About our businesses - South West Water

Tighter price controls over the revenue of the company's regulated business

The current periodic review was completed in November 2009 when Ofwat set water company charges for the years 2010-2015. South West Water has met Ofwat's efficiency targets in the last three Periodic Review periods.

Failure to deliver the capital investment programme

The company has a track record of delivering its capital programme in accordance with regulatory requirements and progress is regularly monitored and reviewed. The K4 capital programme has been delivered and the company has developed plans to deliver the K5 programme.

The company may be unable to raise sufficient funds to finance its functions

Pennon Group and the company have robust treasury policies in place. These include policies that there are always pre-drawn or committed facilities to cover at least one year's estimated cashflow and that no more than 20% of borrowing matures in any one year. Treasury policies and risk management are described in more detail here.

Failure to deliver operating cost savings implicit in the regulatory review

In line with its track record, the company remains confident of delivering the assumed operating cost savings. A major restructuring programme is currently being implemented to contribute towards the additional efficiencies required for the K5 period.

Environmental regulations and quality standards could increase the company's costs

These issues are addressed through the five-year regulatory review mechanism.

Climate change

The company has plans ready and will adapt the way it conducts its business to respond effectively to the hotter, drier summers and wetter winters which are anticipated.

Contamination of water supplies

The company has established procedures and controls in place, as well as contingency plans and incident management procedures. It also maintains insurance policies in relation to these risks, although there can be no assurance that all or any of the costs associated with these risks would be covered or that coverage will continue to be available in the future.

Non-recovery of customer debt

In addition to existing strategies, which are kept under review, South West Water continues to implement new initiatives to improve and secure cash collection, including the use of property charging orders. Stretching debt and collection targets - with incentives - have been agreed with the customer service contractor. The accounts of major customers are kept under close review. Provision has been made in the K5 Final Determination for companies to make an application for an Interim Determination in the event of household bad debts being significantly above the amount allowed by the water regulator due to worsening economic circumstances in the company's operating area.

Water resource adequacy

The company has a number of schemes in place to maintain water resources (such as pumped storage for certain reservoirs) and promotes conservation measures.

In particular, South West Water prepares a new Water Resources Plan every five years and reviews it annually for a range of climate change and demand scenarios. The Water Resources Plan indicates that no new reservoirs are required before the planning horizon of 2035. However, investment is needed to develop the overall trunk main infrastructure, to expand treatment capacity and to enhance certain pumped storage facilities.

Operational failures

The company is able to monitor its significant assets by automated and remote operation and has routine controls and operating procedures in place that are constantly kept under review. Asset management techniques are employed to pre-empt the failure of assets.

Reduced revenue from falling customer demand for water

The reduced demand experienced in the K4 regulatory period has been taken into account by the regulator in setting a baseline turnover level for the K5 period. A revenue correction mechanism is in place from the start of the K5 period, which allows water companies to recover a shortfall in income for a five-year regulatory period in the next period.

Financial loss arising from the insolvency of a major supplier or contractor

The company uses a third party credit monitoring service to track changes to major suppliers' financial status and creditworthiness to supplement an annual risk review of key and strategic suppliers.

Impact of competition in the industry

South West Water continues to consider and evaluate developments and proposals in relation to the development of competition as part of its risk management and business strategic planning processes. Legislation will be required for any further extension of competition in the water and sewerage markets.