The Periodic Review process
A financial review process whereby the water industry’s economic regulator, Ofwat,
determines the price limits (the K factor) that water companies can increase or decrease
the prices charged to customers over the next 5 year period.
Each water company submits a Business Plan (BP) for the period of the review which is
assessed by Ofwat. Price limits for the period 2005 to 2010 (Asset Management Period 4)
was set in 2004 and is known as the periodic review process 2004 or PR04. The price limits for 2010 to 2015 will be set
in 2009.
The price limits are set to enable water companies to deliver the services required of
them over a five year period. These include allowing for capital maintenance of assets,
ensuring security of supply and meeting drinking water and environmental quality
requirements.
DWI’s involvement
DWI participates fully in the review in respect of the requirements in a company’s
Business Plan for a drinking water quality programme. This is usually set up as a separate
and additional requirement under capital investment to meet statutory obligations.
The water companies identify improvement schemes they consider are required, DWI
challenges the justification for those schemes and then puts the agreed drinking water
quality programme in place by using various legal instruments, usually Undertakings under
section 19 of the Water Industry Act 1991).
For past reviews, Ofwat’s Director General has been responsible for making final
determinations. For PR09, the newly established legal body that is the financial
regulator, the Water Services Regulatory Authority (WSRA) will be collectively
responsible. However, Ofwat remains as a ‘brand name’.
Throughout the review process, Ofwat must work with key stakeholders i.e. quality
regulators (DWI and the Environment Agency), and government and WAG. However, it is
Government (Ministers) that make final decisions on the drinking water quality and
environmental quality programmes. Therefore, DWI and EA make ministerial submissions on
the scale, scope and pace of the quality programme. Ministers take advice from Ofwat on
the key issue of whether the proposed programme is affordable. Ofwat can challenge
Minister’s decision on what should be included in the quality programmes and so
funding is not automatically approved. There is a separate but parallel exercise with WAG
and Welsh companies.
DWI must work closely with Defra (Water Services Regulation) who provide the policy on
drinking water quality and so co-ordinate departmental and government input to the process
in that area. DWI also needs to be kept aware of the key issues for the environmental
quality programme which is achieved through liaison with Defra (Water Quality) who is
responsible for dealing with the EA.
Other stakeholders who contribute to the review process include other government
departments such as the Cabinet Office and Treasury and Consumer Council for Water
(CCWater) and Natural England (EN).
Details of DWI proposed methodologies and timetable for PR09 can be found here (in Excel format).
DWI’s objectives for PR09
DWI has a duty to ensure that water companies’ take into account all drinking
water regulation requirements for the period covered by the review. In particular, DWI
looks to ensure that there is a sustainable level of expenditure on quality programmes and
on asset maintenance for the function of supplying safe drinking water to consumers.
The key areas for water companies to consider in order to discharge that duty are:
Meeting existing and future statutory obligations
- Standards set out in the current Water Supply (water Quality) Regulations 2000 (2001 in
Wales).
- Amendment to the Regulations (coming into existence on 22 December 2007) - these
Regulations will introduce the requirement for wider catchment risk assessments and bring
in a Drinking Water Safety Plan (DWSP) approach to safeguarding quality of drinking water
supplies.
- A revision to the Drinking Water Directive is likely by 2012 which will introduce a DWSP
approach in European legislation.
Provision of sustainable operation and maintenance strategies
- Proactive management of water supplies through Distribution and Operation Maintenance
Strategies (DOMS).
- Proactive management and operation of treatment works.
Preparation for PR09
Ofwat established a Chief Executives Group that includes representatives from
Ofwat, DWI, EA, WAG, Defra and CCWater. The role of this group is to determine strategy
and policy, monitor progress with delivery of the review process and be a forum for
raising issues and resolving disputes.
A senior co-ordinators group has also been formed with representatives of all the key
stakeholders to ensure good communications and co-ordination of their respective
activities.
A Consumer Research Steering Group has been established to co-ordinate three stages of
consumer research to inform PR09. The three stages are:
- Stage 1 - Company-led research into consumer priorities to inform the SDS (ongoing);
- Stage 2 - CCWater-led national qualitative based research to inform draft business plans (available on Ofwat website)
- Stage 3 - Ofwat-led quantitative research after draft business plans on affordability and related
issues (available on Ofwat website).
Ofwat has identified the key stages of the process as follows:
- Water companies submit Stategic Direction Statements (SDS) to Ofwat between June and
December 2007
- Defra publish its Water Strategy document in summer 2007
- Ofwat provide methodology paper to water companies in October 2007
- Defra provide a Statement of Obligations to water companies in December 2007
- Defra publish social and economic guidance to Ofwat in March 2008
- Water companies submit draft business plans to Ofwat in August 2008
- Water Companies submit final business plans to Ofwat in April 2009
- Ofwat publish draft final determinations in July 2009
- Ofwat publish final price determinations in November 2009
- New price limits take effect from April 2010
DWI's activities for PR09
For Draft Business Plans:
DWI Information Letter 02/2008 set out our guidance on drinking water quality requirements for the 2009 Periodic Review of price limits.
This Letter provided the regulatory context for the review; the principles to be applied to justify the need for investment in drinking water quality improvement schemes; information requirements; and our methodology for assessment of submissions by water companies.
In response, water companies submitted a total of 266 proposed improvement schemes. Our assessments of these were summarised in Preliminary Assessment Letters (PALs) to companies for each submission, indicating that we were minded to support the scheme for inclusion in draft Business Plans (total 114 schemes); or that we declined to support the scheme (120), or there was insufficient information provided to decide on the scheme (32). The PALs were made available to other stakeholders for consultation purposes.
For Final Business Plans:
DWI Information Letter 11/2008 set out our further guidance on drinking water quality requirements for the 2009 Periodic Review of Prices. This Letter provided feedback on the preliminary submissions process; commented on draft Business Plans; and provided further guidance on specific issues and drivers.
Water companies, having considered our feedback, addressed the caveats on supported preliminary improvement scheme proposals, and reconsidered areas of uncertainty and information gaps. They submitted a total of 192 improvement schemes for consideration for inclusion in final Business Plans. Our assessments, including consideration of the views of other stakeholders, resulted in Final Assessment Letters (FALs) to companies for each submission indicating that we supported 166 schemes for inclusion in final Business Plans; that we declined to support 16 schemes and that we commended for inclusion 10 improvement schemes separate from the drinking water quality improvement programme.
The supported improvement programme is considerably smaller in scale by comparison with the improvement programmes supported for the AMP3 and AMP4 periods. The programme has particular focus on preventative integrated management of risks within the water supply service using the World Health Organisation water safety plan approach that promotes protection of human health and application of good water supply practice by seeking to minimise contamination of source waters, reducing/removing contamination through appropriate sustainable treatment processes, and preventing contamination in the distribution network and the domestic distribution system.
For Draft Determinations:
DWI reviewed companies final business plans (submitted to Ofwat in April 2009) and the majority of schemes supported through our final assessment stage were included. In July 2009, Ofwat published its draft determinations and commenced a consultation on its draft proposals. Regulators and other stakeholders were given until 2nd October to make representations on the Draft Determinations. Details of DWI representations to Ofwat can be found here.
Next steps for the drinking water quality improvement programme:
DWI has written to each company setting out the regulatory action it intends to take to put in place each individual improvement scheme. These letters were copied to Ofwat, CCWater and other stakeholders where appropriate.
Last updated: 12/10/09
For information of the previous PR04 process, please visit our archived pages |
