Water industry regulator Ofwat is planning  to tighten up its guidance on cost and performance reporting in the wake of variable reporting in the water companies’ AMP6 Business Plans.

Ofwat held a stakeholder workshop for the water companies on 4^th November to seek their views on its proposals to introduce a single, annual regulatory report, together with broadening current regulatory accounting guidelines (RAGS). The report will be the primary vehicle that companies use to demonstrate compliance with the separate price controls.

The regulator has talked previously about a review of the existing regulatory accounts and future reporting framework.

Ofwat said the focus would be on reporting information to all stakeholders on how the sector is delivering for its customers. Setting the context for its proposals, Ofwat said that due to the regulatory approach, statutory accounts on their own are insufficient.

The regulator has therefore developed proposals for a single regulatory report, prepared at the same time as the statutory accounts. This is on contrast with the approach taken by energy regulator Ofgem, which has separate data and stakeholder reporting over a longer period of time.

According to Ofwat, some minimum prescribed content is now required to drive consistency and comparability and allow stakeholders the ability to analyse both relative as well as absolute performance. The regulator is proposing the following:

1. A regulatory financial report – a baseline level of historical cost financial information that is aligned to the way in which price controls (and associated regulatory performance commitments and incentives) are being set for the next control period

2. Price control and segmental reporting - financial information on the wholesale and retail elements of the appointee business, with additional disaggregation of revenues and costs as required

3. A performance summary – a high-level report of performance including outcome delivery and financial results of company

4. Additional regulatory information – including:

• Additional accounting policies
• Financeability statement
• Current cost reporting
• Detailed outcome and service level reporting
• Totex analysis

Ofwat said performance reporting would allow a focus on reporting performance on outcomes and delivery service levels with both narrative and financial data. Information on cost performance would cover both wholesale totex and retail costs, recognising the importance that cost under or over-performance will be shared with customers at the end of the price control period.

The key benefits of prescribed performance reporting outlined by the regulator are as follows:

• Consistent reporting across the sector will facilitate relative and absolute performance review by all stakeholders
• Presentation allows base level of outcome comparability
• Provides transparency to all stakeholders (customers, investors, companies, other regulators, NGOs) to ensure ability to understand performance against price determination
• Provides the ability to understand how performance will affect customers and companies in the longer term

Ofwat said it recognised the proposals have cost implications, although it expects that the companies will in any event be preparing the information for their own needs and for other communications. The regulator understands that many companies intend to present the majority of the information separately and is looking to minimise any overlap which might result from the proposals.

The regulator has also invited views from the water companies on the most appropriate form, scope and provider of outcome reporting and associated assurance - all companies are required to obtain third party assurance over their outcome reporting.

More detailed guidance on costs to serve in the pipeline

Ofwat has already tightened up its guidance on cost allocation in response to the introduction of four price controls for PR14 and to prepare for market opening in 2017. In March 2014, it published prescriptive guidance on the allocation of costs between retail and wholesale and between household and non-household.

One area where the guidance is currently less prescriptive is the allocation of costs between ‘base’ costs to serve unmetered customers and the additional cost to serve metered customers .

In Ofwat's view there is now a need to issue more prescriptive guidance in this area in particular via RAGS, following representations on the draft determinations about the subject.

According to the regulator, the lack of prescription in current guidance has led to variable approaches by the water companies in their AMP6 business plans.

However, with final determinations due on 12 December, Ofwat has told the water companies these will have to be set before more prescriptive guidance can be introduced. The final determinations will therefore be based on companies’ business plan allocations where the regulator can see that companies have complied with the existing guidance for metered and unmetered allocations.

Ofwat is planning to finalise its proposals in December, followed by publication of the new guidance and reporting requirements in January.