PR09/01: PR09 Business plan information requirements: cost base

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Ofwat home > Publications > Letters to Regulatory Directors

PR09/01

TO ALL REGULATORY DIRECTORS OF
WATER AND SEWERAGE COMPANIES
AND WATER ONLY COMPANIES

10 September 2007

Dear Colleague

PR09 BUSINESS PLAN INFORMATION REQUIREMENTS: COST BASE

This is the first of a series of letters setting out in more detail our policy for the 2009 periodic review. The cost base forms an essential part of our process. It is key to setting efficiency assumptions under our existing approach and would be part of baseline setting if we were to adopt menu regulation.

Over the past year we have been working with the industry to address the concerns set out in RD17/06 ' Review and development of the cost base tool for use in setting price limits in 2009' and incorporate the lessons leant from the PR04 process to improve confidence in the cost base as a comparative efficiency tool.

RD17/06 identified two key themes, which we have developed with input from consultants, whose reports are on our website:

Estimating methods. The work by Faithful and Gould will influence our wider consultation on the PR09 approach to be issued in October and subsequently the information requirements for draft business plans.

Improved consistency for compliance with the standard cost descriptions. The work by Jacobs has informed our development of these information requirements.

We have used a working group of companies and Reporters to help develop solutions, and we have visited companies to improve our practical understanding by seeing their approaches at first hand. We would like to thank companies that took part in the working group or allowed us to visit. We plan further working group meetings (see below) to discuss the cost base information requirements and guidance.

Annex 1 describes what we are doing in response to each of the concerns listed in RD17/06. We have updated the cost base information requirements to reflect these actions. We are issuing these draft information requirements in electronic form only. There are three sections containing general, company and reporter guidance. We have also drafted the cost base tables and line definitions.

The purpose of this consultation is to obtain your views on the changes we have made and to give you an opportunity to make us aware of any further issues that you don't think we have considered properly.

Concurrent with this consultation, we are commissioning a technical review of the information requirements, particularly the standard cost definitions.

Cost base timetable for PR09

Planned activities and timing are:

2 October 2007 – Working group meeting to discuss this consultation on information requirements.

November / December 2007 – Information requirements published

Late November / December 2007 – Training workshop on the information requirements for companies and Reporters

March 2008 – First cost base submission due

March to June 2008 – Ofwat analysis and queries

June 2008 – Publish feedback

September 2008 – Working group meeting to identify any changes to guidance

January 2009 – Re-issue information requirements and explain any changes

April 2009 – Final Business Plan cost base update

November 2009 – Final Determination

January / February 2010 – Workshop on the reasons for differences and the opportunities for efficiency savings that we think the cost base has identified

Points we specifically want your view on:

Are the general principles clear?

Overall coverage of the standard costs – Does the reduced selection of standard costs represent your bread and butter / material capital programme activity?

Will you be able to provide good estimates of the new standard costs developed for maintenance of above ground assets?

Is the new format for submitting a breakdown of standard costs straight forward and a minimal additional burden? Does it give you confidence that we will identify non-efficiency related variance?

The new approach to comparison with 2004 costs, comparing PR09 costs using PR09 definitions with PR04 costs using PR04 definitions. This means companies do not have to provide any additional data. In contrast at PR04 we asked companies to rework their current costings using AMP2 guidance to ensure strict comparability.

The planned cost base timetable for PR09.

How to respond
Please send your responses by email to ian.hopkins@ofwat.gsi.gov.uk by 6 November 2007. Please contact Ian Hopkins on 0121 625 1427 or me on 0121 625 1307 if you have any queries on this consultation. As part of a recent reorganisation, work on the cost base has moved to Comparative Efficiency Team, and Ian has taken over from Kay Webb.

Yours sincerely

HELEN TWELVES
Head of Comparative Efficiency

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