• What are price limits?
• Why does Ofwat set price limits?
• How does Ofwat apply price limits?
• What charges do price limits cover?
• Are there any charges that price limits don’t cover?
• Do all customers’ bills change by the same amount?
• Does my company have to charge the maximum allowed by its price limits?
• Can my water company object to the price limits Ofwat sets?
• Can price limits be changed more than once very five years?
• What are current price limits?
• What is the effect of price limits on my bill?  

What are price limits?

We regulate water and sewerage charges by limiting the average change in charges that your water company can impose in any year. We set price limits for each water (and sewerage) company in England and Wales. We have reviewed prices every five years since privatisation in 1989.

The price limit is the percentage by which a company can change its overall average charge above or below inflation each year. This is enough to allow the companies to continue to deliver the high-quality services that customers need and expect, and safeguard the environment.

Our price limits are based on certain assumptions. For example, we make assumptions about what the water companies need to spend on delivering services to customers. We also make financial assumptions and assumptions about how efficient we think the water companies should be.

Why does Ofwat set price limits?

We set price limits so that your water and sewerage charges do not go up by any more than is necessary. We do this because water is a monopoly business. This means that you cannot choose the company that supplies your water and sewerage services.

When we set price limits, we consider how much money each company needs to finance the services that you have the right to expect. We also expect the companies to operate more efficiently to keep your bill as low as possible.

Between price reviews we make sure that the assumptions we made remain appropriate. We can sometimes adjust price limits between price reviews, if circumstances change. This is known as an ‘interim determination’.

How does Ofwat apply price limits?

We use a formula to limit the amount water companies can charge for the services they deliver. This is set out in each company’s licence, which set out the conditions they must meet in running their business.

The formula is RPI + K + U and is called the overall price limit (RPI and K can be minus figures).

• RPI is the percentage change in the Retail Price Index. We use the RPI inflation rate for the November before the start of the charging year on 1 April. The RPI inflation rate was 4.71 for November 2010.
• K is the price limit.
• U is any K that the company hasn’t used and wishes to carry forward to use from previous years.

For example, if a company’s price limit for a particular year is 1% and the RPI increase in the 12 months to the previous November is 1.5% – and it is not carrying forward any unused price limit – then the average increase in charges can be no more than 2.5%.

Each company must produce an annual audited statement. This sets out all of the company’s individual charges and the revenue that the company will get from each charge. We check this statement to make sure that the average increase in the company’s charges does not exceed its overall price limit.

What charges do price limits cover?

The price limits cover charges in the tariff basket for household customers, and non-household customers who use less than 50 million litres per year. Changes in individual charges may be more or less than the water company’s price limit. However, the average change to charges in the tariff basket must not exceed the price limit.

Are there any charges that price limits don’t cover?

Price limits don’t cover things like infrastructure charges, connection charges and charges for large users (who use more than 50 million litres per year). We set infrastructure charges at each price review. We expect other charges to be reasonable and relate to costs.

Do all customers’ bills change by the same amount?

No. Because price limits apply to the average change in charges, individual customers’ bills are unlikely to change by the same amount.

The water companies can change different charges by different amounts. For example, a company could decide to increase metered water charges by more than unmetered water charges. Or it could alter the balance between standing charges and variable charges. Each year we check that companies do not change their charges to discriminate unduly against groups of customers, or treat others preferentially.

Does my company have to charge the maximum allowed by its price limits?

No. Price limits are a ceiling on what the water companies can charge. If the water companies can meet their obligations at lower costs than we assumed in price limits, then they may choose to share these benefits with customers by charging less.

Can my water company object to the price limits Ofwat sets?

If your water company is unhappy with the price limits we set it can ask us to refer its determination to the Competition Commission. This applies for both price reviews and interim determinations. The water company must appeal to the Commission within two months of us making our decision. The Commission aims to make its decision within six months, but can extend this by a further six months.

Can price limits be changed more than once very five years?

Although we set price limits for the five years from 2010 to 2015, we recognise that unforeseen circumstances, which are outside the control of an efficient company, could change costs significantly (both up and down). To deal with this, we have three mechanisms to protect the companies and their customers from material changes in costs between price reviews.

• Interim determinations (IDoKs). These allow the companies, or us, to request revised price limits if circumstances change after price limits are set. Any changes must make a difference of at least 10% of a company’s turnover. (See our report, ‘Future water and sewerage charges 2010-15: Final determinations’.)
• Substantial effect determinations. These allow the companies, or us, to request revised price limits if an event beyond a company’s control affects its turnover by at least 20%.
• Logging up and down. This makes adjustments at the start of the next price limit period for changes in outputs the companies had to deliver during the previous price limit period.

Further details about interim determinations are available from our interim determinations page.

What are current price limits?

In November 2009, we set price limits for each company for the years 2010-11 to 2014-15. We published these limits and explained the reasons for them in our report, ‘Future water and sewerage charges 2010-15: Final determinations’.

Bristol Water asked us to refer its price limits to the Competition Commission for review. And the Competition Commission changed Bristol Water’s price limit starting from year 2011-12 to 2014-15. More information on the Competition Commissions decision can be found in their report, Bristol Water plc Price Limits Determination. 

The linked table shows the price limits and average increase in charges for 2011-12. The average price limit for all the companies is 5.1%. This includes an inflation rate of 4.71%.

The overall price limit column shows the total amount by which we have allowed the companies to increase their charges. The next column shows the amount by which they have actually increased their charges. The difference between the two is shown in the last column as unused price limit (K).

A price limit abatement is when a company does not raise its charges by the full price limit for the year, so charges are lower than they would otherwise have been. If the abatement is voluntary, the companies can carry the unused price limit forward to the next year. Northumbrian Water has not used up its full price limits for 2011-12.

What is the effect of price limits on my bill?

The ‘average household bills 2011-12’ leaflet shows details of average household bills for each company for 2010-11 and 2011-12. The tables also show the percentage changes in average household bills for combined water and services for water and sewerage companies and the percentage change in water bills for water only companies.

The leaflet also has a graph that shows average bills from 1989 to 2011 in today’s prices, highlighting the trend in bills over the period.

We project that the average household bill for 2011-12 in England and Wales for water and sewerage services will be £356 (£174 for water and £182 for sewerage).

The level of your bill will depend on where you live and your own circumstances, for example whether you have a meter or not. Your bill is unlikely to be the same as the average for your company.

The level of household bills varies across England and Wales. Wessex Water has the highest average bill for water at £218 and Portsmouth Water has the lowest at £91. Average sewerage bills range from £300 for South West Water to £123 for Thames Water.

Changes to non-household bills are broadly similar to those in of household bills.