The price review is a financial review process led by the water industry’s economic regulator the Water Services Regulatory Authority (known as Ofwat).
Ofwat determines the price limits (the K factor) that water companies can increase or decrease the prices charged to customers over a period of time, which is currently 5 years.
Each water company submits a Business Plan (BP) for the period of the review which is assessed by Ofwat. Price limit periods normally begin on the first day in April in years ending in 0 or 5 and end on the last day of March 5 years later. The price limits for the current period (2015 to 2020) were set at the end of 2014 to take effect on 1st April 2015 and is commonly referred to as Price Review 14 (PR14). Planning for the next price review (PR19 which will run from 1st April 2020 to 31st March 2025) is underway. Our guidance note Long Term Planning for the quality of drinking water supplies sets out our views on issues that water companies may need to address for the PR19 period and beyond.
Price limit periods are sometimes known as AMP (Asset Management Plan) periods. The current period is commonly known as AMP6 because it is the sixth cycle since the water industry was privatised in 1989.
The price limits are set to enable water companies to deliver the services required of them over the period. These include allowing for capital maintenance of assets, ensuring security of supply and meeting drinking water and environmental quality requirements.
DWI participates fully in the review in respect of the requirements in a company’s Business Plan for maintaining and/or improving drinking water quality. This is usually set up as a separate and additional requirement under capital investment to meet statutory obligations as required by the Regulations.
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 either Undertakings submitted under section 19 of the Water Industry Act 1991, or Notices served under Regulation 28(4) of the Regulations.
Throughout the review process, Ofwat must work with key stakeholders, including DWI on drinking water supply matters, and the Environment Agency (EA)/Natural Resources Wales (NRW) on environmental matters. Ministers advise Ofwat as to their strategic priorities and objectives, and take advice from Ofwat on the key issue of whether the proposed programmes are affordable. Other stakeholders who contribute to the review process include other Government departments, for example the Cabinet Office and the Treasury, the CCW and Natural England (EN).
DWI published in May 2020 their third party submission to the Competition and Markets Authority case: Ofwat price determination.
- DWI Compliance Risk Index (CRI): Definition (PDF 126KB)
- DWI Event Risk Index (ERI): Definition (PDF 74KB)
Building resilient water supplies
Defra, the Environment Agency, Drinking Water Inspectorate and Ofwat have issued a joint letter on improving resilience in water resource management in England. The letter sets out what we expect from water companies to address this challenge and covers five key areas;
- Increasing ambition in the forthcoming business plans. We want companies and regional groups to use the PR19 regulatory period to demonstrate tangible progress in increasing collaboration and developing creative strategic water supply solutions.
- Regional water resource planning, through greater coordination of water resource management plans. We recognise that the sector has been thinking about better ways to co-ordinate. Water companies should take a genuinely regional approach to producing plans that transcend company boundaries and identify optimum solutions for the region as a whole. This planning should then provide the basis for individual water company plans.
- Greater use of markets and competition, we will be looking for regional groups to fully explore the role of markets in delivering their strategic water resource solutions. Competition can reduce the cost of developing new resources and help deliver strategic and innovative solutions. Ofwat will lead work to facilitate new markets to support improved water resilience.
- A clear direction from government.The government is developing a national policy statement (NPS) for water resources and The Environment Agency will lead the development of a National Framework for water resources which will set clear challenges to the industry and develop tools to support collaboration between companies and with other sectors.
- A responsive regulatory approach. To meet the challenges facing water resources, we will listen to any issues raised by the sector and work in a joined up way with companies to help overcome any real challenges identified. We are already working to refine the water resources management planning process and other regulatory incentives.