average cost of capital (WACC) provided by Ofwat in its risk and reward guidance, which was published in January 2014. This is a real, vanilla WACC of 3.7% for its wholesale business, plus retail margin. The initial business plan proposed 4.1%, plus retail margin.

Ofwat is expected to publish draft determinations on 29 August 2014, with final determinations due on 12 December 2014.