Ofwat has published its annual report on the Financial performance and expenditure of the water companies in England and Wales 2007-08.

According to Ofwat, despite a 5% increase in operating profits, pre-tax profits for the sector decreased by 12% to £2.2 billion in 2007-08. The increase has been more than offset by increased interest costs. Operating profits were higher than in 2006-07 because higher revenues were only partly matched by increased costs for capital maintenance.

Operating expenditure was £125 million lower than in 2006-07 (a 4% decrease) - £67 million (2%) less than Ofwat assumed in price limits for 2007-08 and £319 million (9%) less than the companies set out in their 2004 business plans. According to the Report, the most significant reduction compared with 2006-07 is for energy costs, which are 9% lower. There was a fall in energy costs in 2007-08 compared with 2006-07. Although there is a significant year-on-year reduction in power costs they are still 6% above what Ofwat assumed in its final determinations for the current AMP4  investment period.

Overall investment increased by 8.1% to £4.9 billion in 2007-08, of which the amount spent on maintaining the network alone remained steady at about £2.5 billion. Ofwat  said that 9% less was spent overall than expected over the first three years of the current price limit period, 4% of which Ofwat attributed to efficiencies. The regulator also highlighted the fact that planning issues had contributed to some of the delays in delivering some schemes.

The report also draws attention to the fact that over the same period, quality enhancement expenditure was 28% lower than  expected. Companies have made only minor progress in catching up with delays from the first two years - some of which Ofwat said is “ is due to companies needing time to find optimal solutions”.