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AFW company-specific appendix

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December 2014
Setting price controls for 2015-20
Final price control determination notice:
company-specific appendix – Affinity Water
Final price control determination notice: company-specific appendix – Affinity Water
Contents
Overview
2
A1
Enhanced final determination – at a glance
6
A2
Wholesale water
12
A3
Household retail
28
A4
Non-household retail
35
A5
Appointee financeability and affordability
39
Annex 1
Wholesale costs
51
Annex 2
Household retail
55
Annex 3
Reconciling 2010-15 performance
57
Annex 4
Outcomes, performance commitments and ODIs
74
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Final price control determination notice: company-specific appendix – Affinity Water
Overview
This appendix sets out the details of the enhanced final determination of price controls that are
specific to Affinity Water.
An enhanced final determination
We awarded Affinity Water enhanced status after the completion of our risk-based review, which
assessed the quality of business plans companies submitted for the 2014 price review (PR14).
Enhanced status means the company produced a high-quality business plan that stood apart
from the other companies. For example, in its business plan the company proposed community
level reporting, giving its communities a clear picture of performance against its commitments
within their local area and the ability to compare performance across the eight communities. It
also means that we have had to make minimal changes to the company’s plan to protect
customers' interests and act in line with our other statutory duties.
Enhanced companies gain the reputational advantages of enhanced status and a fast track
through the price review process. As we said in ‘Setting price controls for 2015-20 – decisions
on enhanced companies and next steps’ (our pre-qualification decision document), these
companies also receive financial benefits, through an initial financial award and access to
enhanced cost performance menus, reflecting the benefits of high-quality business plans to
current and future customers. Affinity Water chose to recover its initial reward of £4 million
through an addition to its regulatory capital value (RCV).
Enhanced companies also have the benefit of the ‘do no harm’ principle, which ensures it will
not be any worse of for being categorised as enhanced. Enhanced companies also received an
earlier determination.
We explain the ‘do no harm’ principle in more detail in table A4 in appendix 2 of our prequalification decision document. In line with the ‘do no harm’ principle, the company is not
subject to the reduction in the allowed return. A reduction in the allowed return of 0.1
percentage points has a value of £5 million to the company. The company is also protected from
changes driven by new information relevant to the wider industry framework.
Enhanced companies’ draft determinations have been updated to reflect new information since
the December business plan in relation to their own costs of delivering its current and future
performance commitments (PCs) and for any changes in 2010-15 performance. These changes
are not covered by the ‘do no harm’ principle.
2
Final price control determination notice: company-specific appendix – Affinity Water
These protections and incentives produce benefits for both the companies and customers. They
form an important part of the incentive framework; encouraging companies to produce high
quality business plans based on customer priorities, both at this review and in the future.
Changes since draft determination
On 10 March, Affinity Water pre-qualified as an enhanced company, and it had a limited number
of actions to address. We confirm that the company has met all of these actions.
We published ‘Draft price control determination notice: company-specific appendix – Affinity
Water’ (the ‘draft determination’ for Affinity Water) on 30 April 2014, which was earlier than other
companies.
In June and October 2014, Affinity Water made technical representations on a small number of
areas of its draft determination – including on the retail average cost to serve (ACTS) and on the
wholesale total expenditure (totex) profile. It has submitted additional evidence in some areas
(such as its asset health index, and on PR09 legacy), including in response to areas we flagged
the need for in our August draft determinations (retail cost allocation). We agree with the
company representations and have made changes in the final determination to reflect them.
We have also received a small number of specific representations from the Environment
Agency in relation to some of Affinity Water’s PCs. The Consumer Council for Water (CCWater)
raised a number of specific concerns around the acceptability and affordability of Affinity Water’s
business plan, when taking into consideration sewerage bills. We respond to these comments in
this document and in the relevant policy chapters. Affinity Water’s customer challenge group
(CCG) did not make representations on the April draft determination, and in October it
confirmed it did not have any concerns about Affinity Water’s representation that it wanted to
draw to our attention.
We summarise our final determination for Affinity Water in section A1: ‘Enhanced final
determination – at a glance’.
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Final price control determination notice: company-specific appendix – Affinity Water
About this document
The remainder of this document sets out our final determination in more detail 1 and is structured
according to the binding price controls we are setting for the wholesale and retail elements of
the appointee (the whole regulated business):
•
•
•
wholesale water;
household retail; and
non-household retail.
As we explained in our final methodology statement, these controls are binding, confirmed
through the modifications already made to the price setting elements of companies’ licence
conditions. This means that the companies cannot recover more revenue than allowed under
each specific price control and cannot transfer costs between the controls. The revenue
allowance for each price control is determined by the costs specific to that particular price
control. This provides the companies with more effective incentives. It also helps to avoid
distortion to the non-household market, which will be fully open to competition from 2017, as
provided for in the Water Act 2014.
To support these binding controls, throughout this document we also provide details on:
•
•
•
•
•
•
•
•
•
the responses that we have received to our draft determinations and any consequential
adjustments that we have made;
the outcomes for the company to deliver and associated outcome delivery incentives
(ODIs);
the efficient costs that we consider the company can achieve;
the adjustments we are making to the wholesale water price control to reflect the
company’s performance in 2010-15;
the allowed return for the wholesale water control, and the retail household and nonhousehold net margins;
the return on regulatory equity (RoRE) range;
the financial ratios under the notional capital structure;
the uncertainty mechanisms that form part of each price control; and
where appropriate, the assumptions we have made to arrive at the allowed revenue for
each price control.
As set out in ‘Policy chapter A1 – introduction’ (‘policy chapter A1’), the final determination
protects consumers in accordance with our statutory duties and ‘Setting price controls for
1
Figures stated in this document (including wholesale costs and bill information) are in 2012-13 prices; retail data
is stated in nominal prices. This is consistent throughout this final determination unless otherwise stated.
