Ofwat has accepted Anglian Water’s application to increase charges to customers to allow it deliver two components of its Direct Procurement for Customers (DPC) Elsham Transfer and Treatment scheme in-house, instead of including them in the tender for the DPC project.

The water company asked the regulator in June to increase the level of the price controls that were determined for the period 2020-2025.

Ofwat’s final determination has left the costs requested by Anglian Water virtually unchanged, concluding that the majority of its requested costs within the application were appropriate and efficient. The regulator will continue to apply a £200,000 challenge to Anglian Water’s DPC development costs.

Anglian Water:

• requested £87.9m to deliver a large transfer pipeline and conditioning plant in-house.
• proposed a reduction to the DPC costs Ofwat had allowed at PR19 to design the scheme and develop it for competitive tender – it proposed to return £4.4m opex to reflect that a smaller scheme would be delivered via DPC.

Alongside the application Anglian Water also proposed to mitigate the potential loss of customer benefit, due to no longer delivering the full scheme through DPC. The company committed to invest an additional £1.4 million in lead pipe replacement and undertook to replace pipes in at least a further 280 properties. This will be wholly funded by the company’s shareholders and is outside of its totex allowance for 2020-2025.

Anglian Water’s interim determination application would result in an increase to customer bills of £0.84 by the end of AMP7 – the utility estimates this to be less than 0.25% increase on the total bill for an average Anglian Water customer.

For Anglian Water’s interim determination, Ofwat was required to use the cost of debt to assess materiality, but was able to consider what the appropriate rate of return should be based on the specific circumstances of Anglian Water’s application.

The regulator decided that the CMA’s weighted average cost of capital was appropriate because the CMA could have chosen to include the costs in its recent re-determination on Anglian Water’s PR19 appeal to the CMA. Ofwat commented:

“This is a decision specific to the circumstances of this interim determination and the Elsham Transfer & Treatment scheme. It does not mean that we would necessarily use the CMA’s weighted average cost of capital in a future interim determination (DPC related or otherwise) for Anglian Water or any other water company.”

Performance commitment

Alongside its application for an interim determination, Anglian Water also asked Ofwat to amend its internal interconnection delivery performance commitment (PR19ANH_39), as a consequence of the interim determination, to include the transfer pipeline and conditioning plant elements of the DPC project which will now be delivered in-house.

Although changing a performance commitment does not constitute a change in price controls and therefore falls outside the scope of Ofwat’s interim determination, the regulator has agreed to accept the company’s proposal on the basis that it is ”appropriate to amend the commitment in order to protect customers’ interests should the company fail to deliver the transfer pipeline and conditioning plant.”