New water tariffs come in on 1 April. Ofwat’s announcement of tariff changes in December 2019 focused on the impact on domestic customers: the headline was clear - an average £50 reduction in bills. With average bills of £325.53 in 2019-20, this gives a real-terms reduction of 15% over 5 years, or 3% each year. CPI was 1.9% at the October 2019 reference date, so it would be reasonable to expect tariff reductions to average 1.1% in nominal terms on 1 April for non-household customers. Alas, not so simple….
We asked 13 water Wholesalers to give us the average tariff increase or decrease expected on 1 April, broken down across the main categories of charging. Not all were able to do so, but 8 did – thanks guys - and we have calculated the results for one major omission ourselves. The surprise isn’t quite so much in the average outcome, a tariff increase on a weighted average basis of 0.5% (a not too shocking mouse-sized variation of 2.0% against the reasonable expectation of the impact of PR19).
However, the bigger rotting rat in the sleeping bag is the spread of tariff changes relative to Ofwat’s PR19 determination. At one end of the spectrum, one wholesaler has a tariff reduction of 12% less than the Ofwat determination; at the other, one has a 2.7% greater reduction than Ofwat’s headline numbers.
The underlying logic within these changes is even less clear when you break down the tariff basket: water charges vary from a 13% reduction to a 7% increase; waste charges from a 15% reduction to a 5% increase. The spread across Trade Effluent, typically high bills, is even wider with an average 4% reduction on a weighted average basis masking a coypu-sized spread of 23%.
Even the averages for each service from each company hides disparate outcomes for individual customers. Looking at the Thames Water wholesale tariff document, for example:
Less well publicised is the revision to the Retail Exit Code, used by Ofwat to set price controls on the “retail” element of water charges, and in particular to protect smaller customers. Ofwat has set default Retail allowed Cost to Serve and Net Margins from 1 April 2020, which “protect” customers with under 500m3 of usage. The average Cost to Serve is £29.02 and the average margin is 3.14%.
For the Cost to Serve, the range within this is a high of £122.08 (Anglian, TE measured) down to £8.40 (Bristol, unmeasured water). Net Margins range from 11.71% (Yorkshire, water unmeasured) down to 1.12% (Anglian, waste, unmeasured). It isn’t possible to find in either the consultation or the determination of the rationale for any specific cost or margin. We are baffled that the retail Cost to Serve in Thames for unmeasured water is 2x that in Southern, and we calculate that the Thames Cost to Serve is only 25% of the real cost, suggesting a significant cross-subsidy from large customer to small.
For business customers, charities and public sector bodies, the overall impact of this is that i) prices are not going to be reduced by as much as you expect (unless you are plain lucky) and for most customers, your bills are going up; and ii) without very diligent research (or a helpful retailer) it is difficult to forecast the impact on individual sites.