Ofwat has given water companies and other stakeholders the heads up that it will be consulting at the end of March on the econometric cost models it will use at PR19. The models are key to the price review process: Ofwat’s forecast of efficient expenditure is largely informed by them; they play an important role in the initial assessment of business plans; and in setting efficient cost allowances in the determinations.
The regulator has invited stakeholders to submit suitable cost models to be considered for inclusion in this consultation by 13 March 2018. It will then consult on these, and its own models, on 29 March for four weeks.
In line with its methodology, Ofwat will develop a suite of models that include ‘top down’ approaches (for example, models that assess the efficiency of wholesale costs or network plus costs in aggregate) and more granular models (for example, models that assess the efficiency of individual services’ costs, such as treatment, distribution, water resources and bioresources), as follows:
In wholesale water: water resources, raw water distribution, water treatment, treated water distribution, water resources plus (water resources + raw water distribution + treatment), network plus water (raw water distribution + treatment + treated water distribution), and wholesale water (water resources + network plus)
In wholesale wastewater: wastewater collection, wastewater treatment, bioresources, bioresources plus (treatment + bioresources), network plus wastewater (treatment + collection), and wholesale wastewater (network plus + bioresources).
In residential retail: bad debt and debt management costs, total retail costs less bad debt and debt management costs, and total retail costs.
The econometric models will cover base costs (operating expenditure and maintenance capital expenditure), and elements of enhancement expenditure, thought other elements will be assessed separately.
The consultation will inform the final PR19 models, though Ofwat said other information will also play a role, including further analysis, the 2017-18 data submission due in July 2018, and the data submitted in company business plans. It explained: “This means that we will not publish final cost models before companies submit their business plans. We remind companies that we do not consider that publication of our final cost models is an essential input to development of company business plans – companies should focus on developing efficient business plans that deliver for their customers. Companies’ business plans should not be driven by regulatory models of cost assessment.”