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 gave 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. We provided further clarity by:
- updating a number of these models;
- publishing new models; and
- bringing the published models together to make them easier to locate.
The models are not finalised and are draft at this stage.
On 4 March 2020 we published a formal consultation on the document (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. We are also consulting on the models that calculate the reconciliations.
The table below sets out the various PR19 reconciliation models, together with a brief description and details of the latest version of the model. We will update this page as the models are published and updated.
If you have a question about a specific model or have general comments, you can contact us using [email protected].
|Model name||Publication date||Description|
|In period adjustments model||Published 4 March 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).|
|PR19 blind year ODI difference model||Published 4 March 2020||This model calculates the difference between the net outcome delivery incentives (ODIs) for 2019-20 for each price control as forecast for our PR19 final determinations and the net ODI payments for each price control that would have been calculated if actual performance for 2019-20 had been known.|
|PR19 Revenue forecasting incentive model||Updated 4 March 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||Updated 4 March 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||Updated 4 March 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 4 March 2020||This model 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.|
|Bioresources revenue reconciliation model||Updated 4 March 2020||This model 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.|
In-period and end-of-period reconciliations
|ODI performance model||Updated 4 March 2020||This model will determine how we will reconcile the outcome delivery incentives (ODI’s) 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 4 March 2020||This model that shows how we could reconcilie revenues over 2020-2025 at PR24.|
|PR19 Water trading incentive model||Updated 4 March 2020||This model calculates PR19 water trading incentives for qualifying trades starting in 2020-2025.|
|Developer services model||Updated 4 March 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 4 March 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 4 March 2020||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 4 March 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 4 March 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.|
|Tax reconciliation||Updated 4 March 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 4 March 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 4 March 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 4 March 2020||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’|
|Innovation competition||Published 4 March 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. This is an emerging area where we will continue to consult separately in more detail.|
|Havant Thicket||Updated 4 March 2020||This model sets out 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’.|