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Price review 2009
PR09/07 30 November 2007 Dear Colleague CONSULTATION: PR09 business plan information requirements On 18 October 2007, we published 'Setting price limits for 2010-15: Framework and approach' seeking written comments on our proposed approach for the 2009 price review. In the paper we explained that we would consult on the information we intend to collect from companies to support the price review and this letter begins that consultation. In August 2008, we want you to provide us with a draft business plan, including proposals for price limits, for the five years from 2009-10 to 2014-15. Your plan must be consistent with the long-term strategy set out in your strategic direction statement. As in the 2004 price review, the business plan information requirements are structured in a way that allows you to provide the information necessary to set price limits and to allow customers and stakeholders to understand the key elements of your plan. We are committed to the principles of better regulation and minimising the regulatory burden. However, as long as the water industry remains a monopoly industry, our duty to regulate in a way that protects consumers is likely to mean that we will need each company to provide us with a substantial amount of information. Nevertheless, we have again reviewed the information required for the draft and final business plans with the aim of ensuring that the information we require is both necessary to inform discussions on the options available for customers and the environment, and sufficient for us to determine price limits fairly and objectively. We have considered both the scope and the range of data required and are only asking for the minimum necessary for setting price limits for the period 2010-15. We seek your views and the views of other key stakeholders, on:
In addition, annex A to this letter sets out some of the areas where changes in our approach to setting price limits have had a material impact on the business plan reporting requirements. We would value your views on the questions raised in the annex. Cost base We are also publishing the cost base information requirements today. We consulted on a draft of these in PR09/01 'PR09 business plan information requirements: cost base', and we have taken your comments into account in finalising these information requirements. Although the first cost base submission is effectively part of the draft business plan, it is proceeding to an earlier timetable, with company submissions due by 4 April 2008. We will issue the cost base information capture system by the end of January 2008. Please send your comments on the business plan reporting requirements to: Audrey Mason Senior Information Manager Ofwat Centre City Tower 7 Hill Street Birmingham B5 4UA by e-mail to: audrey.mason@ofwat.gsi.gov.uk. by 8 February 2008. Responses will be placed on our website and in our library, and made available to the public unless a respondent has clearly indicated that they do not wish this to happen. In general, we will honour this request, but there may be circumstances in which, under the Freedom of Information Act, the public interest requires all responses to be made public. In these circumstances, however, any details that may identify the person submitting the response will be removed prior to publication. We will consider all the responses to both the consultation on our proposed approach and the information requirements before we finalise the content and structure of the draft and final business plan information requirements. We will publish our conclusions on both consultations in March 2008. Yours sincerely Jonathan Hodgkin Director of Network Regulation Enc Annex A In addition to the general questions for consultation relating to the PR09 business plan reporting requirements, we would also like to bring to your attention the following material changes to the information requirements and specific questions for PR09.
Each company can set out an 'overlap' programme for the period immediately beyond 2015. We will challenge the projects in the same way as we do for proposals affecting the immediate price review period. This will give each company and its stakeholders confidence that future price limits will support enhancement investment clearly necessary after 2015.
We have changed our approach to revenue forecasts to one that requires substantially less data than was required at PR04. Revenue forecasts will draw from the volume and property data supplied in part B5 of the business plan, only volumetric and rateable value changes for completed charging years are required. Future years' charges will be calculated to satisfy K and the measured/unmeasured differential. Fixed charges per property will be derived within the model for completed charging years and increase by RPI thereafter.
Each company should carry out an appraisal of the costs and benefits of its proposals using cost benefit analysis appropriate to the scale of its investment programme. This will provide a firm basis for consumers to have confidence in the outcomes they are paying for and complement the 25-year approach. We will issue further guidance on cost benefit analysis in December 2007.
In the PR09 business plan reporting requirements we have introduced a requirement for each company to provide information about the robustness of a selection of its capital estimates. We introduced this concept in RD 17/06, 'Review and development of the cost base tool for use in setting price limits in 2009', where we set out our intention to develop our approach to understanding and challenging business plan estimating methods and the quality of cost information used. To inform our thinking, we commissioned cost engineering consultants Faithful & Gould to set out the principles of estimating best practice. This report is available on the Ofwat website and we have used it to develop a scorecard system. Each company will be required to assess a selection of its capital projects against the scorecard to reveal the level of confidence that can be placed in the project estimate.
The scorecard assessment is a new requirement, but the principle of challenging capital estimates is not new and has always been a key consideration when reviewing company business plans. We are not expecting the companies to change their systems or policies regarding capital estimating. However, the scorecard approach will allow us to improve our understanding of the evidence base underpinning capital expenditure forecasts and will therefore improve the consistency and focus of our challenges.
We are interested in your views on the draft scorecard reporting and guidance. We are also considering holding a workshop early in 2008 to provide a further opportunity to discuss and understand the cost estimating scorecard.
The PR04 projects database created a number of reports for use by companies and Ofwat. If there are any additional reports that would be helpful to companies in compiling and justifying their plans for PR09, please let us know. If so, we will try to include this functionality within the PR09 projects database.
We would draw your attention to changes in the asset inventory tables. We have:
On water mains condition grading, we have removed references to manufacturing standards and expectations as to timing of replacement/renovation (remaining life), such that it is based on burst frequency alone. This is in line with a UKWIR report that is expected to be published shortly. We have also tentatively split out mains over 321mm internal diameter, so that their condition may be reported separately. Companies are asked whether they wish: a) to report these larger mains separately; and b) to use different grading criteria. If so, we will use the same UKWIR report to inform the condition grade burst frequency ranges, which we expect to be a sub-division of Grade 1 set out in table 1 of the company guidance to part C3.  |
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