4
Final price control determination notice: company-specific appendix – Affinity Water
2015-20 – final methodology and expectations for companies’ business plans’ (our ‘final
methodology statement’). We have also had regard to relevant guidance from the UK
Government and the principles of best regulatory practice to be transparent, accountable,
proportionate, consistent and targeted.
Implementing these price limits
Affinity Water must deliver its obligations as required by the Water Industry Act 1991, other
relevant legislation and its Instrument of Appointment (“licence”). This price control
determination has been made under the terms of Affinity Water’s licence and the Water Industry
Act 1991. We consider that Affinity Water must act in an economic and efficient manner in
delivering all of its obligations.
Policy chapter A1 sets out the milestones leading up to 1 April 2015 that will ensure effective
business plan delivery. These cover menu choices, charges approval, reporting and assurance
requirements during 2015-20, and PR14 reconciliation.
In IN 14/15: ‘2014 price review – timetable for setting charges for 2015-16 and making menu
choices’ we set out the requirement for companies to notify us of their menu choices by 16
January 2015. We will make any adjustment to the company’s allowed revenues that result from
its menu choice as part of the price review in 2019 (PR19). A company’s menu choice will be
influenced by our decisions in this final determination. We confirm in annex 4 of this document a
commitment that the ODIs will be recalibrated in the true-up calculations, based on a sharing
rate that is consistent with the company’s menu choice. To facilitate this, we expect the
company to publish its ODIs with the cost-sharing rate that is implied by its menu choice on 16
January 2015. This will allow inclusion of the recalibrated ODIs within the framework for
reporting and assurance from 1 April 2015, which we will publish on 9 February 2015. We
require companies’ Boards to provide assurance that the recalibrated ODIs conform with the
final determination and are consistent with their menu choice. Any modifications should be
confined to correctly adjusting the incentive rates for the difference between the FD assumption
on the cost-sharing rate and the rate associated with their final menu choice.
This price determination sets out the allowed revenues that Affinity Water can recover from its
customers in the period 2015-20. Affinity Water is responsible for converting the allowed
revenues into charges. In IN 14/17: ‘Approval of charges 2015-16 – our approach, process and
information requirements for large and small companies’ and the accompanying policy
document, we set out the timeline and process for charging approval. Companies are required
to provide us with their charges schemes, associated assurances, and the other information
requirements, and to provide any new appointees in their area with their charges schemes by
16 January 2015. By 2 February 2015, each company is required to publish its charges scheme.
5
Final price control determination notice: company-specific appendix – Affinity Water
A1 Enhanced final determination – at a glance
This chapter provides a summary of the enhanced final determination for Affinity Water. It
summarises what the final determination will mean for customers, with respect to the average
bills they will pay and the outcomes that the company will deliver in return, and for the company
in terms of its allowed costs and revenues, RoRE and financeability ratios. We also summarise
the minor changes we have made to the company’s draft determination in order to protect the
interests of customers.
Combined average household bill (£)
The chart below shows the average bills proposed in the company’s December plan; the
average bills in our final determination; and the level of current bills (2014-15). All bills are
shown without the impact of inflation and are indicative, as final bills will depend on the growth
in the number of customers, changes in their usage and the specific charges that the company
sets each year within the overall price controls that we have determined.
Our final determination means that average bills in 2019-20 will be £156, which is 5% lower than
current average bill levels (of £165).
The difference between the company’s December plan and our final determination is the result
of the actions the company took to qualify as an enhanced company, including accepting
‘Setting price controls for 2015-20 – risk and reward guidance’ (our ‘risk and reward guidance’).
This represents a cumulative saving of £9 for the average customer over the 2015-20 period.
As Affinity Water is an enhanced company, our final determination is based substantially on its
revised plan. Consistent with the company’s enhanced status, we have amended the bill profile
for our final determination to help target the profile proposed by the company in its June
information update.
6
Final price control determination notice: company-specific appendix – Affinity Water
166
164
165
165
164
162
160
160
158
157
156
156
154
152
150
2014-15
2015-16
2016-17
Final determination average bill
2017-18
2018-19
2019-20
Company December plan
Note:
The comparative bills from ‘Company December plan’ is based on the data submitted in the business plan but projected using
our financial model, thereby ensuring consistency with the final determination projection. So the company’s proposed bills
illustrated above may not necessarily be the same as those described in its March business plan update.
The outcomes committed to by Affinity Water
Affinity Water has committed to delivering outcomes that reflect its customers’ views. These are
supported by thirteen associated PCs that identify the company’s committed level of
performance under each outcome. For nine of these PCs the company is subject to associated
financial ODIs whereby it will incur a penalty for performance worse than its commitments, but
for some can earn a reward for performance better than its commitments during the period from
2015 to 2020.
These outcomes reflect the priorities of customers set out in research and engagement with the
CCG. We have accepted these outcomes. Details of the types of incentives and level of PCs
associated with these outcomes are set out in annex 4.
Wholesale water
Making sure our customers have enough water, whilst leaving more water in the environment
Supplying high quality water you can trust
Minimising disruption to you and your community
Retail
Providing a value for money service
7
Final price control determination notice: company-specific appendix – Affinity Water
Allowed costs and revenue for Affinity Water
As an enhanced company, Affinity Water has the benefit of the ‘do no harm’ principle and so it is
protected from reductions in the level of the cost of capital and the retail margins. Items related
to new information since the December business plan on the company’s own costs of delivering
its current and future PCs, as opposed to new information relevant to the wider industry
framework, are not covered by the ‘do no harm’ principle, so these have been updated since the
draft determination where relevant.
