Ofwat has written to the water companies in England and Wales to update them on progress in its leakage target review. Ofwat has now decided to describe the target level of leakage as the Sustainable, Economic Level of Leakage (SELL) which will replace the existing term Economic Level of Leakage (ELL).
In February Ofwat commissioned consultants, WRc, to carry out work on developing a frontier approach to leakage target setting – which involved normalising the leakage management performance of water companies, and driving less efficient companies to catch up with the performance of the best (or 'frontier') companies.
Ofwat view the approach as having the potential to deliver continuing efficiency improvements for all companies, with innovation from the catch-up companies leading to improvements in industry best practice.
However, to date Ofwat has still not received feedback from all of the companies trialling the guidance for including 'externalities' (costs and benefits that do not have a market value) in the economic level of leakage (ELL) calculation. The date for finalising the guidance, which is intended to be used by the water companies to inform their final business plan submissions, has now been revised to October 2008.
The consultants' final report on the frontier approach to leakage target setting has now been published on the Ofwat website. Since the report has been finalised, Ofwat has been considering how best to take the work forward. The regulator said it has no immediate plans to do further work on the frontier approach because “we doubt whether it would provide the right incentives for companies overall”.
However, Ofwat has said it does not want to dismiss the approach without giving stakeholders an opportunity to identify significant points. Ofwat is seeking stakeholders' views and says that if it receives any material suggestions in response to this letter by the end of August, it will reconsider its position and if appropriate, convene a stakeholder group to discuss significant issues. Ofwat will report its conclusions in October.
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