Severn Trent Water

Procurement policy
Like all utility companies, Severn Trent has to meet European Union requirements when it letting contracts. This means all major contracts have to be advertised in the EU's Official Journal.

In terms of new work, the company has four lists of approved suppliers covering process contracts. These cover clean and wastewater treatment plants, clean water pipelines and sewerage and minor works valued at less than £250,000.

When letting work, three companies are invited to bid against a target price and the firm chosen works with Severn Trent to develop the final design of the project.

There are also incentives to suppliers in terms of sharing cost overruns and savings. These contracts will be readvertised for the AMP3 period, from April 2005 to March 2010.

Current and future projects
Ofwat's estimate of Severn Trent Water's investment programme over the five-year period to March 2005 was about £391m a year, or roughly £2bn in total (in May 1999 prices). This equates to about £425m in 2000/01 prices. In arriving at this total, Ofwat assumed that the company will achieve efficiencies in its capital and maintenance programmes of 8-15%.

In the first year of this programme, Severn Trent invested close to £330m, whereas in 2001/02 investment increased to £387m. So although Severn Trent has underspent over the first two years of the review period, investment will only have to rise modestly to meet requirements.

Severn Trent's £387m investment in 2001/2002 comprised £156m of clean water expenditure, and £230m for dirty water. Infrastructure renewal expenditure totalled close to £70m. The slight slippage in investment in 2001/2002 relates partly to delays created by foot-and-mouth. The company has been successful in driving down costs, resulting in a greater physical output for any given cost. Since the beginning of AMP3, operating efficiencies of £47m have been achieved. This is £11m ahead of Ofwat's target. Meanwhile, the group has managed to achieve 7% savings on its capital expenditure programme. In the first half of the financial year 2002/03, Severn Trent Water invested £169m. It expects to invest close to £420m in 2002/03.

Essential information
In mid-December 2002, water regulator Ofwat approved Severn Trent's appeal to raise prices for the next two years, in order to meet new standards to protect water supplies and tackle increasing floods from sewers. Severn Trent's water prices fell by an initial 14% at the start of the decade. With the above price rise, bills will rise by 2% above inflation for each of the next two years. Severn Trent noted that the major reason for the price rise was to tackle new regulations concerning nitrates, which were not allowed for in Ofwat's original pricing formula. In short, the increased prices will provide more scope for Severn Trent to increase investment.