Geography Reference
In-Depth Information
Table 10.2 Examples of the required standards of potable
waters. The achievement of these standards is tested by
sampling of tap water and the formal reporting of results to
the Drinking Water Inspectorate. The standards do not
apply in all circumstances. Derogations can be sought to
exempt companies if local circumstances always cause
failures naturally or if there is a time-limited specific
agreement to resolve a problem.
profitability to the detriment of shareholders and
customer levels of service and, on the other hand,
damage the authority of the regulator and
promote overcharging of the customer.
Prices are set for a ten-year period but are
reviewed after five. The next review, is in 1999.
This will be a more complex and sophisticated
review as the regulator learns from past
experience. The components (intimated in open
letters to the industry as actions that the director
general is 'minded' to do) are shown in Table
10.4.
The K factor refers to a 'basket of goods and
services', for example effluent treatment,
sewerage management, and domestic and
commercial water supply. The water companies
have been permitted to charge what they wish
for each item in the basket as long as they adhere
to the overall K value. Ofwat is encouraging
companies towards a balanced application of K.
The current single requirement is that the
unmetered customer who uses the 'average'
amount of water be charged, through the
unmetered tariff, the same as the metered
customer using that average volume of water.
Further parity constraints across the basket may
be expected. Water companies are expected to
recover costs. There can therefore be no 'loss
leaders' in this industry. Therefore the Urban
Wastewater Treatment Directive has resulted in
higher K values for sewage treatment than for
water supply. This has an impact on the large
number of small, water-only, companies.
Certainly, the future will be more financially
fraught for the water industry. The additional
costs of the windfall levy, announced in the
1997 Budget, will not be allowed to be passed
on to customers. Further, Ofwat also believes
that the water industry underestimated
'efficiency gains' achievable under AMP2 in
1994 and that the corresponding price limits set
under AMP2 were too generous. Consequently,
Ofwat proposes a one-off cut in the K factor
for 2000. While Ofwat is promoting a
downward pressure on K, the Environment
Agency is lobbying Ofwat for an increase in K
(or a least a smaller drop) in order that funds are
price companies can charge for water is set in a
periodic review, which is conducted from time to
time by the water industry regulator at Ofwat.
Companies have to present a business plan that
contains statements (forecasts) of future water
resource demands and availability. To achieve the
business plans under the conditions of demand
and resources forecast, the companies also present
to the regulator an asset management plan (AMP).
The AMP will identify the required expansion and
renewal in the underground and overground assets
of the individual water company over the time
period of the business plan. This expansion and
renewal will require capital and a capital
expenditure plan (CAPEX), as well as operating
expenditure plans (OPEX), are presented to
Ofwat.
This collection of forecasts, if believed by the
regulator, will be a key consideration in the
assignment of the K factor, an amount, modified
by the retail price index, that the company can
charge its customers for the service provided.
Clearly, the plans should be considered as the
opening proposals in a bargaining game, but the
role of the forecast to both sides is crucial. Errors
in either direction will, on the one hand, damage
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