Periodic Review of Water Price Limits 2009
(PR09)

What is 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.

What is 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).

What are 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.
  
  
  

What has happened so far on PR09?

Ofwat has 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:

• Company-led research into consumer priorities to inform the SDS (ongoing);
• CCWater-led national qualitative based research to inform draft business plans (Sept/Oct 2007)
• Ofwat-led quantitative research after draft business plans on affordability and related issues (late 2008).

Ofwat has identified the key stages of the process as follows:

• Water companies to submit Stategic Direction Statements (SDS) to Ofwat between June and December 2007
• Defra to publish its Water Strategy document in summer 2007
• Ofwat to provide methodology paper to water companies in October 2007
• Defra to provide a Statement of Obligations to water companies in December 2007
• Defra to publish social and economic guidance to Ofwat in March 2008
• Water companies to submit draft business plans to Ofwat in August 2008
• Water Companies to submit final business plans to Ofwat in April 2009
• Ofwat to publish draft final determinations in July 2009
• Ofwat to publish final price determinations in November 2009
• New price limits take effect from April 2010
  
  
  

What has DWI been doing?

• DWI has had informal discussions with most water companies on drinking water quality requirements for the PR09 process, on current & future initiatives which could influence the drinking water quality programme and on the approach that water companies will need to take in considering submissions for the drinking water quality programme. A number of recent meetings have also included discussions on the content and format of the SDS. These meetings are continuing.
  
  
• DWI has engaged with CCWater, EA, and the relevant companies through the regional Quadripartite meetings. A number of inaugural meetings have taken place where each stakeholder has set out its position and views on their relevant input to the PR09 process. Further meetings have been scheduled and will continue throughout the process.

For information of the previous PR04 process, please visit our archived pages