Ofwat consults on licence change to end revenue recovery Catch 22

Ofwat is consulting on a proposed modification to the licence conditions of water companies to address a Catch 22 in the regime that can prevent a water company from making up a revenue shortfall without incurring a penalty under price control revenue limits.

An existing mechanism – the Wholesale Revenue Forecasting Incentive Mechanism (WRFIM) – allows companies to charge customers to make up for revenue shortfalls in an earlier year. But a misalignment between the WRFIM formula and the licence means that in making up a previous shortfall in revenue, a company could breach its revenue limit set under its price control. Were it to avoid that breach by not fully making up the shortfall it would be liable to a penalty under the WRFIM.

Following consultation in February Ofwat has proposed: “amending the licence for companies so that it is clear that in 2017-18, 2018-19 and 2019-20 water companies can levy charges to recover shortfalls in revenue in previous charging years that are calculated in accordance with the WRFIM, regardless of the annual limits on the change in revenue in the price controls for wholesale activities that we set for the 2015-20 period.”