The table below shows the wholesale totex we have allowed over the period from 2015 to 2020.
The final determination allows Affinity Water to receive revenues of £1,389 million. This
combines allowed revenues for the wholesale and household retail controls. For non-household
retail, we have also set average revenue controls per customer for each of the customer types
proposed by the company. The £25.9 million of non-household revenue shown in the table
below is indicative, as it does not assume any gains or losses from competition or the company
charging customers at levels different to the relevant default tariffs.
Wholesale
Water
Totex 2015-20 total (£m)
1,074.3
Allowed return (%)
3.70%
Allowed wholesale revenue 2015-20 (£m)
1,245.0
Retail
Household
Nonhousehold
Cost allowance – 2015-20 total (£m)
131.5
Margin (%)
1.00%
2.50%
Retail allowed revenue (£m)
144.1
25.9
Note: Wholesale figures are in 2012-13 prices as revenue will be affected by inflation and retail figures are in nominal prices as
revenue will not be affected by inflation – this is consistent throughout this final determination unless otherwise stated.
RoRE ranges – appointee
Affinity Water has estimated the range of RoRE that it could earn dependent on its performance
and external risk factors over the price control period. The RoRE range reflects the company’s
views and is based on an efficient company with the notional capital structure 2. We have
identified the RoRE impact separately for ODIs, totex performance, financing and the service
incentive mechanism (SIM). We note that Affinity Water's actual returns may differ from notional
returns due to differences between notional and actual capital structure and notional and actual
cost of debt and level of cost efficiency compared to allowed totex and household retail ACTS.
2
The notional capital structure is the capital structure that reflects Ofwat’s assumption of an appropriate level of
gearing to use in determining the allowed WACC.
8
Final price control determination notice: company-specific appendix – Affinity Water
RoRE range – whole company
10.0%
9.0%
Financing outperformance
0.2%
Totex outperformance
8.0%
7.0%
6.0%
2.7%
SIM outperformance
0.0%
0.5%
5.0%
1.9%
4.0%
0.6%
Base
case
6.1%
ODI underperformance
SIM underperformance
3.0%
2.0%
1.0%
ODI outperformance
Totex underperformance
2.6%
Financing underperformance
0.2%
0.0%
Source: Ofwat calculations based on information from Affinity Water
Note: Numbers presented based on calibration of the ODIs against an assumed menu choice of a 50% sharing factor
Our calculation of notional financeability ratios
Ofwat has a statutory duty to secure that a company is able to finance the proper carrying out of
its functions. We interpret this financing duty as requiring that we ensure that an efficient
company with a notional capital structure is able to finance its functions. A company’s actual
capital structure is a choice for the company and it bears the risk associated with its choices. An
efficient company is assumed to be able to deliver its plans based on the expenditure allowance
in our final determination.
Affinity Water provided assurance that its plan was financeable on the basis of a notional and its
actual structure.
The notional financial ratios on which this final determination is based, which take account of
our interventions, are set out in section A5 and summarised on a 5-year average basis below.
We have assessed this final determination for Affinity Water to be financeable on a notional
basis.
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Final price control determination notice: company-specific appendix – Affinity Water
Financial ratios for notional company
Our calculation (average 2015-20)
Cash interest cover
3.56
Adjusted cash interest cover ratio (ACICR)
2.17
Funds from operations/debt
12.08%
Retained cash flow/debt
9.51%
Gearing
63.49%
Dividend cover (profit after tax/dividends paid)
2.00
Regulatory equity/regulated earnings for the regulated company
16.61
RCV/EBITDA
9.47
Summary of changes to the draft determination
In reaching our enhanced final determination we have made only minor changes to our draft
determination, which as Affinity Water is an enhanced company was based largely on its own
business plan. In doing so, we have carefully considered the representations we have received
on the draft determination and taken account of the most up-to-date information available where
appropriate. We summarise the changes in the table below.
The changes we have made are consistent with the do no harm principle we set out for
enhanced companies in our pre-qualification decision document.
Outcomes
Wholesale costs
•
•
•
One of the company’s actions it needed to achieve
to qualify for enhanced was to provide further
details on its serviceability measure. The company
has proposed an asset health index, which we have
included in the final determination.
The company is not affected by our comparative
assessments as we consider that it is appropriate to
accept the enhanced companies’ business plans in the
round in order to maintain the incentive on companies
to produce the highest quality business plans.
•
In response to Affinity Water’s request, we have
reprofiled its totex and revenue to reflect its
business plan.
Affinity Water is now £57 million (-5%) below the
wholesale cost threshold, which is further below
than at draft determination (which was £47m, -4%
below the threshold). This reduction is driven by a
number of technical changes, the most significant
being a reduction in company plan pension costs to
match Ofwat numbers.
Retail
Reconciling 2010-15 performance
•
•
•
•
•
We have used 2013-14 prices to set both the
household and non-household retail control.
We have updated our industry view of the ACTS.
We have taken into account further evidence
provided by the company after its draft
determination on the allocation of retail efficiencies
between metered and unmetered costs, which
impacts the ACTS.
In response to our request, the company made
minor adjustments to its retail cost allocation, which
we have taken into account. This completes the
company’s action to comply with our cost allocation
guidance.
•
•
10
We have updated our assessment to reflect the
latest information on 2013-14 and 2014-15
performance and to correct minor errors.
Overall, we have reduced the revenue by £12.3
million (£1.5 million less than the company
proposed) and increased the RCV by £38.0 million
(£40.5 million more than the company proposed).
The significant increase in the RCV is due to the
removal of a balancing figure applied to the opening
RCV balance and the adjustment for actual
expenditure in 2009-10.
Final price control determination notice: company-specific appendix – Affinity Water
Risk and reward
Financeability and affordability
•
•
In line with the ‘do no harm’ principle, the company
is not subject to the reduction in the allowed return.
