The aim of the future price limits project is to answer the question:
How should we carry out price controls in the future, in order to achieve our strategic goals?
How we decide to set future price or charge limits is important because some elements of water and sewerage supply chain are natural monopolies and we will need to control their prices for the foreseeable future. The way that we control prices and services will have a major effect on the ability of water companies to meet the challenges of the future.
We completed this project in spring 2012. Our current review of prices will implement the principles we developed.
Developing a framework
The project was not intended to produce a detailed methodology or a model that can be used to set price or charge limits. Instead we produced a framework within which we can carry out a price control. This framework must be robust so that it will work in a wide range of circumstances.
We are unlikely to be able to carry out all our thinking on how we will carry out a price control at the first price or charge review following this project. However, we expect that will make our direction of travel clear.
Elements of price control
Our review consisted of a small number of sub-projects which consider fundamental aspects of price controls. Within each sub-project we will develop a series of options for that element of the price controls and will test those options against our scenarios. One way we will decide between options is how well they deal with the different scenarios, and if an option does not work robustly with a reasonable set of scenarios, we will not pursue it.
The elements we considered in the first stage of the project were:
- Form of control –what types of price or revenue controls will we use?
- Regulated or unregulated businesses – how should we treat regulated and unregulated activities to achieve the objectives we set out for our price controls
- Risk allocation – how should the risks within the sector be shared between stakeholders?
- Incentives – what are the best ways to encourage the behaviour and outcomes that we need to achieve our strategic goals?
- Customer engagement – how should we involve customers and other groups in setting price controls? Including our customer engagement policy.
- Outputs and outcomes – how should we define what price limits will deliver?
We also set out a preliminary model that could be used to set price limits and held workshops on key elements.
In the second and third phases of the project, we have considered:
- Capex bias – are there factors that cause companies to spend capital when perhaps they shouldn’t?
- Capex and opex – which activities should be treated as capital expenditure (capex), or investment and which as operational expenditure (opex), or running costs? We commissioned independent reports that look at tools we could use when we assess these costs.
- Cost of capital and risk mitigates – in what ways can, or should we reduce the level of risk in the water and sewerage sector, and how should price controls ensure investors are appropriately rewarded for their investment in the sec?
- Retail/wholesale package – how could we split price controls between the retail and wholesale elements of supply?
- Efficiencies of scope
Recommendations from previous major reviews
We considered all the relevant recommendations resulting from the recent reviews of water, sewerage and regulatory issues:
- Pitt review: Learning lessons from the 2007 floods
- Cave review: Competition and innovation in water markets
- Walker review: Household charging for water and sewerage services
- Gray review: Review of Ofwat and the Consumer Council for Water
We completed this project in June 2012. The principles we developed have been applied in our 2014 price review.
Bristol Water’s response to ‘Defining retail services: a discussion paper’
13/Jul/2012 (PDF – 269 KBytes)
Future price limits – what does it mean for non-household customers?
12/Jun/2012 (PDF – 209 KBytes)
Future price limits – what does it mean for investors?
12/Jun/2012 (PDF – 217 KBytes)
Future price limits – what does it mean for household customers?
12/Jun/2012 (PDF – 208 KBytes)
Future price limits – what does it mean for the environment?
