Ofwat consultation on capital expenditure menu proposals

Ofwat consultation (26 pages, PDF) on a proposal to use "menu regulation" for all areas of capital expenditure in the 2009 price control review (PR09).

The paper acknowledges the importance of Ofwat's expenditure projections, whether or not a menu system is used. The proposal in this area is as follows:

We propose that the starting point should be a company’s out-turn capital maintenance expenditure averaged over a suitable period, subject to a cost base efficiency challenge. This will provide a suitable 'efficient' base level of expenditure. We will assess the case for any deviation from this in setting the baseline using a simplified version of the 'common framework' criteria scoring used at PR04. We would not impose any further 'continuing' capital efficiency challenge on the grounds that this is for companies to assess in their menu choice.

We believe that this approach would deliver balanced baseline assessments of capital maintenance expenditure needs, while also delivering simplification by:
• Removing the use of econometrics for capital maintenance.
• Removing continuing capital efficiency assumptions.
• Simplifying the asset management scoring system.

Responses by Thursday 22 November 2007, for a stakeholder workshop to be held in Birmingham on Wednesday 5 December 2007.

Update, 1 November 2007: Microsoft Excel workbook (with macros) providing a worked example of the proposal, using expenditure data for the period 2000-2005. The spreadsheet assumes that the "baseline" (which, under the menu proposals, needs to be set by Ofwat before companies submit their expenditure projections) would have been set to the same level as the allowances made by Ofwat in the 1999 final determinations.

For further information or advice please contact Franck Latrémolière.

Filed under Ofwat, Price controls, Water.

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