IB 11/15 Ofwat publishes PR14 reconciliation rulebook

Ofwat has today published its reconciliation rulebook as part of the 2014 price review (PR14) process, which concluded in December 2014. The 2014 price review set revenues and outcomes for the water and wastewater companies in England and Wales for the period 2015-20, with £44 billion set to be invested in improving services.

At the conclusion of the price review Ofwat committed to publishing a rulebook as it acknowledged that PR14 represented a significant evolution of the historical approach to setting price controls. The rulebook provides investors and companies with the clarity to help facilitate investment in the long term interest of customers.

Following consultation in March, the rulebook sets out how Ofwat proposes to reconcile incentives set as part of PR14 and company performance at the next review in 2019. The rulebook also sets out the reconciliation approach to the factors not reconciled from the 2009 price review.

The rulebook includes how Ofwat proposes to manage:

  • outcome delivery incentives (ODIs), which provide companies with rewards for achieving stretching performance targets and compensate customers if performance is below performance targets
  • wholesale total expenditure (totex) sharing, where company over- and underperformance is shared with customers
  • wholesale revenue forecasting incentive mechanism (WRFIM), which provides financial incentives for companies to provide accurate forecasts, and ensures under- and over-recovery is reconciled
  • PR09 reconciliation (blind year adjustments)
  • household retail, where the total revenue allowance is adjusted for actual customer numbers

The rulebook does not include Ofwat’s conclusions on the reconciliation of the PR09 capital expenditure incentive (CIS) scheme. The Competition and Markets Authority (CMA) is currently considering Bristol Water’s price determination appeal. While the CMA has provisionally decided not to address this issue as part of the appeal, Ofwat considers it would be appropriate to conclude on the CIS issue later in the year when the CMA’s process has ended.

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Notes to Editors

1. The Water Services Regulation Authority (Ofwat) is the economic regulator of water and sewerage companies in England and Wales. Its role is to help the sector build trust and confidence with customers, the environment and wider society. It exercises its powers in a way that it judges will protect the interests of consumers, promote value and safeguard future resilient water and sewerage services by allowing efficient companies to carry out their functions properly, and finance them.

2. This release may be of interest to those following these companies: Affinity Water, Anglian Water Services Ltd, Bristol Water plc, Cholderton and District Water Company Ltd, Dee Valley Water plc, Dŵr Cymru Cyfyngedig (Welsh Water), Northumbrian Water Ltd, Portsmouth Water plc, Sembcorp Bournemouth Water Ltd, Severn Trent Water Ltd, South East Water Ltd, Southern Water Services Ltd, South Staffordshire Water plc, South West Water Ltd, Sutton & East Surrey Water plc, Thames Water Utilities Ltd, United Utilities Water Ltd, Wessex Water Services Ltd, and Yorkshire Water Services Ltd.

3. Further information on the consultation can be found on the Ofwat website – www.ofwat.gov.uk.

4. Media enquiries to Ofwat Press Office: Ben Fisher on 0121 644 7642 or [email protected]

5. Analyst enquiries to Elinor Mathieson on 0121 644 7814 or [email protected]