Ofwat has today published the final methodology for the upcoming Price Review (PR24) setting out the framework which water companies will follow to develop their AMP8 business plans -  the methodology will set the price, service and incentive package for 2025-2030 in December 2024.

The methodology is the framework that sets out the expectations for the companies’  AMP8 business plans, which must be submitted in October 2023, and how the business plans will be assessed. The methodology will require water companies to meet new environmental commitments and improve service to customers. 

The PR24 final methodology places greater emphasis on best value in its assessment of enhancement expenditure. As part of Ofwat's approach to assessing costs for environmental improvements at PR24, the regulator will:

• expect companies to assess a wide range of options to meet a defined need, including nature-based solutions, operational actions, innovative and modular schemes;
• encourage company proposals for additional investment to focus on addressing environmental harm from high-priority sites;
• set out an approach for funding upgrades to wastewater treatment works to support nutrient neutrality.

The methodology also determines the allowed return on capital - two years ahead of final determination, Ofwat has provided an early view of the allowed return, which is 3.29% (in real, CPIH terms). This is above the allowed return set at PR19, reflecting changes in interest rates, Ofwat said.

Ofwat is also clear that it is not all about future plans - in his foreword to today’s publication, David Black, Chief Executive, is emphasising that companies need to act now to deliver improvements ahead of the next price review taking effect:

“Companies have fallen short of the expectations of customers and communities – they need to seize the opportunity to transform their performance at PR24. Turning around performance on the environment and improving resilience will require innovation, new approaches to managing water and investment.

“The sector needs to act now – in advance of PR24. Significant improvements are needed to drive down water demand, improve customer service and reduce pollution incidents. We are looking to companies respond to urgent need for change and set out ambitious plans to improve outcomes for customers and the environment”.

Commenting on the need to rebuild public trust, he said:

"Companies need to recognise that the public’s trust in them has been shaken as investors and executive teams appear to be rewarded despite companies failing customers and the environment."

Ofwat is requiring companies to set their five-year business plan in the context of a 25-year long-term delivery strategy. The regulator said that companies need to plan over the long-term and expects them to use adaptive planning to identify what needs to be done in 2025 to 2030 and what decisions should be scheduled in future periods when there will be greater certainty.

According to Ofwat, this will lead to a clearer focus on the long-term needs of customers and the environment and better decision-making on how those needs are met. Ofwat said it will allow customers’ money to fund only the efficient costs of providing services. Where significant new investments are identified, the regulator will ensure that customers don’t pay if companies fail to deliver.

The key elements of the PR24 framework include:

• New environmental commitments for companies including on the use of storm overflows, improving biodiversity, improving bathing water quality and reducing greenhouse gas emissions
• Steps to drive companies to deliver excellent customer service, and to maintain and improve the health of their assets, so that customers have consistently good service, every day
• Clear expectations for companies to address the long-term challenge of ensuring we have sufficient water resources, including through steps to reduce leakage and water consumption and increase water supply, with a new fund of up to £100 million to stimulate new approaches to water efficiency
• Setting clear expectations on companies’ dividend and executive pay policies, with the prospect of additional measures on performance-related pay to protect customers’ interests if these expectations are not met
• Putting the views of customers at the heart of the process, with each company conducting robust customer research and holding two public meetings in 2023
• Incentives for companies to be more efficient and innovative, including through a £300 million Innovation Fund to support further sector-changing ideas
• Greater use of markets where they can deliver better value for customers by driving down costs while maintaining quality, including in how major investment projects are procured, and in the operation of the markets for developer services and bioresources

During the next phase of the price review process, the companies will develop their business plans and long-term delivery strategies which will set out the expected level of investment needed to deliver the changes required. 

Aileen Armstrong, executive director for the PR24 programme, said:

“Companies will need to deliver substantial change in the coming years. We need to have well-run, resilient companies, delivering quality service for their customers and a better outcome for the environment at a price that remains affordable”.

At PR24 Ofwat is retaining separate controls as follows:

• Setting water resources and network plus as total revenue controls;
• Setting retail and bioresources as average revenue controls.

CCW: customers must be actively involved in decision making during price-setting process

Emma Clancy, Chief Executive of the Consumer Council for Water (CCW), said:

“This methodology lays the foundations for what promises to be the most customer-focused price review to date. It also highlights the need for companies to act now and not wait to tackle the pressing challenges facing the sector, including enhancing the environment and safeguarding the future of our water resources. Our work with Ofwat on research looking at customers’ priorities, developing guidelines for affordability and acceptability testing and establishing the new ‘your water, your say’ open challenge sessions will ensure people’s voices are heard.”

Click here to download Ofwat's final methodology in full.