RD05/02

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

12 March 2002

Dear Regulatory Director

THE APPROACH TO DEPRECIATION FOR THE PERIODIC REVIEW 2004

We indicated in the 'Ofwat forward programme 2002-03 to 2004-05 draft for consultation' that we would consult widely on how we should deal with depreciation well in advance of the next periodic review in 2004.

Depreciation is a key component of price limits. For 2000-05 it accounts for 20% of the average household bill. Our approach to, and the calculation of, depreciation is therefore one of our key considerations at periodic reviews.

The attached consultation paper and tables consider  the issues raised following the periodic review in 1999 about depreciation and consults on possible approaches for the 2004 review. The paper considers all the elements of our calculations at PR99 and the assumptions which we made. We are seeking views on a range of issues. In particular, the need to maintain an approach which is consistently applied across all companies and which means that depreciation charges are not unduly influenced by different accounting policies. We also discuss the approaches taken by the Competition Commission and other utility regulators. There is a series of numbered questions in the paper which cover all of the issues in detail.

We want to hear from all those with an interest in the issues raised in this paper. In order to provide enough background for non-specialists to respond to the issues raised, the paper also explains what depreciation is, its role in price limits and how it is calculated.

The responses to this paper will help us to develop our approach to depreciation for the next review. We will summarise the responses to this consultation in the summer of 2002. Our proposed approach to depreciation will be set out in our consultation paper on the methodology for the periodic review in 2004. This will be published in October 2002.  

As part of our consultation process, we often hold seminars during the consultation period to explain the issues on which we are seeking views. We are considering holding a seminar on this paper towards the end of the consultation period. Please contact Tracey Anderson by Wednesday 20 March 2002 (contact details below) if you are interested in attending such a seminar.

If you have any queries on this letter or the attached paper please contact Tracey Anderson, Head of Regulatory Accounts and Business Affairs on 0121 625 1311 or by e-mail at tracey.anderson@ofwat.gsi.gov.uk.

Yours sincerely

Keith Mason
Director of Regulatory Finance