Ofwat review of WoC cost and revenue reveals confusions over guidance

A review of sludge and water resource cost and revenue data among the seven main water only companies (WoCs) by Ofwat has, according to the regulator, mirrored earlier findings in a review by Cambridge Economic Policy Associates (CEPA) of the water and sewerage companies. Ofwat emphasised however that "several new company specific issues were also identified."

Issues uncovered by Ofwat included misunderstandings of regulatory asset guidelines (RAGs).

Ofwat said the objective of its review of the WoCs was "to gain a better understanding of the

robustness and comparability of water resources reporting data of the companies and to identify any additional issues." Examples of issues are listed below. The review can be found here

Issues

Aquifer recharge schemes were allocated by some WoCs to either raw water distribution or water

treatment rather than water resources. Ofwat asked the firms to review their treatment of aquifer

recharge costs to ensure compliance with the RAGs

One WoC, according to Ofwat, had allocated all pipework relating to aquifer recharges into raw water distribution. The regulator said it had asked the firm to review how it accounted for these costs and assets.

The WoCs allocated power costs using various approaches. Ofwat said one WoC coded power directly by site and business unit. And two allocated power per business unit based on a pumping head basis, while another used meter readings to allocate costs. Another WoC did not allocate any power costs to water resources.

"It is clear from these findings that the companies are not applying a uniform approach to allocating these costs," said Ofwat.

The CEPA report said RAG 2 should include clearer guidance on allocation of labour costs. It

proposed management estimate should be used to allocate site labour unless "a better driver can be found." in its review of the WoCs Ofwat found that they used various approaches when

allocating employment costs to water resources but most coded costs directly or allocated them based on management estimates. "Companies employ a variety of different methods for capturing labour costs, some are more sophisticated than others," said Ofwat

Several WOCs highlighted confusion around the guidelines for the treatment of

cumulo and local authority rates in the previous RAGs.

The confusion, Ofwat said, had arose because the allocation method in RAG 2.05 had been aligned with PR14, but the guidance assumed that, as with WaSCs, cumulo rates were applied to wholesale assets and business rates were applied to retail operations office buildings. This assumption was not the case for all WoCs – some received only a cumulo rates bill.

Ofwat said: "We accept that the billing of rates is not as straightforward as was previously

assumed. To ensure more comparability, clarity has been provided in the cumulo and local authority rates section of RAG2."