Method and modelling

We have set out our final approach to setting price controls for 2015-20. This also includes:

  • our expectations for the information each water company should include in its business plan, setting out its proposals for the next five years
  • how we will review and challenge those plans

We have also developed a financial model to help us assess companies’ business plans.

Setting price controls for 2015-20 – final methodology and expectations for companies’ business plans

Customers of water and sewerage companies deserve excellent service at a fair price. But most customers in England and Wales are unable to choose their suppler and have to receive their services from one or more monopoly suppliers. So it our role is to protect the interests of current and future customers.

Following extensive engagement with our stakeholders, we are now setting out our final approach to setting price controls for 2015-20. This also includes:

  • our expectations for the information each water company should include in its business plan, setting out its proposals for the next five years
  • how we will review and challenge those plans

Final methodology and business planning expectations
Setting price controls for 2015-20 – final methodology and expectations for companies’ business plans
Appendix 1: Integrating the calibration of outcome delivery and cost performance incentives
Appendix 2: Setting allowed household retail revenues in practice
Appendix 3: Trading and procurement codes – requirements and advice on principles to be included
Appendix 4: Network management questions
Appendix 5: Guidance on supporting data tables
Appendix 5a: Data tables – water
Appendix 5b: Data tables – wastewater
Appendix 5c: Data tables – retail
Appendix 5d: Data tables – appointee
Setting price controls for 2015-20 – final methodology and expectations for companies’ business plans: A summary briefing note for stakeholders

Further information

Updated Price Limits Impact Assessment, PriceWaterhouseCoopers 2013

Methodology and business planning briefing sessions

We held workshops with key stakeholders to explain our methodology and expectations of companies’ business plans. Summaries of the questions and answers raised at the workshops are available below.

2014 price review financial model

The 2014 price review is our process for setting the price and service package (the ‘price controls’) that each of the companies must deliver in each of the five years between 2015 and 2020.

As part of the price review we have developed a financial model to help us assess companies’ business plans. The three main purposes of the financial model are to:

  • determine the wholesale price controls
  • calculate the revenues arising from the retail price controls
  • help assess financeability of the company

Following external review and feedback from stakeholders we have made some further minor changes to the model. A revised version of the model, and release notes explaining all the changes that have been made since it was first published are available below.

We have also published information about our feeder models and – following on from our risk and reward guidance – our risk assessment tool.

  • The risk assessment tool tests the impact of various scenarios on companies’ returns and customer’s bills. We use it to understand how much risk companies have included in their business plans and how this risk is split between the company and its customers.
  • The feeder models give transparency on how data flows from the business plan data tables, through the feeder models into the financial model.

We expect companies to use both the financial model and risk assessment tools, and to explain any variances between the results using our model and any models they have created themselves. We have published the feeder models  to explain more fully our approach.

If you have comments on any of the models, please send them to [email protected] or if you are a water company please contact your respective portfolio lead.

Risk assesment tool version 2
Risk assessment tool version 2
Financial model version 6
PR14 financial model rulebook
PR14 financial model user guide
PR14 financial model release notes
Companies’ populated PR14 financial models
PR14 feeder models

Note that the financial model is an xlsb spreadsheeet and the risk assessment tool is an xlsm spreadsheets. If you are having problems opening them, we suggest you try downloading the file, and renaming it with the correct file extension (xlsb or xslm respectively), and then opening it in Excel. Please note that they will not work as xlsx files.

Questions and answers about the final methodology and preparing business plans

Clarifications requested by companies and other stakeholders

Information notices about our 2014 price control methodology

Information notices are formal documents that alert our stakeholders to a change in the way that we regulate the water and sewerage sectors in England and Wales.

Setting price controls for 2015-20 – risk and reward guidance

As part of our 2014 price review process, on 2 December 2013 water companies submitted business plans for the services they plan to deliver for 2015-20.
We are now carrying out a risk-based review of their business plans. Our risk-based review will:

  • assign each element of each company’s business plan to one of three processes – enhanced, standard or resubmission – which determines the likely level of scrutiny and challenge of that element
  • assign each company to one of three categories – enhanced, standard or resubmission – which determines procedural, reputational and financial
    benefits

As part of that review, we came to the view that company proposals on risk and reward were not in line with our expectations. So, we have now issued further guidance on risk and reward, including our view on the cost of capital and other key financial parameters.

In March 2014, any company that passes our tests for costs, outcomes, affordability and Board assurance will pre-qualify for enhanced status. The Board of the company will then have to decide whether to accept this risk and reward guidance and in so doing gain enhanced status. Any pre-qualified company that chooses not to accept the guidance will then be a standard company and follow the standard price review process.

