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Price review 2009
PR09/04 18 October 2007 Dear Stakeholder PR09: THE OPEX INCENTIVE ALLOWANCE AND THE OUTPERFORMANCE MULTIPLIER FOR 2005-10 In 2004 we introduced an additional incentive to encourage the most efficient companies to outperform our regulatory expenditure assumptions for the period 2005 to 2010. We set out our conclusions in MD191 'Our conclusions on rewarding outperformance and handling underperformance' (March 2004). As we explained in MD191 the new incentive will mean that the current total outperformance benefit by service can increase by 50% for leading companies and by 25% for companies close to the frontier. This letter sets out how we will implement the operating expenditure incentive allowance at PR09. Changes to the opex incentive allowance As set out in MD191 for the opex incentive allowance for the current price review period (2005-10) we will:
Inclusion of the additional year We will apply the opex incentive allowance using the 'additional five years model' as for capex. We will increase the value of the incentive allowance by adding an extra year so that companies retain the benefit of outperformance for the year in which they achieve it plus an additional five years. An example of this is set out in Annex A. Calculation at a service level At PR99 and PR04 we calculated the incentive allowance for water and sewerage companies using total water and sewerage operating expenditure. For PR09 we will calculate the incentive allowance separately for each service. We will use the methodology as set out in Annex A for each service separately. We will check carefully that water and sewerage companies have not allocated costs inappropriately between services in order to maximise the incentive allowance. Additional outperformance benefit We set out in 'Future water and sewerage charges 2005-10: Final Determinations' those companies that were likely to qualify for enhanced rewards for future outperformance. The qualifying companies are now set out in table 1 below. There are no changes from the companies we identified in our final determination document in December 2004. Table 1
We will apply two levels of enhanced benefit, a 1.5 multiplier and a 1.25 multiplier based on the total outperformance benefit in the qualifying years. We will apply the multiplier to capex outperformance as set out in MD187. Calculation of opex outperformance benefit We will calculate the opex outperformance benefit as set out in MD187 amended to take account of the extra year added to the retention period of the opex incentive allowance. We will calculate this separately for each service. We will add the additional outperformance benefit to the incentive allowance. We set out an example of how we will do this calculation at Annex B. Yours sincerely Fiona Pethick Director of Corporate Affairs  |
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