We use data models to calculate water companies’ price controls – and certain information we need to set those controls.
Companies’ revenues were set in our 2019 price review for 2020-25. As part of this, we have published models that set out how we will reconcile companies’ performance in 2020-25.
On 4 March 2020 we published a formal consultation on the ‘reconciliation rulebook’ setting out our approach to the reconciliations that will be required during and at the end of the 2020-25 price control to take account of past performance and the various price control incentive mechanisms, and consulted on the models that calculate the reconciliations.
We have reviewed all comments made and now set out our response to the consultation in PR19 reconciliation rulebook consultation – final policy approach and response. For smaller technical comments made with reference to individual models, responses can be found in the Minor Issues Log and the table below sets out the various PR19 reconciliation models, together with a brief description and details of each model.
Guidance on the overall process and detailed mechanics for each reconciliation model can be found in the PR19 Reconciliation Rulebook: Guidance Document.
If you have a question about a specific model, you can contact us using [email protected].
|Model name||Publication date||Description|
|In period adjustments model||Published 2 December 2020||This model adjusts price controls to reflect in-period outcome delivery incentives including the customer measure of experience (C-MeX) and the developer services measure of experience (D-MeX).|
|Revenue forecasting incentive model||Published 2 December 2020||This model shows how we could apply the Revenue Forecasting Incentive (RFI). The RFI is a symmetric revenue adjustment applied in-period to reconcile any revenue under or over-recovery in an earlier year. Where differences between actual and allowed revenues are greater than 2%, the RFI applies a financial penalty. The RFI is applied to the network plus and water resources controls. Appendix 7 (wholesale revenue incentives) of our PR19 Methodology provides background information.|
|C-MeX||Published 2 December 2020||The customer measure of experience (C-MeX) is designed to incentivise companies to provide excellent levels of service to their residential customers. Based on their relative performance, each company can receive outperformance or incur underperformance payments each year.
Find out more information on our webpage for C-MeX and D-MeX.
|D-MeX||Published 2 December 2020||The developer services measure of experience (D-MeX) is designed to incentivise companies to provide excellent levels of service to their developer customers. Based on their relative performance, each company can receive outperformance or incur underperformance payments each year.
Find out more information on our webpage for C-MeX and D-MeX
|Bilateral entry adjustment (BEA)||Updated 2 December 2020||This model shows how we adjust relevant companies’ revenues should bilateral entry in the water resources market occur. Appendix 5 (water resources control) of our PR19 Methodology provides background information.|
|Bioresources revenue reconciliation model||Updated 2 December 2020||This model shows how bioresources revenue reconciliation work over 2020-25. The model shows how the average revenue control is modified each year based on the difference between outturn and forecast sludge production. In addition, the model shows how we adjust allowed bioresources revenue in one year to correct for any under or over-recovery of revenue in earlier years. Finally, it also shows how we apply the bioresources forecasting accuracy incentive. Appendix 6 (bioresources control) of our PR19 Methodology provides background information.|
In-period and end-of-period reconciliations
|ODI performance model||Updated 2 December 2020||This model determines how we will reconcile the outcome delivery incentives (ODIs) that have been accrued by companies in each year of performance, based on the performance commitment set in the PR19 final determinations.|
|Residential retail reconciliation model||Updated 2 December 2020||This model shows how we reconcile revenues over 2020-25 at PR24.|
|PR19 Water trading incentive model||Updated 2 December 2020||This model calculates PR19 water trading incentives for qualifying trades starting in 2020-25.|
|Developer services model||Updated 2 December 2020||This model is designed to reconcile developer services revenues within the network-plus control for PR19. We explain further details in ‘PR19 final determinations: Our approach to regulating developer services’.|
|Water industry national environment programme (WINEP) reconciliation model||Updated 2 December 2020||The purpose of this model is to account for the impact of ministerial decisions on the scale of companies’ environmental enhancement programmes where this differs from our assumptions made at final determinations. Chapter 9 and Appendix 11 (Securing cost efficiency) of our PR19 Methodology and section 11.5 of our PR19 final determinations – Securing cost efficiency technical appendix provide background information.|
|Cost of new debt reconciliation model||Updated 2 December 2020||This model will index the cost of new debt by reference to a market benchmark in 2020-25, with an end of period reconciliation adjustment.|
|Gearing outperformance sharing mechanism||Updated 2 December 2020||We explained our proposed default Gearing Outperformance Sharing mechanism in our ‘Putting the sector in balance’ position statement, published in July 2018. The mechanism is now updated with a glide path on the trigger, as described in the ‘Aligning risk and return technical appendix’, published in December 2019. This reconciliation model contains the calculations that underpin the updated mechanism.|
|Cost reconciliations model||Published 2 December 2020||This is the model we will use at PR24 to reconcile actual performance against the totex allowances from PR19.|
|Tax reconciliation||Updated 2 December 2020||Our PR19 methodology introduced a tax true-up mechanism, which will take account of any changes to corporation tax or capital allowance rates after we make our final determinations, as these are significant drivers of the tax allowance.
We will recalculate the tax allowance for each year, to reflect changes to either the headline corporation tax rate or to the writing down allowances available on capital expenditure. To do this, we will rerun the PR19 financial model using the totex allowances, PAYG and RCV run-off rates (set out in the final determination). We will make these true-up adjustments at the end of the period, at the same time as we make true-up adjustments in respect of the cost of debt.
|Land sales||Updated 2 December 2020||This model calculates the adjustment to the Regulatory Capital Value (RCV) as at 1 April 2020 (the RCV midnight adjustment) for any disposal of land by the regulated business in the years from 2019-20 to 2024-25.|
|RPI-CPIH Wedge True Up model||Updated 2 December 2020||This is the model we will use in PR24 to reconcile for the difference between the actual RPI-CPIH (measures of inflation) wedge observed over the price control period, and the RPI-CPIH wedge included in the final determination. It calculates the annual difference in the wedge and its impact on the RCV, allowed run-off revenue and allowed return revenue. Our methodology for the 2019 price review Appendix 12 (aligning risk and return) provides background information.|
|Strategic regional water resources reconciliation model||Updated 2 December 2020||This is the model that illustrates how we will reconcile revenue allowances for the strategic regional water resource options. The reconciliation is required to account for the progression of strategic options through the gated process. More information about our final approach to strategic options is set out in ‘PR19 final determinations – Strategic regional water resource solutions appendix’|
|Innovation competition||Published 2 December 2020||In December 2019, we confirmed our decision to make up to £200m available for innovation activities for the period 2020-2025 through the introduction of an innovation competition. The model calculates the total amount of unused funds to be redistributed to individual companies’ customers. This is done in line with the original allocation methodology set out in PR19 Final Determinations.|
|Havant Thicket||Updated 2 December 2020||This model sets out how we will reconcile revenue allowances for the activities related to the Havant Thicket reservoir. More information about our approach is set out in ‘PR19 final determinations – Havant Thicket appendix’.|