Following submission of the water companies’ Business Plans on 2nd December, water industry regulator Ofwat has announced that it is making changes to its plan for PR14 delivery.
Ofwat is publishing details in advance of further guidance in the New Year, in order to provide stakeholders with as much notice of the change as possible and to allow Ofwat to deploy its resources efficiently.
Since receiving the water companies’ business plans on 2 December Ofwat has held meetings to hear their proposals. The regulator commented:
“ A number of these meetings were very positive and demonstrated a significant focus towards customers.”
However, Ofwat said its initial testing of the companies’ plans has highlighted a number of areas where it requires further information. As a result, Ofwat has notified companies that it will be extending its query process to gather the information that it needs.
Ofwat said the initial testing of companies’ views on risk and reward has shown that they are not in alignment with market evidence for the water sector. As a consequence, the regulator said it will now be providing companies with “a further opportunity to secure the best possible outcome for customers.”
In January 2014, Ofwat will issue further guidance on risk and reward, including its view on the cost of capital and other key financial parameters given the risks that companies should be taking and those which customers will be bearing. This guidance will include the flexibility that companies will have in areas such as pay-as-you-go (PAYG) ratios.
For a business plan to be enhanced, Ofwat must be satisfied that it is in customers’ interests for it to accept the company’s plan without intervention except to set industry-wide incentives such as the average cost to serve for household retail customers.
Ofwat is proposing to pre-qualify companies that have business plans which pass its tests for outcomes, costs and affordability, and which have demonstrated robust Board assurance.
In March 2014, Ofwat will invite the Boards of the pre-qualifying companies to accept its published guidance in relation to the risk and reward components of price limits and in doing so gain enhanced status.
At that point, in addition to reputation and procedural benefits, the financial gains from enhanced status will be quantified. If a pre-qualifying company chooses not to accept our published guidance, its business plan will be classified as standard.
The remaining non-qualifying companies will receive the outcome of the risk-based review for them on 4 April 2014 as planned.
In addition to the changes, Ofwat has decided that the determination of default tariffs will be removed from the risk-based review. Further information will follow on Ofwat’s approach to determining these tariffs.
Ofwat said it will continue to work with all its stakeholders to ensure that PR14 delivers the best possible outcome for customers and it looks forward to further constructive engagement.
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