Ofwat publishes independent report on targeted review of 2011-12 accounting separation cost allocations

Why has Ofwat commissioned this report?

The purpose of this review was to:

  • provide us with confidence that companies’ accounting separation data is robust enough for us to set retail price controls at the 2014 price review
  • ensure our future reporting requirements are fit for purpose.

The review focused on the boundaries between the retail and wholesale business units and between household and non-household customers.

What were the conclusions?

The key conclusions of the review are as follows.

  • Core customer services costs are robust and comparable.
  • Sources of inconsistency include costs of activities at the retail – wholesale boundary and the allocation of shared costs. Some affect line by line comparability, others affect overall retail costs.
  • The level of information disclosed with the data varies widely between companies.
  • The impact of inconsistencies on retail costs is small (around 2%).

To improve the robustness, comparability and transparency of the retail cost information, the report recommended that we:

  • implement additional audit procedures for the retail data
  • require companies to disclose more information in their accounting separation methodology statements
  • clarify our guidance in areas where there is inconsistency between companies


How will we use the report findings?

We agree that the recommendations should improve the robustness and consistency of companies’ retail data. This additional transparency will also make the data more useable for all stakeholders.

We have provided individual feedback to all companies on the findings of the review. We intend to clarify our guidance for business plan reporting and for the 2013-14 regulatory accounts. We also intend to:

  • develop and implement additional requirements for information disclosed in companies’ accounting separation methodology statements
  • work with auditors to develop agree audit procedures for companies’ retail data for the 2013-14 regulatory accounts.


Further information

Targeted review of accounting separation cost allocations Ernst and Young