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Letters to Regulatory Directors
RD10/07 3 May 2007 Dear Regulatory DirectorCAPITAL MAINTENANCE RELATIVE EFFICIENCY MODELLING FOR THE 2009 PERIODIC REVIEW We assess relative efficiency in capital maintenance using a combination of econometric and unit cost models. We publish the results of these models annually in our reports on industry unit costs and relative efficiency. We also use these models to inform our relative efficiency assumptions at periodic reviews. Our current capital maintenance relative efficiency models are based on the suite of econometric and unit cost models we reviewed in 2003 for use at the 2004 periodic review. We have annually updated these with new expenditure averages; the explanatory variable data has remained unchanged since 2004 and is based on assets in 1997-98. To inform the 2009 periodic review we want the models to reflect the industry as it is today. To do this we need to review and update our current suite of capital maintenance relative efficiency models and the data we collect to inform them. We would like your input into the revision and update of the capital maintenance econometric return (CMER) and specification of the individual models. The update to the CMER and the model specification are obviously linked. We need to understand company's views on variables that they feel are important to each area of expenditure. We will then need to consider the availability of any additional data, and the scope to improve the models. We also want to ensure that the data we are collecting in the 2007 CMER is the most appropriate, minimising unnecessary data collection. The attached paper gives an overview of the capital maintenance efficiency modelling and discusses a number of specific issues on which we seek your views. We have also set out details of all nine econometric and unit cost models, and our proposed timetable for this review, from now until the publication of the 2007-08 report on unit cost and relative efficiency. We welcome your comments on this paper, in particular potential revisions to the models and CMER data requirements. Please send your responses by email to Jayne Gregory at Ofwat (jayne.gregory@ofwat.gsi.gov.uk) by 22 June 2007. Responses to this paper will form the basis of a workshop on 11 July 2007 at Ofwat where companies will have the opportunity to discuss the model specifications and data requirements. Following on from the workshop we intend to work with the industry to refine the CMER data requirement and the models. If you have any questions relating to this letter please contact Jayne Gregory on email at the address above or call her on 0121 625 1306. GEORGE DAY Head of Capital Maintenance  |
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