Price review process
The price review is a financial review process governed 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).
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 i.e. quality regulators (DWI and the Environment Agency (EA)), and government (including the Welsh Government). 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 the 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 the Welsh Government and companies supplying drinking water to Wales.
DWI works closely with Defra (Water Availability and Quality) who provides the policy on drinking water quality and so co-ordinates departmental and government input to the process. DWI is also kept aware of the key issues for the environmental quality programme through liaison with Defra Water Quality team which is responsible for implementing environmental policy through the Environment Agency.
Other stakeholders who contribute to the review process include other Government departments for example the Cabinet Office and the Treasury, the Consumer Council for Water (CCWater) and Natural England (EN).
Page reviewed: 3 October 2016
Page modified: 3 October 2016