11
Consistent with Affinity Water being an enhanced
company, we have adjusted its pay as you go
(PAYG) rate, in line with the company's preference,
to target its desired final determination wholesale
revenue, which helps to target the company’s bill
profile at the level it proposed.
Final price control determination notice: company-specific appendix – Affinity Water
A2 Wholesale water
A2.1 Consideration of representations on our draft
determinations
In policy chapter A1, we provide a list of the respondents to the draft determinations
published in April, May and August of this year. We have fully considered all of the
responses received, and where appropriate, we have made either consequential
adjustments to our price control methodology or company-specific interventions.
Our general policies relevant to the wholesale water control are set out in the
following policy chapters that accompany our final determinations. These include our
responses to representations on sector-wide issues.
•
•
•
•
•
‘Policy chapter A2 – outcomes’ (‘policy chapter A2’).
‘Policy chapter A3 – wholesale water and wastewater costs and revenues’
(‘policy chapter A3’).
‘Policy chapter A4 – reconciling performance for 2010-15’ (‘policy chapter
A4’).
‘Policy chapter A7 – risk and reward’ (‘policy chapter A7’).
‘Policy chapter A8 – financeability and affordability’ (‘policy chapter A8’)
Table A2.1 lists the representations we have received that are specific to Affinity
Water’s wholesale water control and sets out where to find more information on our
responses in this document.
Table A2.1 Representations specific to the wholesale water control of Affinity Water
Area
Company-specific
representations
Detailed commentary in this
company-specific appendix
Outcomes, performance
commitments and
incentives
Affinity Water
Annex 4
Outcome delivery and
reporting
None
Annex 4
Calculating allowed
wholesale water
expenditure
Affinity Water
Section A2.3.1 and Annex 1
Environment Agency
CCWater
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Final price control determination notice: company-specific appendix – Affinity Water
Area
Company-specific
representations
Detailed commentary in this
company-specific appendix
Calculation of revenues:
PAYG and RCV run-off
None
Section A2.3.2 and A5.5
Return on the RCV
CCWater
Section A2.3.3
Reconciling 2010-15
performance
None
Annex 3
Uncertainty mechanisms
None
Section A2.4
A2.2 Company outcomes, performance commitments and
delivery incentives
A2.2.1
Outcomes, performance commitments and incentives
We summarise the outcomes, PCs and ODIs for the wholesale water control for
Affinity Water in table A2.2 below.
Table A2.2 Wholesale water outcomes, performance commitments and incentives
Company proposal
Outcome
Making sure our
customers have
enough water, whilst
leaving more water in
the environment
Supplying high quality
water you can trust
Performance
commitment
Incentive type
Update to draft
determination
Leakage
Financial – reward
and penalty
No change
Average water use
Financial – penalty
only
No change
Water available for use
Financial – penalty
only
No change
Abstraction incentive
mechanism (AIM)
Reputational
No change
Sustainable
abstraction reduction
Financial – reward
and penalty
No change
Compliance with water
quality standards
Financial – penalty
only
No change
13
Final price control determination notice: company-specific appendix – Affinity Water
Company proposal
Outcome
Performance
commitment
Incentive type
Customers contacts
about water quality
Update to draft
determination
Financial – penalty
only
No change
Financial – reward
and penalty
No change
Number of burst mains
Financial – penalty
only
No change
Affected customers not
notified of planned
interruptions
Reputational (with
compensation
payments)
No change
Planned work taking
longer to complete
than notified
Reputational (with
compensation
payments)
No change
Minimising disruption to
Unplanned
you and your
interruptions to supply
community
over 12 hours
In policy chapter A2, we discuss our approach to outcomes for the wholesale and
retail controls. Affinity Water has developed and committed to delivering outcomes
that reflect its customers’ views. These are supported by specific PCs and
associated incentives (ODIs) whereby the company can be rewarded or penalised
for its performance during the period from 2015 to 2020.
The company’s outcomes have been developed with input from its CCG. The CCG’s
role was to challenge how well the company’s outcomes, PCs and delivery
incentives reflect the views and priorities of customers, both now and in the future,
as well as environmental priorities.
We reviewed representations on the company’s outcomes but we do not consider
that any interventions are required. As Affinity Water is an enhanced company, the
changes to the comparative analysis that impact on other companies have not been
applied. Overall, the outcomes that Affinity Water proposed are those which it will
need to deliver over the next 5 years.
The determinations for the enhanced companies have not been changed to reflect
the comparative analysis, since we continue to consider that it is appropriate to
accept the enhanced companies’ business plans in the round. However, both
enhanced companies have recognised that even though their financial incentives are
not being changed, they face reputational incentives to improve their performance in
14
Final price control determination notice: company-specific appendix – Affinity Water
areas where they are not yet delivering upper quartile performance. Affinity Water
has indicated that it will have regard to upper quartile performance in these areas in
anticipation of its 2019 price determination.
As an enhanced company, Affinity Water gained its draft determination earlier than
all non-enhanced companies, allowing it extra time to prepare for delivery of these
outcomes for its customers.
Full detail of the wholesale water outcomes, PCs and incentives, and our
consideration of relevant responses, is provided in annex 4. One of Affinity Water’s
pre-qualification actions was to consider PCs around its asset serviceability. When
we announced that Affinity Water was an enhanced company, we confirmed that it
had completed this action. Following the draft determination Affinity Water provided
further detail on its overall performance measurement framework, which includes the
PCs alongside a suite of key performance indicators (KPIs) and its new asset health
index.
