Ofwat confirms price adjustment mechanism

(by Verity Mitchell)

Ofwat has introduced a cost change process to enable water companies to access additional revenue in the PR24 period. The adjustment process, promised as part of the PR24 settlement, is for the following critical cost areas: cyber security, PFAS, asset health, growth, large gated schemes, development of the Havant Thicket reservoir, and development costs for other major projects. Companies will be able to submit claims in 2026, 2027 and 2028.

This is a significant development and companies are already looking at the additional costs that might be eligible for price re-openers. The process will give companies earlier certainty over costs that will be recovered in the next price control period. It will also allow companies to access additional revenue in-period.

If companies want an in-period adjustment, Ofwat said they should include an assessment of the bill impact of the proposed investments, supported by relevant customer bill testing. Companies should also provide evidence of the impact of the proposed costs on key financial metrics, including: the financial position of the notional company; the likelihood of getting investment to deliver solutions without in-period adjustments; and progress against delivery of existing programmes and against totex allowances. Companies can submit an updated financial model to help demonstrate that they need an in-period adjustment.

To be eligible for the process, items must meet a materiality threshold of at least 2% of appointed business turnover.