Any pre-qualifying company that wishes to adopt the guidance must revised certain aspects of their business plans and  submit certain data tables.

Further information

IB 02/14: Ofwat publishes guidance on risk and reward
IB 28/13: Change to Ofwat’s price review process
Setting price controls for 2015-20 – delivery plan
Investor meeting 29 January 2014
Transcript of investor conference call 27 January 2014
Ofwat Board minutes – meeting held 23 January 2014
Water retail net margins, PriceWaterhouseCoopers January 2014

Revised data table requirements for pre-qualifying companies

As part of our 2014 price review process, on 2 December 2013 water companies submitted business plans for the services they plan to deliver for 2015-20.  We are now carrying out a risk-based review of their business plans.  In March 2014, any company that pass our tests for costs, outcomes, affordability and Board assurance will pre-qualify for enhanced status. The Board of this company will then have to decide whether to accept our risk and reward guidance and in doing so gain enhanced status benefit from additional financial incentives for outperformance.

We said that we would require pre-qualifying companies to send us updated tables to allow us to model their updated business plans. We have provided new templates for pre-qualifying companies to complete. We have also provided guidance explaining how these tables have changed from the original business plan requirements.

It is essential for pre-qualifying companies to use these new tables, as there are minor differences from the original tables – in some cases asking for more detail in order to allow us to better understand plans or calculations. These tables also include validation checks so that we can assess revised plans quickly and reduce need for queries to companies.

We will announce pre-qualifying companies on Monday 10 March 2014. Those who wish to accept our risk and reward guidance must then submit revised tables by Monday 17 March 2014.

Note that the data tables are in an xlsm spreadsheet. If you are having problems opening it, we suggest you try downloading the file, and renaming it with a .xlsm file extension, and then opening it in Excel. Please note that it needs to be xlsm, not xlsx.

Revised data table requirements following Ofwat’s risk-based review  (amended 2 June 2014)

As part of our 2014 price review process, on 2 December 2013 water companies submitted business plans for the services they plan to deliver for 2015-20.

Following our risk-based review, all companies need to submit revised data tables. We have also provided guidance explaining how these tables have changed from the original business plan requirements.

It is essential for pre-qualifying companies to use these new tables, as there are minor differences from the original tables – in some cases asking for more detail in order to allow us to better understand plans or calculations. These tables also include validation checks so that we can assess revised plans quickly and reduce need for queries to companies.

The table below explain when companies must submit revised information to us.

Submission date Enhanced companies June draft determination companies August draft determination companies
11 April 2014 Optional submission:
Retail ACTS R3
Cost recovery A19
2 May 2014 SIM data A24 Outcomes
Water data set
W1, W2, W2a, R1, R2, R2a
Wastewater data set
S1, S2, S2a, R1, R2, R2aWholesale
Water data set
W3, W3a, W4, W9, W10, W11, W13, W14, W15, W16, W17, W18, W19, W20, W21, W22
Wastewater data set
S3, S3a, S4, S6, S9, S10, S11, S13, S14, S15, S16, S17, S18, S19, S20, S21, S22
Appointee
A1, A2, A3, A7, A8, A9, A10, A11, A12, A13, A14, A15, A18, A19, A20, A20a, A22, A23, A24, R5Optional submission:
Retail ACTS R3
Cost recovery A19
SIM data A24
27 June 2014 Wholesale
Water data set
W3a, W13, W14, W15, W16, W17, W20, W21, W22Wastewater data set
S3a, S13, S14, S15, S16, S17, S20, S21, S22Appointee
A7, A9, R4If not submitted in April:
Retail ACTS R3
Cost recovery A19
 

Default tariffs R4

If not submitted in May:
Retail ACTS R3 and
updated Cost recovery A19

Outcomes
Water data set
W1, W2, W2a, R1, R2, R2a
Wastewater data set
S1, S2, S2a, R1, R2, R2aWholesale
Water data set
W3, W3a, W4, W9, W10, W11, W13, W14, W15, W16, W17, W18, W19, W20, W21, W22
Wastewater data set
S3, S3a, S4, S6, S9, S10, S11, S13, S14, S15, S16, S17, S18, S19, S20, S21, S22
Appointee
A1, A2, A3, A7, A8, A9, A10, A11, A12, A13, A14, A15, A18, A19, A20, A20a, A22, A23, R3, R4, R5

2014 price review risk-based review – internal methodology