However, companies can also ask us to change their price limits if an unforeseen circumstance substantially increases any of their costs or revenue. This is known as a substantial effect determination.
When we receive an application from a company we apply a two stage test.
- First, we consider whether the application is sufficiently material (defined as equal to at least 20% of company turnover) and whether prudent action by the company would have meant the impact on revenue or costs could have been avoided.
- Second, having established that the materiality hurdle is cleared, we assess whether an adjustment to price limits is necessary. In making this assessment, we consider our duties under the Water Industry Act 1991.
Companies can apply for a substantial effect determination at any time. Like interim determinations, they normally cover the remaining time until the next price review and the new price limits set apply from the start of the next charging year in April.
Subject to the same criteria, we can use a substantial effect determination to trigger a change in prices. We may trigger a determination if if an unforeseen circumstance substantially decreases a companies’ costs or revenue.