Water industry regulator Ofwat has announced that it will not pursue a re-opening of Thames Water’s price limits for 2014-15 using the ‘substantial favourable effect’ mechanism   – which could have resulted in deductions in the company's prices for customers.

The substantial effect mechanism is included in companies’ licences and allows price limits to be adjusted for circumstances outside of management control, where a significant and material favourable, or adverse, effect occurs.

Ofwat took the decision following consideration of responses to its informal consultation on the application of the  mechanism and Thames Water’s own decision not to challenge the  determination of the application it made in August 2013 to re-open its price limits for 2014-15.

Announcing its decision, Ofwat said:

“A particular consequence of our determination of Thames Water’s application has been that, like other companies, Thames Water has now accepted that its investors can absorb cost increases that have occurred in 2010-15 above the allowances assumed in existing price limits. In this context, we consider it to be proportionate that we do not issue a substantial favourable effect notice on Thames Water.”

The regulator also said it “remains committed”  to the continued use of the interim determination and substantial effects mechanisms that are included in company licences where their use is justified and appropriate. Ofwat separately also confirmed its position in its recently published ‘Setting price controls for 2015-20 – risk and reward guidance’.

In August 2013, Thames Water applied to Ofwat to re-open its price limits for 2014-15 through the interim determination of K  mechanism – which was rejected by the regulator in November. The company subsequently confirmed it would not challenge the determination in December 2013.

Explaining the background to its decision, Ofwat said it had restricted  its consideration of  the application of the substantial favourable effect mechanism in parallel to Thames Water’s IDoK application to Thames Water only.  In the context of sharing pain and gain with customers in 2010-15, it was the only company that asked Ofwat to re-open the existing price limits and  increase customer bills above the caps we set in 2009.

Thames Water’s existing price limits will now remain in place for 2014-15.