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MD171
TO ALL MANAGING DIRECTORS OF
WATER AND SEWERAGE COMPANIES
AND WATER ONLY COMPANIES
16 May 2001
Dear Managing Director
THE 2001 REVIEW OF THE REGULATORY ACCOUNTING GUIDELINES
Regulatory Accounting Guidelines (RAGs) have underpinned the preparation of regulatory accounts since privatisation. They have greatly assisted the comparison of companies' financial performance and I do not consider they require 'root and branch' reform. However, numerous changes have occurred in both the external reporting requirements of companies and the structure of the industry in recent years. Consequently, it is now timely to update RAGs 1 to 4. I propose to consult with the industry and stakeholders in this exercise. I will not, however, be reviewing RAG 5, dealing with transfer pricing, at this time because it was recently revised in March 2000.
The initial consultation paper is attached to this letter (together with Annex A and Annex B)and outlines various issues that I am considering.
The most significant issues raised in the consultation paper are: The disclosure and integration of the regulatory capital value (RCV) into the regulatory accounts.
Further disaggregation of revenues and cost by service in order to assist competition.
More informative commentary to explain the figures within the regulatory accounts and to provide comparisons with price limit assumptions.
The disclosure of RCV's is an issue that has been frequently raised with me by the industry and investment community in recent months. Currently these figures are only disclosed each year in my annual report 'Financial performance and expenditure of the water companies in England and Wales' and only then on a historical basis. The RCV's are an important part of the assumptions underlying price limits and I consider that they should be integrated into the financial performance reporting of companies. It would also potentially improve the overall transparency of the regulatory process. The investment community would also like to have the prospective i.e. future RCV's published. They believe that this would also increase the transparency of regulatory decisions. I agree that this is an important aspect, and this proposal will be the subject of a separate consultation exercise later this summer, as set out in Ofwat's Forward Programme 2001-02.
I also touch on the role of auditors in the preparation of regulatory accounts.
I also welcome your views on other regulatory accounting issues that you feel may need to be addressed.
I am conscious that in some areas the level of financial disclosure may decrease whilst in others it may increase as a result of the proposed changes to the RAGs. The new disclosure requirements should make the financial performance of companies more transparent and accessible. In particular it should assist companies and potential entrants to the industry through the disclosure of the potential costs of providing water and sewerage services on a consistent basis. I anticipate that any data requirements would already be readily available within a well-operated company. It is anticipated that the burden (if any) of additional disclosure will not be significant.
Some of these issues have been raised by the Regulatory Accounts Inter-Regulatory Working Group and published recently in their final proposals paper. The proposals in the attached paper are consistent with those of the Working Group.
Following this initial consultation and consideration of the responses, the RAGs will be redrafted and I will consult further with a view to their implementation before 31 March 2002.
If you have any questions on this letter, please contact Keith Mason, my Director of Regulatory Finance. I should be grateful for written responses to the issues raised in this paper by 13 July 2001.
PHILIP FLETCHER | 
Letters to Managing Directors
