The price review is one of our key regulatory tools. At the beginning of the five- year price review process, we set a framework (or ‘methodology’), in line with UK and Welsh government priorities, which sets out how we will assess water and wastewater companies’ business plans so that they deliver improvements for customers and the environment.
Companies then work with their customers and communities to produce a business plan that they submit to Ofwat. These five-year plans set out what companies want to do to, how they plan to do it, and how much money they believe they need to deliver and improve their services for customers and the environment. The plans also reflect the funding which each company believes it will need to pay a fair return to investors. Ofwat scrutinises these plans, benchmarking them against each other and also against past performance. We challenge companies to improve their plans where necessary, and remove any spending proposals that are not efficient, that lack evidence a company can achieve what it has set out to do, or when the work has been funded already (preventing customers paying twice).
Companies’ plans and investment cover a wide range of areas, from the base costs, which cover companies’ day-to-day running costs, including maintaining their network, to enhancement costs, which is the investment that companies plan to spend to enhance their network and services for the benefit of customers and the environment.
We set limits on what companies can charge their customers, alongside the amount that companies are allowed to spend (known as its ‘spending allowance’). We also set ‘performance commitments’: targets we use to hold companies to account on the plans. These performance commitments cover a wide range of areas, including reducing leakage, improving river water quality, enhancing biodiversity, and reducing spills from storm overflows. We also set price control deliverables for companies, where we confirm expectations for delivery specifically on improvements (or ‘enhancements’), funded through enhancement expenditure allowances. These deliverables incentivise timely delivery and return funding to customers if water companies do not deliver what they have been funded to deliver.
We publish our draft decisions (or ‘determinations’) on business plans after which there is a period of consultation where stakeholders can submit their views on our plans. A few months after the consultation period, having considered these views and any new information supplied by companies, we publish our final determinations. These confirm companies’ allowed spend for the next five years, subject to various commitments including those outlined above. If a company does not agree with our final determination, they can ask for an appeal to the Competition and Markets Authority.