Water industry regulator Ofwat has launched a new consultation on its plans to recover a further £18 million in licence fees from the water companies in England and Wales via a one-off charge to cover the costs of delivering the 2014 Price Review.
The maximum amount of extra money Ofwat can recover to fund the price review to set the price and service package for AMP6 is covered by a specific cap in companies’ licences. The current cap on the recovery of price review costs is 0.1% of each company’s turnover. Ofwat is now seeking to increase this to 0.3% of turnover on the grounds that the 2014 price review has marked a “significant shift” in the way in it regulates the water sector through the price setting process. Ofwat commented:
“The significant changes in our approach and the scale of assurance required to guarantee successful delivery of the price review have led to an increase in our costs.”
The current 0.1% cap would allow Ofwat to recover around £9 million – the increase to 0.3% equates to an additional £18 million. The regulator said it was not proposing to recover the full amount of funding allowed by the proposed modification but that it was considered “prudent to set the cap at 0.3% to allow some headroom.”
Ofwat said that the modification would be for a one-off licence fee increase in 2014-15 to meet the costs of the price review and the fee would be reduced for 2015-16, once the price review process is complete. However, the modification mechanism would be retained – Ofwat said:
“The modification we are proposing will remain in place after 2014-15. This is to avoid another modification process, with the time and resource implications this has for us and the companies, should it be necessary to increase our fees, as we move towards the 2019 price review.”
The consultation document indicates that Ofwat has already gained the water companies’ indicative agreement and that the regulator is now seeking companies’ formal agreement to the proposals.
Deadline for responses to the consultation, including formal acceptances by the water companies, is 29 November 2013. In the event of failing to gain the necessary agreement, Ofwat can use its powers under section 14 of the WIA91 to refer the matter to the Competition Commission which would then be free to decide whether the modification should be made and, if so, in what form.
Click here to access the consultation document.
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