Affinity Water has developed the index it proposed in its business plan, in
collaboration with its CCG, to focus on the availability and criticality of the noninfrastructure assets. This will allow the company to report on its non-infrastructure
assets at an asset, community and company level. Our assessment concluded that
the company’s overall performance framework offers customers appropriate
protection on asset health.
Therefore, in line with Affinity Water’s enhanced status, and accepting the
company’s plan in the round, we confirm for final determination that we will not
intervene to elevate the index to the level of a performance commitment. Affinity
Water will continue to develop and refine the index throughout the 2015-20 period.
We consider that Affinity Water’s overall performance measurement framework will
provide customers and stakeholders with a rounded view of performance to ensure
the company is held to account.
A2.2.2
Outcome delivery and reporting
Affinity Water’s proposed approach to the measurement, reporting and governance
of outcomes and our assessment of this approach is summarised in annex 4.
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Final price control determination notice: company-specific appendix – Affinity Water
A2.3 Calculating the wholesale water price control
A2.3.1
Calculating allowed wholesale water expenditure
The cost of delivering wholesale water services is a major driver of customer bills
comprising almost 90% of the value chain. In order to protect the interests of
customers, we have determined the efficient level of costs for the company to deliver
the outcomes that matter to customers both today and tomorrow and to allow it to
meet its statutory obligations.
In its business plan, Affinity Water proposed a level of wholesale water totex that
was below our view of costs and which we consider to be efficient. There are
mechanisms to share out- or under-performance with customers in relation to
wholesale costs, including the use of a menu. One of the financial benefits of being
an enhanced company is access to an enhanced menu with enhanced cost sharing
rates. This incentivises companies to deliver efficiently costed business plans, which
in turn benefits customers.
Our approach to determining efficient wholesale expenditure is set out in policy
chapter A3. This includes information on the enhanced menu and sharing rate that
applies to Affinity Water as an enhanced company.
Following representations, the company’s proposed wholesale water totex is £1,034
million over 2015-20 (versus £1,049 million it proposed ahead of its draft
determination). This is 5% below the final determination threshold (post additions) of
£1,091 million. Table A2.3 below notes the comments that we have received that are
specific to this aspect of the wholesale water control of Affinity Water and outlines
how our enhanced final determination has been influenced by our consideration of
these responses.
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Final price control determination notice: company-specific appendix – Affinity Water
Table A2.3 Representations specific to the wholesale water totex for Affinity Water
Respondent
Summary of comment
Ofwat response
Affinity
Water
The company suggested we should
retain the totex profile from its
business plan.
Consistent with our default approach
to other companies, we have
reprofiled the company’s totex and
revenue to reflect its business plan
profile.
Affinity
Water
Affinity Water requested that the final
determination include its full pension
deficit costs, without an efficiency
challenge.
We have corrected for the minor
error in the application of efficiencies.
Consistent with IN 13/17 we have
continued to apply the level of
efficiencies as at PR09.
The wholesale water allowed expenditure for Affinity Water is detailed in table A2.4
below. We provide a further breakdown of some of the calculations in annex 1.
Further information about our assessment of each claim is set out in the populated
version of the final determination cost threshold models.
We have adapted our final determination threshold by using the projections of
explanatory variables for the water wholesale service provided in the company plan
as inputs to our cost models. This is on the basis that, for the two enhanced
companies, we have relatively high confidence that these cost driver projections are
aligned with the companies’ delivery to customers.
In Affinity Water’s draft determination, we used our own profile of the company’s
totex. In line with the ‘do no harm’ principle, and consistent with the default approach
to all other companies, for the final determination we have used the company’s totex
profile.
Table A2.4 Wholesale water allowed expenditure (£ million)
2015-16
2016-17
2017-18
2018-19
2019-20
Final determination
cost threshold
Total
2015-20
1,091.3
Costs excluded from
menu
2.9
2.8
2.8
2.8
2.8
13.9
Menu cost baseline1
245.1
247.6
215.2
192.1
177.4
1,077.4
17
Final price control determination notice: company-specific appendix – Affinity Water
2015-16
2016-17
2017-18
2018-19
2019-20
Company’s view of
menu costs2
Total
2015-20
1,020.1
Implied menu choice
94.7
Allowed expenditure
from menu
241.8
244.3
212.3
189.6
175.0
1,063.1
Costs excluded from
menu
2.9
2.8
2.8
2.8
2.8
13.9
244.7
247.1
215.1
192.3
177.8
1,077.0
0.6
0.6
0.6
0.6
0.6
2.8
244.2
246.5
214.5
191.8
177.2
1,074.3
Total allowed
expenditure3
Less pension deficit
repair allowance
Totex for input to
PAYG
Notes:
1. Menu baseline is equal to the final determination threshold less pension deficit recovery costs, third party
costs and market opening costs related to 2014-15 (see annex 1).
2. Based on company plan totex (reflecting its representation on its draft determination) minus costs for items
excluded from the menu. The company will make a final menu choice by 16 January 2016 and any difference
between this and the implied menu choice will be reconciled as part of PR19.
3. Includes pension deficit recovery costs.
A2.3.2
Calculation of revenues: PAYG and RCV run-off
In section A5.5, we discuss financeability at an appointee (whole regulated
company) level.
Table A2.5 shows the PAYG rates and the amount of totex recovered for wholesale
water, which we have used as the basis for this enhanced final determination. The
‘Resulting PAYG (£m)’ is the amount of money recovered from customers in the
short term. Table A2.5 shows the RCV run-off amounts included within the wholesale
water charge. This is the amount of money recovered in the long term through the
company’s RCV.
