RD 24/03: 2004 periodic review - feedback on draft business plans

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Ofwat home > Publications > Letters to Regulatory Directors

RD 24/03

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

11 June 2003

Dear Regulatory Director

2004 Periodic review – Feedback on draft business plans

Your draft business plan is a key step in the price review process. We look to you to present a complete and well-justified plan that highlights all the material issues of concern. The plan needs to be of a high quality to inform the debate we all need to have on your plans for the future and to aid the important decisions that Ministers must make early next year. We have set down our expectations for your plan in our reporting guidelines.

We are midway through a programme of meetings with each company to review the emerging issues, as you prepare your plan for submission on 15 August. One of the points that many companies are raising is the need for more clarity on how we will review and assess your draft business plan, and the scope of the feedback we will give you in the autumn on the issues it raises. We have discussed and debated our outline proposals on the process with Water UK. This letter sets out our proposals for assessment and feedback for consultation.

Overall criteria

In paragraph 10.10 of 'Setting water and sewerage price limits for 2005-10: framework and approach' (March 2003) we envisaged a review process by which we would assess your draft business plan against a set of criteria. We identified an initial listing of what we thought should be included in the criteria. We also set out our aim to provide meaningful feedback to companies to ultimately improve the quality of your final business plan.

We now propose to use three broad tests to assess your draft business plan in a structured and consistent way across all the company submissions. These tests are set out below.

1. An integrated and strategic approach

whether your draft business plan demonstrates that you have adopted a fully integrated approach based on an articulated strategic vision for your company that places the next period in a longer-term context; and
whether your plan makes it clear that you have adopted long-term least cost total planning with a full appreciation of risks, and taken account of costs and benefits wherever possible.

2. Clear outputs

whether your draft business plan includes clear outputs;
whether you show where, and how, your strategy reflects the views of your customers; and
your plan should explain how your strategy takes account of the initial guidance from the Secretary of State (or Welsh Assembly Government), your owner's priorities and addresses the views of other stakeholders.

3. Good data

whether your draft business plan, wherever possible, uses high quality data with datasets that are complete, consistent and compliant with relevant guidelines;
whether you have demonstrated that you gave due consideration to the quality of the available data when you made decisions; and
if you have set out convincing supporting evidence for the assumptions that you are using and there is evidence of clear audit trails.

Assessment and feedback

Annex A outlines our approach to providing feedback on your draft business plan. We will provide specific, detailed, feedback directly to you ahead of our next round of meetings in the autumn. But before that we will publish a more general assessment of the quality of all companies' draft business plans in our October 2003 paper setting out the issues for stakeholders. We have considered a number of proposals and we believe our preferred approach strikes the right balance. We believe this will:

improve transparency;
help you prepare for the final business plan submission; and
set out, for stakeholders, our view on the overall quality of your submission.

Our feedback to you will concentrate on those parts of your plan that we believe require further work and justification ahead of the final business plan.

We would welcome your views on the approach outlined in Annex A. Please send your comments by 9 July 2003 to:

Audrey Mason
Ofwat
Centre City Tower
7 Hill Street
Birmingham
B5 4UA

Yours sincerely

BILL EMERY
Director of Costs & Performance
and Chief Engineer

Annex A - Proposals

Feedback on your draft business plans will reach you in three ways.

1 Query Process

We will use the established query process to seek clarification from you on specific points or assumptions within your draft business plan where we are not certain what you say or mean. This is a well established process and has proved an effective way to clarify apparent inconsistencies in the past. We will not use this process to comment directly on your draft business plan but this will provide an early warning of any areas that are unclear.

2 Company specific feedback letter

We will send to you, prior to your meeting with us in the autumn, detailed feedback notes on your draft business plan. These notes will set out where we believe you will need to undertake further work to justify your strategy and where your assumptions and/or proposals do not convince us. Where appropriate we will explain to you the view we would be minded to take, based on the current information, if we were making a determination this autumn.

This will include feedback from each functional team and form the basis of the working level meetings we will have with each company during November. We will be writing shortly to finalise arrangements for these. The feedback letters will be sent to companies and reporters at least ten working days before the meeting.

Your draft business plan will consist of four parts:

A - Your strategy;
B - Key components;
C - Supporting information; and
D - Public domain summary.

Our review of your draft business plan will draw on all the sources that we have available to us such as the reporters, other regulators and Watervoice. Where we utilise such sources we will make this clear to you in the feedback.

Our feedback on part A, your strategy, will refer as a starting point, to the first test set out in the main text of this letter. We will set out any concerns we have about the way that part A draws on evidence presented in parts B and C. The focus of our feedback will be on parts B and C. We will comment on:

where we remain to be convinced by your arguments;
what further analysis/justification you will need to complete to convince us;
any concerns we might have about the data (and any analysis of it) that you submitted;
areas where we believe uncertainty remains and whether these can be resolved for the final business plan; and
what judgements we might need to take if the identified issues cannot be resolved/improved.

We will especially draw your attention to any errors, omissions or unsubstantiated projections that we feel are so significant that they would, if left unaltered, place a question mark against your final business plan submission.

3 An overall assessment of your draft business plan

We are committed to publishing an overall assessment and general commentary on your draft business plan. We will test your draft business plan, against the three broad criteria already outlined in this letter, using a star system where three stars equates to the following.

Well argued, clear and coherent strategy
Top quality submission with few errors or gaps
Investigations or analyses properly documented and/or supported
Method of assessment demonstrates best practice
No mismatches between the public and confidential parts
Clear and substantiated arguments and justification

And zero star equates to the following.

a number of significant (or large number of less significant):

Errors or gaps in submission
Areas of unexplained reasoning
Examples of inaccurate data
Unsupported claims or projections
Significant mismatch between the public and private parts

Our overall assessment will be published in October 2003 in our paper setting out the issues arising from business plans. We will assign a rating that best reflects your whole plan. We will comment generally on the quality of company draft business plans at an industry level. We will inform you of our overall assessment of your draft business plan prior to publication.

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