PR19 reconciliation models

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

We have now set companies’ prices 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 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.
  • Other companies, whose original plans required more significant interventions, submitted revised plans to us on 1 April 2019. We published their draft determinations on 18 July 2019.
  • On 16 December 2019 we published our final determinations. These set out a five-year price and service package that will enable water companies to deliver more for people today, invest for future generations and at the same time operate more efficiently and reduce bills.

At PR19 we 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 in early 2020. We will consult on these models where appropriate. But we would appreciate any feedback on any of the models that we have published before the formal consultation. This should be sent through to the above email address.

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 and updated.

We will also publish a document (the ‘reconciliation rulebook’) setting out our approach to the reconciliations that will be required at the end of the 2020-25 price control to take account of past performance and the various price control incentive mechanisms.

Model name Publication date Description
Cost sharing mechanism – reconciliation Expected January 2020 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 Published indicative model 16 December 2019. Update due early 2020. This model will determine how we will reconcile the outcome delivery incentives (ODI’s) that we will specify in our determinations.
Cmex Published 20 December 2019 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.

Dmex Published 20 December 2019 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

PR19 Revenue forecasting incentive model Updated 10 January 2020 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.
RPI-CPIH Wedge True Up model Updated 12 March 2018 This model illustrates the operation of the true up for differences between actual and forecast RPI/CPIH (measures of inflation) wedge may work in practice. It isolates the effect of variances in the wedge, and then demonstrates that the true up applies a revenue adjustment to correct for this. This model was originally published alongside the PR19 methodology; we will consider whether any further update is necessary when we publish the reconciliation rulebook. Appendix 12 (aligning risk and return) 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 final determinations: Our approach to regulating developer services’.
Bioresources revenue reconciliation model Updated 16 December 2019 This is a draft model that shows how bioresources revenue reconciliation could work over 2020-2025. It combines and simplifies the previously published ‘Bioresources modified revenue model’, the ‘Bioresources in-period revenue correction model’ and the ‘Bioresources forecasting accuracy incentive 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. Finally, it also shows how we could apply the bioresources forecasting accuracy incentive. Appendix 6 (bioresources control) of our PR19 Methodology provides background information.
PR19 Water trading incentive model Updated 16 December 2019 This is a draft model that illustrates how we could calculate PR19 water trading incentives for qualifying trades starting in 2020-2025.
New cost of debt reconciliation model Updated 18 December 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 24 January 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.
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) Updated 16 December 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 16 December 2019 This is a draft model that shows how we could reconcilie revenues over the PR19 period at PR24.
WINEP reconciliation model Published 2 September 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 final determinations. Chapter 9 and Appendix 11 (Securing cost efficiency) of our PR19 Methodology provides background information.
Strategic regional water resources reconciliation model Published 16 December 2019 This is a draft 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’
Havant Thicket Published 16 December 2019 This is a draft model that illustrates how we will reconcile revenue allowances for the activities related to the Havant Thicket reservoir (“Havant Thicket Activities”). More information about our approach is set out in ‘PR19 final determinations – Havant Thicket appendix’.
Land sales Published 20 December 2019 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.
Innovation competition Due Spring 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. We will need to make a number of adjustments at the end of the period, for example to return any unspent funds to customers. These will sit within the Cost Sharing model. This is an emerging area where we will continue to consult separately in more detail.