Table A2.5 Affinity Water’s wholesale water PAYG rates
Totex (£m)
2015-16
2016-17
2017-18
2018-19
2019-20
244.2
246.5
214.5
191.8
177.2
18
Total
1,074.3
Final price control determination notice: company-specific appendix – Affinity Water
PAYG (%)
Resulting PAYG (£m)
2015-16
2016-17
2017-18
2018-19
2019-20
Total
69.1%
67.4%
74.7%
81.9%
87.7%
76.2%
168.8
166.2
160.3
157.2
155.4
807.9
The figures in this table reflect the change in PAYG rates as described in section
A5.5 on financeability.
Table A2.6 Affinity Water’s wholesale water RCV run-off (£ million)
2015-16
2016-17
2017-18
2018-19
2019-20
Run-off of 2015 RCV
39.1
37.5
36.0
34.6
33.2
180.5
RCV run-off of totex
additions
1.5
4.6
7.3
9.1
10.2
32.7
40.6
42.2
43.3
43.7
43.4
213.2
Total RCV run-off
Total
Note: The figures in this table reflect a run-off rate of 4% for the RCV as at 31 March 2015 and 25 years for the
totex additions to the RCV over 2015-20.
This reflects the change in RCV run-off rates as described in section A5.5 on
financeability.
A2.3.3
Return on the RCV
As stated in policy chapter A3, the return on the RCV is a key component of allowed
wholesale revenues. The return on the RCV is the wholesale weighted average cost
of capital (WACC) applied to the RCV during the 2015-20 period. The RCV is
calculated as the RCV at the start of the period plus totex that is not funded on a
PAYG basis minus RCV run-off (or regulatory depreciation).
In our risk and reward guidance, we set out a single industry cost of capital for both
wholesale water and wastewater services based on market evidence, which at the
time was 3.70%. The company accepted this guidance as a condition of its
enhanced categorisation. As set out in policy chapter A7, based on the latest market
evidence for the cost of new debt we have set the wholesale cost of capital at 3.60%
for non-enhanced companies.
As Affinity Water is an enhanced company, it is protected against downward
adjustments to the cost of capital by the ‘do no harm’ principle. This protection is an
important part of the incentive framework; encouraging companies to produce high
19
Final price control determination notice: company-specific appendix – Affinity Water
quality business plans. A reduction in the allowed return of 0.1 percentage points has
a value of £5 million to the company.
Affinity Water’s wholesale cost of capital is therefore 3.70%. This results in a return
on capital of £191.7 million over 2015-20.
As discussed in policy chapter A3, the RCV is calculated as the RCV at the start of
the period plus totex that is not funded on a PAYG basis minus RCV run-off (or
regulatory depreciation).
Table A2.7 shows our calculation of the opening RCV at 1 April 2015 taking account
of the adjustments for 2010-15 performance discussed in section A2.3.4 below. It
also sets out the wholesale water element of the £4 million initial reward to the
company as a result of it achieving enhanced status. In April 2014, the company
chose to receive the reward through its allowed revenues and K factors.
The average RCV, set out in table A2.8 for each year, takes into account the
proportion of totex additions to the RCV determined by the PAYG rate and RCV runoff as set out in tables A2.5 and A2.6 above.
Table A2.7 Affinity Water’s wholesale water opening RCV (£ million)
2015-16
Closing RCV 31 March 2015
939.5
Land sales1
-5.2
Adjustment for actual expenditure 2009-102
24.4
Adjustment for actual expenditure 2010-153
14.8
Net adjustment from logging up and logging down3,4
0.0
Adjustment for shortfalls3,4
0.0
Adjustment for serviceability shortfalls5
0.0
Enhanced reward
4.0
Other adjustments6
0.0
Opening RCV 1 April 2015
977.5
Notes:
1. Land sales adjustment is set out in table AA3.19.
2. 2009-10 actual expenditure adjustment is set out in table AA3.19.
3. A component of the capital expenditure (capex) incentive scheme (CIS) adjustment as set out in table AA3.16.
4. The net adjustment from the change protocol is set out in table AA3.7.
20
Final price control determination notice: company-specific appendix – Affinity Water
5. The serviceability shortfall adjustment is set out in table AA3.10.
6. Other RCV adjustments are set out in table AA3.19.
Table A2.8 Affinity Water’s wholesale water return on RCV (£ million)
2015-16
Opening RCV
2016-17
2017-18
2018-19
2019-20
977.5
1,012.3
1,050.4
1,061.3
1,052.2
RCV additions (from
totex)
75.4
80.3
54.2
34.6
21.9
Less RCV run-off
40.6
42.2
43.3
43.7
43.4
1,012.3
1,050.4
1,061.3
1,052.2
1,030.7
994.9
1,031.4
1,055.9
1,056.8
1,041.5
36.8
38.2
39.1
39.1
38.5
Closing RCV
Average RCV (year
average)
Return on capital
A2.3.4
Reconciling 2010-15 performance
At the time of final determinations in 2009, we included a number of incentive
mechanisms designed to encourage companies to improve and deliver services
more efficiently, and, to manage uncertainty. Consistent with the broad approach set
out at the time of the final determinations in 2009 we have made adjustments at this
price review (PR14) to 2015 to 2020 revenues to take account of company
performance in the 2010 to 2015 period.
Our approach to reconciling 2010-15 performance is set out in policy chapter A4.
The company proposed adjustments to the opening RCV and allowed revenue for
the wholesale water services to reconcile performance in 2010-15 in December
2013. We and the company have made slight adjustments to these based on the
identification of minor errors and on updated information for 2013-15 not available
when we made our draft determination in April. As a result, the revenue adjustments
for wholesale water have changed from -£ 13.9 million to -£12.3 million. We
summarise these adjustments in table A2.9 below. The impact on the opening RCV
of 2010-15 adjustments is shown in table A2.7 and we discuss our changes in this
area further in annex 3.
