Chief changes in PR19 methodology: The Water Report's on-the-day round up

Ofwat last week. published its final methodology for its next price review and THE WATER REPORT provided its subscribers with the following sum up of the regulator's changes since its July draft.

Finance

  • 2.4% cost of capital in RPI terms – down from 3.7% at PR14 and a record low for a regulated utility (no doubt closely observed by other regulators). Ofwat said this equates to an average saving per customer of £15-£25 a year from 2020.

  • ¥ Transition to CPIH confirmed. Equivalent CPIH real cost of capital is 3.4% (assuming long term CPIH of 2%).

Business plan assessment

  • Larger potential reward of up to 35bp (from 20bp in July) on RORE for top level ‘exceptional’ plans

  • New reward of 10bp on RORE for second rank ‘fast track’ plans.

  • Disincentives for bottom rank ‘significant scrutiny’ plans: reduced cost sharing rates and capped outperformance and ODI payments.

  • New business plan assessment test on board assurance.

Outcomes

  • Some relaxation on the upper quartile challenge - companies will be challenged to achieve forecast UQ performance each year rather than the 2024/5 UQ forecast from year 1.

  • 14 common Performance Commitments confirmed. Number 14 amended from “Asset health: wastewater asset failure causing pollution” to “Asset health: treatment works compliance”. Definitions of three others have been adjusted.

Cost efficiency

  • Stonger cost sharing incentives - companies with efficient plans to be allowed to keep a greater share of cost outperformance while inefficient plans will retain a lower proportion of outperformance than presented in July.

  • Anti-gaming provision: flat underperformance sharing rate of 50% for companies who submit low cost plans which then overrun on costs.

Price controls

  • Household retail price control timeframe extended from three to five years.

  • Confirmation there will be a five year non household retail price control for customers of non-exited companies (this will only apply to three companies as things stand). For customers using up to 5Ml/yr, this will be based on a cost to serve and net margin approach. For other customers a gross margin cap will be used.

  • More clarity on the long term risk sharing arrangements for large investments in the water resources control.

  • Modified design for the bioresources control so when measured volumes vary from forecasts, the adjustments to allowed revenues are based on the increment, rather than the average.

  • Wastewater network plus control - inclusion of a requirement for companies to show how they are implementing long term drainage and wastewater planning.

Customer engagement

  • Clarification that companies should engage with business retailers as part of their customer engagement work.

  • Clarification on how environmental concerns should be included in the customer engagement model.

Other

Approach and expectations clarified in light of announcements/publications between July and now, including on long term resilience; leakage; and affordability/vulnerability