Ofwat launches its 2009 price review ‘approach’

Posted: Tuesday 30th October 2007

Ofwat has published its first major consultation on how it will set price limits for customers' water and sewerage bills for the five years from 2010 to 2015. The consultation paper describes the approach that the regulator will take to make sure that the prices companies charge their customers are designed to deliver the best results for those customers.

Ofwat Chief Executive Regina Finn said: "The approach we set out here has its foundations in the robust challenge that Ofwat has always brought to its scrutiny of companies' business plans to make sure they deliver value for money for customers. But in the light of the challenges of the future we do propose to make some changes to the way we set price limits."

One new development is the requirement for all companies to publish a 25-year strategic direction statement. This will show how each company proposes to tackle long term issues such as climate change, the development of competition and, where relevant, increased housing development.

Regina Finn said: "Innovation and creativity will be essential if the water sector is to meet the challenges it faces at a price customers regard as fair. Competition is generally the best driver of that type of innovation and our decisions in setting price limits will support our aim of promoting competition in consumers' interests. In the meantime, the longer term focus should concentrate companies' minds on how they can innovate to meet the needs of their customers in the future."

The process will also be simplified by requiring companies to submit only one core business plan, but that plan will have to strike the right balance to deliver the best outcome for their customers now and in the long term.

Other new proposals include a new form of incentive-based regulation for capital expenditure that allows companies to choose their own risk-reward trade off, and a requirement to use cost benefit analysis across all parts of the business to make sure that companies make the best choices for their consumers.

Regina Finn said: "We aim to see a result that delivers best value for consumers and the environment at a fair price. A key part of this will be the cost of finance to the industry. When we look at this we will consider the significant premiums to regulatory value being paid for water companies in recent years, along with other evidence."

Following consultation on the methodology paper, which ends in January 2008, Ofwat will publish its final guidance paper in March 2008 to enable water companies to deliver their draft business plans in August 2008.

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