When making these final determinations we do not have the full information on
companies’ performance in 2014-15. We set out in ‘Setting price controls for 2015-20
– further information on reconciling 2010-15 performance’ that we would reconcile for
the revenue correction mechanism (RCM), change protocol and serviceability in
21
Final price control determination notice: company-specific appendix – Affinity Water
2015, and in 2016 for the CIS, when we have the company’s actual performance for
2014-15. In carrying out this reconciliation, we will take a proportionate approach (for
example applying materiality thresholds where appropriate) to making adjustments
for company’s actual performance and implement these changes at the next
wholesale price control review in 2019.
22
Final price control determination notice: company-specific appendix – Affinity Water
Table A2.9 Affinity Water’s wholesale water revenue adjustments to reflect 2010-15 performance (£ million)
Area
Change to draft determination
Total revenue adjustment 2010-15
(post update).
Company view
Draft determination
Final determination
SIM
There are no changes in this area.
0.0
0.0
0.0
RCM
Our final determination reflects the company’s
updated RCM adjustments following updates
to 2013-14 actuals and 2014-15 forecasts. We
have included our view of the final
determination 2009 (FD09) assumptions and
used the out-turn financial year average RPI
and forecasted 2014-15 tariff basket revenues
as submitted in the company’s business plan
instead of what the company has submitted in
its RCM model.
0.8
2.5
2.3
0.0
0.0
0.0
-10.7
-8.8
-10.6
Combined these changes increased revenue
by £1.4 million compared to the company's
business plan update.
Opex
incentive
allowance
(OIA)
There are no changes in this area but we have
included £0.0123 million as a post-tax
incentive revenue adjustment in 2015-16.
CIS
As for all companies, in carrying out the CIS
assessment for the final determination, we
23
Final price control determination notice: company-specific appendix – Affinity Water
Area
Change to draft determination
Total revenue adjustment 2010-15
(post update).
Company view
Draft determination
Final determination
have used the updated information on 201314 and 2014-15.
We have used the post-tax basis of the PR09
cost of capital for the discount rate when
calculating the future value of the revenue
adjustment in the 2010-15 period. While the
pre-tax discount rate has not been used in the
final determination, we have corrected the
input values for the PR09 pre-tax cost of
capital.
Combined these changes increase revenue
by a further £0.1 million compared to the
company's business plan update.
Other
adjustments
The company included a tax refinancing
benefit clawback adjustment of £0.8 million a
year due to in period changes in its capital
structure. There are no changes in this area.
-4.0
24
-4.0
-4.0
Final price control determination notice: company-specific appendix – Affinity Water
Table A2.1 notes the comments that we have received that are specific to this aspect
of the wholesale water control of Affinity Water. Our final determinations have been
influenced by our consideration of these responses. The changes we have made in
the final determination in reconciling the company’s 2010-15 performance result from
including updated actuals for 2013-14 and forecasts for 2014-15 and from correcting
the company’s data inconsistencies (see Annex 3 for details).
A2.3.5
Calculation of allowed revenue
We set out the calculation of the allowed revenue for Affinity Water’s wholesale
water control in Table A2.10.
Overall, the company’s wholesale water revenue allowance will be £254 million in
2015-16, decreasing by 3.9% to £244 million in 2019-20.
Table A2.10 Affinity Water’s wholesale water allowed revenue (£ million)
2015-16
Totex
2016-17
2017-18
2018-19
2019-20
244.2
246.5
214.5
191.8
177.2
PAYG rate (%)
69.1%
67.4%
74.7%
81.9%
87.7%
Totex additions
to the RCV
75.4
80.3
54.2
34.6
21.9
994.9
1,031.4
1,055.9
1,056.8
1,041.5
RCV (year
average)
Total
1,074.3
266.4
Wholesale allowed revenue build up:
PAYG1
169.3
166.8
160.9
157.7
155.9
810.6
Return on
capital
36.8
38.2
39.1
39.1
38.5
191.7
RCV run-off
40.6
42.2
43.3
43.7
43.4
213.2
2.0
1.2
0.2
0.9
2.0
6.5
Income from
other sources3,4
-2.6
-2.6
-2.6
-2.6
-2.6
-13.0
Reconciling
2010-15
performance
-2.3
-2.4
-2.5
-2.5
-2.6
-12.3
Tax2
25
Final price control determination notice: company-specific appendix – Affinity Water
2015-16
Ex ante
additional menu
income
1.8
2016-17
2017-18
1.8
2018-19
2019-20
Total
1.5
1.4
1.3
7.7
Wholesale allowed revenue adjustments:
Capital
contributions
from connection
charges and
revenue from
infrastructure
charges
Final allowed
revenues
8.4
8.4
8.0
7.8
8.0
40.6
254.0
253.5
248.0
245.5
244.0
1,245.0
Notes:
1. PAYG includes the PAYG calculated from totex and the pension deficit repair allowance.
2. Including tax on adjustments for reconciling 2010-15 performance and ex-ante additional menu income.
3. We have adjusted other income values to remove the deferred income element relating to IFRIC18, as this is
an accounting adjustment.
4. Our assessment of income from other sources is discussed in section A3.5.2 of policy chapter A3.
A2.4 Uncertainty mechanisms
We have set the company’s allowed revenues for the 2015-20 period. All companies
face uncertainty about future costs and revenues and this is reflected in the rate of
return and the established framework in the licence.
We outline our approach to incremental uncertainty mechanisms in policy chapter
A7, where we set out our response to the representations made by stakeholders in
support of sector wide uncertainty mechanisms.
We have allowed all companies an uncertainty mechanism for business rates, as the
revaluation of business rates in 2017 is a material risk that is largely outside the
control of companies. This mechanism allows a proportion of the costs to be passed
through to customers, reflecting the fact that companies have more control than
customers in managing the risk.
