RD 5/00

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

28 January 2000

REVISIONS TO RAG 5 - TRANSFER PRICING IN THE WATER INDUSTRY

I attach a copy of proposed revisions to RAG 5 for consultation.

Ofwat has investigated a number of companies' compliance with the existing guideline. The findings of these investigations have directed the revised guideline.

A number of companies have market tested their Associate's charges by comparison to list rates, 3rd party evaluation and benchmarking. In all but one or two examples this market testing has not been sufficiently robust to determine that charges are at market rates. In light of these findings, competitive letting should be the norm for companies trading with Associates, other than those few examples given in the guideline, to secure compliance with the requirement for arm's length trading.

Transfer pricing will also be subject to the 1998 Competition Act. The guideline has been amended to highlight key areas where this will be the case.

Comments on the revised guideline should be provided to me no later than 28 February 2000. Copies of this letter and the guideline have also been sent to company Auditors and Reporters.

Yours sincerely

Claire Goodland

Transfer Pricing Manager