12/Jun/2012 (PDF – 204 KBytes)
Future price limits – statement of principles Appendix 2: Summary of responses to the consultation
15/May/2012 (PDF – 737 KBytes)
Future price limits – statement of principles
15/May/2012 (PDF – 769 KBytes)
Future price limits – statement of principles Appendix 1: Impact assessment
15/May/2012 (PDF – 840 KBytes)
Future price limits – a summary
15/May/2012 (PDF – 276 KBytes)
From principles to price setting – next steps
15/May/2012 (PDF – 366 KBytes)
Future price limit – statement of principles
15/May/2012 (HTML – 5 KBytes)
Future price limits – enabling modifications Industry workshop slides 6 February 2012
22/Feb/2012 (PDF – 162 KBytes)
Water trading working group 27 January 2012
10/Feb/2012 (PDF – 997 KBytes)
Outcomes, risk, cost assessment and totex approach workshop 13 January 2012
16/Jan/2012 (PDF – 748 KBytes)
Future price limits water only companies framework seminar 12 January 2012
16/Jan/2012 (PDF – 513 KBytes)
Water Industry Act 1991, section 13 proposals by Ofwat to modify the conditions of appointment of all water only and water and sewerage companies
21/Dec/2011 (PDF – 329 KBytes)
Future price limits – a consultation on the framework
23/Nov/2011 (HTML – 3 KBytes)
Ofwat publishes independent report on increasing tariff choice
12/Oct/2011 (HTML – 2 KBytes)
Future price limits – preliminary model consultation responses
15/Sep/2011 (HTML – 4 KBytes)
Future price limits workshops August and September 2011
14/Sep/2011 (HTML – 714 Bytes)
Ofwat publishes independent reports on cost assessment and the use of comparators
16/Jun/2011 (HTML – 4 KBytes)
Cost of capital and risk mitigates – a discussion paper
9/Jun/2011 (PDF – 548 KBytes)
Capex bias in the water and sewerage sectors in England and Wales – substance, perception or myth? A discussion paper
17/May/2011 (PDF – 537 KBytes)
Future price limits – a preliminary model: informal consultation
5/Apr/2011 (PDF – 419 KBytes)
FPL preliminary model – illustrative financial modelling
4/Apr/2011 (PDF – 35 KBytes)
Financeability and financing the asset base – a discussion paper
29/Mar/2011 (PDF – 335 KBytes)
Financeability and financing the asset base – illustrations of the financeability problem
29/Mar/2011 (XLS – 50 KBytes)
Ofwat publishes independent reports on the role of the system operator
16/Mar/2011 (HTML – 6 KBytes)
Inputs, outputs and outcomes – value chain mapping
15/Mar/2011 (XLS – 172 KBytes)
Inputs, outputs and outcomes – what should price limits deliver? A discussion paper
15/Mar/2011 (PDF – 288 KBytes)
Future price limits workshop 17 February 2011
18/Feb/2011 (HTML – 1017 Bytes)
Future price limits stakeholder workshop slides 17 February 2011
18/Feb/2011 (PDF – 432 KBytes)
The form of the price control for monopoly water and sewerage services in England and Wales – a discussion paper
22/Oct/2010 (PDF – 804 KBytes)
Sustainable water 20 October 2010
21/Oct/2010 (HTML – 2 KBytes)
The treatment of regulated and unregulated business in setting price controls for monopoly water and sewerage services in England and Wales – a discussion paper
20/Oct/2010 (PDF – 397 KBytes)
The role and design of incentives for regulating monopoly water and sewerage services in England and Wales
a discussion paper
20/Oct/2010 (PDF – 1 MBytes)
Allocating risk and managing uncertainty in setting price controls for monopoly water and sewerage services – a discussion paper
20/Oct/2010 (PDF – 734 KBytes)
Future Price Limits – Risks and Incentives: Options Appraisal
A report prepared for Ofwat by Europe Economics
20/Oct/2010 (PDF – 1 MBytes)
RG07: Review of cost-benefit analysis and benefit valuation
A report prepared by UKWIR
20/Oct/2010 (PDF – 16 KBytes)
Future price limits ― Form of control and regulated/unregulated business
A report for Ofwat prepared by Frontier Economics
20/Oct/2010 (PDF – 1 MBytes)
Beyond limits – how should prices for monopoly water and sewerage services be controlled?
30/Jul/2010 (HTML – 5 KBytes)
Future price limits – possible sector structures
30/Jul/2010 (PDF – 183 KBytes)
Setting price limits – financeability
21/Jun/2010 (PDF – 28 KBytes)