Severn Trent trumps energy sector by promising below inflation price rises

MIDLAND utility Severn Trent has trumped the energy sector by vowing to introduce below inflation price rises.

The pledge forms a key part of the final business plan for its wholly owned subsidiary Severn Trent Water, which has been submitted to industry regulator Ofwat.

The plan covers the water industry’s next regulatory period – AMP6 – which runs from April 2015 to March 2020.
 
The plan proposes price changes equivalent to an average of 1.2% below inflation over the five-year period. Prices would be frozen in year one and then rise by less than inflation. This will result in average bills being £12 lower in real terms by 2020.

Severn Trent already has the lowest combined average bills in England and Wales with price rises over the current regulatory period being kept below inflation.

The total expenditure envisaged by the company during the period is approximately £6bn with a capital expenditure of around £3.2bn, an increase of £600m on the prior period.

Operational expenditure over the period is likely to be flat at around £2.8bn with the company’s regulatory capital value (RCV) expected to be over £10bn by 2020.

It plans lower blended debt costs of 2.54% (compared with 3.6% in the current regulatory period) which it said would be reflected in wholesale weighted average cost of capital (WACC) reducing to 4.2% from 5.1%. The cost of equity is targeted at 6.7% (compared to the 7.1% in current regulatory period).

Retail margins of 0.7% for households and 3% for business are being targeted over the new period.

Throughout this, it plans to maintain investment grade credit rating; for which funding of £2.6bn or 60% of the current debt portfolio will be required.

“We believe that the plan offers value for money and is fair and balanced. It delivers better value, better services and a healthier environment,” said the utility in a statement to the London Stock Exchange.
 
New investment will be driven by an increased environmental programme, further investment in network resilience, investment to reduce sewer flooding and the maintenance of private drains and sewers.
 
The company said it believed it had struck the right balance between bills, services and returns to investors.

It said more than 15,000 customers had taken part in consultations and its own customer forum had extensively challenged the plan’s development.

It has also pledged to strengthen its existing range of social tariffs.
 
“We will take advantage of the current window of opportunity to obtain lower cost funding and have reduced our wholesale WACC to 4.2% from 5.1%, while maintaining a fair return for shareholders,” it added.  
 
“We have also set out 10 customer focused objectives, against which we have proposed clear measures of success. On a number of these measures we have proposed that financial incentives (both rewards and penalties) should be applied. In aggregate, the potential maximum impact of penalties and rewards is between £144m and £98m over AMP6.”
 
The plan will be one of the last pieces of strategy overseen by current chief executive Tony Wray.

It was announced last month that current CEO of BT Openreach, Liv Garfield, will succeed Wray when he retires from the business next spring.

Wray said: “The challenge for Business Plans for the next regulatory period can be summed up as can you do more, deliver what customers want and the environment needs, and still keep prices down?

“At Severn Trent we believe the answer is yes. We have an established track record of real price reductions over the last five years and for sharing the benefits of outperformance with our customers. We will maintain this record over the next five years and deliver better value, better services and a healthier environment.”