PR19 reconciliation models

We use data models to calculate water companies’ price controls – and certain information we need to set those controls.

We are currently setting companies’ prices at 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 and reflect this in the price controls we set from 2025.

Our 2019 price review (PR19) enables, incentivises and encourages water companies to find new and better ways of delivering their services, so that customers will get more of what really matters to them.

  • On 3 September 2018 companies’ submitted business plans setting out what they propose to deliver for the period 2020-25.
  • On 31 January 2019 we published our initial assessment of business plans.
  • On 11 April 2019 we published our Draft Determinations for the Fast Track companies: Severn Trent Water, South West Water and United Utilities. These companies all submitted plans that set a new standard for the sector.

PR19 will set our draft and final determinations of the price, service and incentive package for water companies for the period 2020-25. By providing financial, procedural and reputational incentives, PR19 allows companies that submit the best plans to benefit – and aligns the interests of companies, investors and customers. What matters most to customers is the delivery of these plans. So the strongest incentives are associated with the successful delivery of business plans; for example, through outcome outperformance and underperformance payments, and through cost-sharing rates.

The PR19 Final methodology document set out how we would operate the price controls and some of the key incentives for the 2025-25 period. We want to give stakeholders early sight of how we could go about implementing these controls and incentives, and in particular how we will reconcile water companies’ actual revenue with the amount that they should collect. We made progress towards this by publishing a number of models last year. Now we are providing further clarity by:

  • updating a number of these models;
  • publishing new models; and
  • bringing the published models together to make them easier to locate.

In general, the models are not finalised and are draft at this stage. For this reason, we would welcome specific comments from stakeholders to be addressed to the contact details on each individual model’s cover sheet. General comments from stakeholders can be directed to Cheryl.Steventon@ofwat.gov.uk. We plan to update many of these models further and to publish the outstanding models in the summer and autumn. We will consult on these models where appropriate.

The table below sets out the various PR19 reconciliation models, together with a brief description and details of the latest version of the model or when we expect to publish an updated model. We will update this page as the remaining models are published.

Model name Publication date Description
Cost sharing mechanism – ex ante allowances Due Summer 2019 This is the feeder model we use to reflect the cost sharing mechanism in PR19 totex allowances used for draft and final determinations.
Cost sharing mechanism – reconciliation Due Summer 2019 This is the model we will use at PR24 to reconcile actual performance against the totex allowances from PR19. An early version of this model was published on 13th December 2017.
ODI reconciliation model Due Autumn 2019 This model will determine how we will reconcile the outcome delivery incentives (ODI’s) that we will specify in our determinations.
Cmex/Dmex Due Autumn 2019 These calculations will determine how we will reconcile the C-MeX and D-MeX financial incentives. These incentives are designed to encourage companies to provide a good customer experience to their residential (C-MeX) and developer customers (D-MeX). C-MeX and D-MeX are asymmetric revenue adjustments, applied in-period. C-MeX is applied to residential retail revenue; D-MeX is applied to developer services revenue. Further information can be found on our ‘Customer and develop service experience’ webpage, and in Appendix 3 of the final methodology document. We have consulted on further aspects of the underlying methodology in the draft determinations in Annex 5 (p189 onwards) of the outcomes policy appendix. Each company specific document also references C-MeX and D-MeX including each companies’ commitment.
PR19 Revenue forecasting incentive model Updated 18 July 2019 This is a draft model that 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.
Developer services model Updated 18 July 2019 This is a draft model which is designed to reconcile developer services revenues within the network-plus control for PR19. We explain further details in ‘PR19 draft determinations: Our proposed approach to regulating developer services’.
Bioresources forecasting accuracy incentive model Published 8 June, 2018 This is a draft model that shows how we could apply the bioresources forecasting accuracy incentive. The forecasting incentive imposes a penalty on companies to all differences between the central forecast and the outturn sludge production where the outturn sludge production over the control period is more than 6% greater or less than the forecast sludge production. Appendix 6 (bioresources control) of our PR19 Methodology provides background information.
Bioresources revenue reconciliation model Published 18 July 2018 This is a draft model that shows how bioresources revenue reconciliation could work over 2020-2025. It combines and simplifies the ‘Bioresources modified revenue model’ and the ‘Bioresources in-period revenue correction model’. The draft model  shows how the average revenue control could be modified each year based on the difference between outturn and forecast sludge production. In addition, the model shows how we could adjust allowed bioresources revenue in one year to correct for any under or over-recovery of revenue in earlier years. Appendix 6 (bioresources control) of our PR19 Methodology provides background information.
PR19 Water trading incentive model Published 8 June, 2018 This is a draft model for companies to fill in new qualifying water trades and calculate their respective export and import incentives for PR24 (and after if applicable). Water trading incentives are primarily aimed at trades between large appointed companies. All new arrangements will be defined in a company’s trading procurement code.
New cost of debt reconciliation model Updated 18 July 2019 This model, which is an updated version of the one which was published alongside the final methodology following consultation, 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 18 July 2019

Consultation alongside draft determinations for slow track and significant scrutiny companies

We explained our proposed default Gearing Outperformance Sharing mechanism in our ‘Putting the sector in balance’ position statement, published in July 2018. This reconciliation model contains the calculations that underpin the default mechanism. We are currently consulting on the calculations contained in this model alongside the draft determinations for slow track and significant scrutiny companies.
Tax reconciliation Updated 18 July 2019 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.

Bilateral entry adjustment (BEA) Published 11 April 2019 This is a draft model that shows how we could 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.
Residential retail reconciliation model Updated 18 July 2019 This is a draft model that shows how we could reconciliation revenues over the PR19 period at PR24. It currently retains key design features of the PR14 retail reconciliation model.
WINEP reconciliation model Due Autumn 2019 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 FD. Chapter 9 and Appendix 11 (Securing cost efficiency) of our PR19 Methodology provides background information.

 

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