1. Ofwat – Protecting consumers, promoting value and safeguarding the future Ofwat City briefing 11 November 2008

2. Introduction Ofwat – Protecting consumers, promoting value and safeguarding the future Company performance – levels of service and finance Draft business plans Development of regulatory regime

3. Summer 2007 floods highlighted challenges Current performance Ofwat – Protecting consumers, promoting value and safeguarding the future Leakage targets met for first time Consumer complaints rising

4. Capital investment in 2007-08 – £4.9 billion Overall investment still 9% below expectations Capital maintenance 5% above expectations Increased investment and improved management has led to better serviceability Current performance – expenditure Ofwat – Protecting consumers, promoting value and safeguarding the future

5. 2007-08 operating profits greater than in 2006-07 2007-08 pre-tax return on capital 6.5% (2006-07: 6.4%) Companies have maintained financial indicators consistent with investment grade credit rating Rest of AMP4 expenditure is prefunded Current performance – financial Ofwat – Protecting consumers, promoting value and safeguarding the future

6. Severn Trent paid penalty to Exchequer of £35.8m. Additional £2m for SFO findings Tendring Hundred fined £42k for misreporting measured income accrual Unable to fine Three Valleys for deliberate misreporting – company committing £2.5m to a charitable trust Financial penalties place incentive on companies to comply. We will consult on our approach to enforcement Current performance – enforcement Ofwat – Protecting consumers, promoting value and safeguarding the future

7. Draft determination announced 5 November Our view is that price limits should not change Company could have done more to manage impacts Company still able to finance its functions Sutton & East Surrey substantial effect Ofwat – Protecting consumers, promoting value and safeguarding the future

8. Draft business plans – price limit proposals Ofwat – Protecting consumers, promoting value and safeguarding the future Industry average annual K +2.4 WASC range+0.5 to +4.6 Industry average first year K (2010-11)+4.5 WASC range-2.2 to +14.8

9. Ofwat – Protecting consumers, promoting value and safeguarding the future Company proposals show bills rising by about £29 over five years (on top of inflation) Some proposed unmeasured bills reach very high levels in 2015 Draft business plans – bill proposals

10. Ofwat – Protecting consumers, promoting value and safeguarding the future

11. Draft business plans – operating expenditure Ofwat – Protecting consumers, promoting value and safeguarding the future Proposals would add around £12 to bills for 2010-15

12. Draft business plans – capital expenditure Ofwat – Protecting consumers, promoting value and safeguarding the future Proposals would add around £58 to bills for 2010-15

13. Draft business plans – finance Ofwat – Protecting consumers, promoting value and safeguarding the future Cost of capital assumptions would reduce average bills by around £12 over 2010-15 Industry might need to raise c£17bn (£5bn Thames) – we will challenge this Companies’ views on the cost of capital (fully post-tax): Water and sewerage companies: 4.6 – 4.9 Water only companies: 4.9 – 5.7

14. Investor views on risk relative to water and sewerage Ofwat – Protecting consumers, promoting value and safeguarding the future

15. Other regulators’ vanilla WACC assessments Ofwat – Protecting consumers, promoting value and safeguarding the future NB CC recommendation to CAA (Stansted) from analyst report

16. Financing functions Ofwat – Protecting consumers, promoting value and safeguarding the future “Credit crunch versus the price control is fortuitous” “The market sees the upcoming UK water regulatory review as a significant negative risk to the sector” Ofwat will not give its view of the cost of capital until draft determinations in July 2009

17. Developing the regulatory regime Ofwat – Protecting consumers, promoting value and safeguarding the future Regulation has delivered a lot: approximately £75 billion invested, leakage reduced by more than a third, bills a third lower Future challenges: Climate change More single households Increasing consumer expectations Need improved regulation and effective market mechanisms Cave review and Floods and Water Bill

18. Useful documents Ofwat – Protecting consumers, promoting value and safeguarding the future Setting price limits for 2010-15: overview of companies’ draft business plans www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/AttachmentsByTitle/s ub_bpd_pr09summary.pdf/$FILE/sub_bpd_pr09summary.pdf Financial performance and expenditure of the water companies in England and Wales 2007-08 www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/Content/rpt_fpr_2007-08 Service and delivery – performance of the water companies in England and Wales 2007-08 www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/Content/rpt_los_2007-08