An Ofwat report published this week, into financial performance and expenditure of the water companies in England and Wales, has shown that water companies achieved the great majority of the outputs expected of them when price limits were set in 1999.

This was despite spending around £1.7 billion less than was estimated. Gross capital investment from 2000 to 2005 was £17.7 billion, compared to the £19.4 billion Ofwat had assumed would be necessary for the period.

Ofwat has explained that the difference in capital expenditure has been through increased efficiency, where the companies have been able to carry out some work at less cost than was assumed.

Operating expenditure on water services was £8.1 billion – £280 million less than assumed in price limits – and on sewerage services was £6.3 billion, £25 million more than expected.

While spending was down, operating profits for 2004-05 increased by £82 million to £2.1 billion, but the return on capital investment remained at 5.9% for the year, unchanged from 2003-04.

Most savings were made during the early years of the period but rising costs have driven up spending in some areas in the last two years. Several companies are using operational, rather than capital investment, solutions, to meet some new requirements.

However, the regulator makes clear that while performance of the companies’ assets, such as water mains, sewers and water treatment works, broadly met expectations, the performance of sewage treatment works in 2004-05 was still a cause for concern.

This could well be due to the ‘efficiencies’ and operational solutions mentioned above taking precedence over capital investment. In the 2004 price review, the regulator set prices to enable companies to improve the performance of their assets in line with its expectations in the period 2005-10 and to maintain that level throughout the period.

Keith Mason, Director of Regulatory Finance at Ofwat said: “Over the last five years the industry has spent less than we expected. Despite claims by the companies that the 1999 review was too severe, they have largely been able to deliver all that was expected of them and perform well financially.”

“We are confident that companies will continue to respond well to our incentive based system of regulation in which they benefit from efficiency savings in the short term before passing the benefits back to customers.”

Customers are already seeing the benefits of the large improvement programme during 2004-05 as the Drinking Water Inspectorate has reported continued improvements in water quality, and the Environment Agency has reported continued improvements in the ecological quality of water courses.

By David Hopkins

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