In table A2.11 below, we set out Affinity Water’s proposed wholesale water
uncertainty mechanisms and our final assessment of these proposals.
26
Final price control determination notice: company-specific appendix – Affinity Water
Table A2.11 Affinity Water’s proposals for wholesale water uncertainty mechanisms
Assessment at draft determination
In the draft determination, we accepted
Affinity Water’s proposed uncertainty
mechanism for water business rates with the
proposed sharing rate of 75:25
(customer:company).
Our final assessment
For our final determination, we confirm the
uncertainty mechanism included in our draft
determination. The specific text of this
Notified Item is in the annex to the final
determination letter. The rationale for its
inclusion in the final determination is set out
in policy chapter A7.
Affinity Water has not objected to our
approach in the draft determination. We have
not included any additional uncertainty
mechanisms for the company.
27
Final price control determination notice: company-specific appendix – Affinity Water
A3 Household retail
A3.1 Consideration of representations on our draft
determinations
In policy chapter A1, we provide a list of the respondents to the draft determinations
published in April, May and August of this year. We have fully considered all of the
responses received, and where appropriate, we have made either consequential
adjustments to our industry-wide approach or company-specific interventions.
Our general policies relevant to the household retail control are set out in the
following policy chapters that accompany our final determinations. These include our
responses to representations on sector-wide issues.
•
•
•
Policy chapter A2.
‘Policy chapter A5 – household retail costs and revenues’ (‘policy
chapter A5’).
Policy chapter A7.
Table A3.1 lists the representations we have received that are specific to Affinity
Water’s household retail control and sets out where to find more information on our
responses in this document.
Table A3.1 Representations specific to the household retail control of Affinity Water
Area
Company-specific
representations
Detailed commentary in this
company-specific appendix
Outcomes, performance
commitments and incentives
None
Annex 4
Outcome delivery and reporting
None
Annex 4
Allocation of costs
Affinity Water
Section 3.3.1 and Annex 1
Adjustments
None
Section A3.3.2 and A5.5
New costs
None
Section A3.3.3
Uncertainty mechanisms
None
Annex 3
28
Final price control determination notice: company-specific appendix – Affinity Water
A3.2 Outcomes, performance commitments and incentives
We summarise the outcomes, PCs and ODIs for the household retail control for
Affinity Water in table A3.2 below.
Table A3.2 Household retail outcomes, performance commitments and incentives
Company proposal
Outcome
Providing a value
for money service
Performance
commitment
Incentive type
Update to draft
determination
SIM1
Financial – reward
and penalty
No change
Value for money
survey
Reputational
No change
Note: 1. We have required all companies to include a PC based on the SIM.
In policy chapter A2, we discuss our approach to outcomes for the wholesale and
retail controls. Affinity Water has developed and committed to delivering outcomes
that reflect its customers’ views.
The company’s outcomes have been developed with challenge provided by the
company’s CCG. The CCG’s role was to challenge how well the company’s
outcomes, PCs and delivery incentives reflect the views and priorities of customers,
both now and in the future, as well as environmental priorities.
As Affinity Water is an enhanced company, the outcomes that Affinity Water
proposed are those which it will need to deliver over the next 5 years.
As an enhanced company, Affinity Water gained its draft determination earlier than
all non-enhanced companies, allowing it extra time to prepare for delivery of these
outcomes for its customers.
Full detail of the household outcomes, PCs and incentives, and our consideration of
relevant responses, is provided in annex 4.
A3.3 Costs
Our assessment of Affinity Water’s retail costs and the impacts these have on its
allowed revenues has changed since our draft determination. The change reflects
29
Final price control determination notice: company-specific appendix – Affinity Water
the retail cost information we have received from Affinity Water, along with other
companies, and our assessment of those costs. It also reflects changes following
representations from all companies. We have updated our view for enhanced
companies because changes in their retail costs are not covered by the “do no harm”
principle.
Our approach to the household retail control is set out in policy chapter A5. As set
out in the policy chapter A5, we have adjusted companies’ costs to align to the 201314 base year. Historic costs are therefore presented in 2013-14 prices, and all future
costs and revenues in nominal prices. We set out our final household retail
adjustments, the modification factors for household retail allowed revenue and the
assumed number of customers we have used to calculate the total revenues in
annex 2.
A3.3.1
Allocation of costs
Table A3.3 Representations specific to the allocation of Affinity Water’s household
retail costs
Respondent
Summary of comment
Ofwat response
Affinity Water
The company has allocated its
costs in line with our guidance.
We have accepted the company’s
cost allocation.
Affinity Water
The company provided revised
allocations of the forecast
efficiencies between metered
and unmetered costs.
We have accepted the company’s
revised allocation of forecast
efficiencies.
In table A3.4, we summarise our assessment of Affinity Water’s cost allocation
methodology.
Table A3.4 Our assessment of Affinity Water’s cost allocation methodology
Area assessed
Assessment
No potential material misallocations
Pass
Adequate assurance provided
Pass
Reconciliation to regulatory accounts and December business plan
provided
Pass
30
Final price control determination notice: company-specific appendix – Affinity Water
We wrote to the company on 29 August 2014 to notify it of the outstanding cost
allocation actions following our review of its June cost allocation submission. We
required the company to address these actions by 3 October 2014. Table A3.4
shows our assessment of Affinity Water’s cost allocation methodology, based on the
information we received from the company by 3 October 2014. We are satisfied that
the company has addressed the actions set out in our 29 August letter. Therefore,
we have used the company’s cost allocation between retail and wholesale and
between household and non-household retail to set our final determination. This
completes the company’s action to comply with our cost allocation guidance.
One of these actions was for the company to undertake a cross check of its doubtful
debts allocation based on write-offs against an allocation based on the movement in
outstanding debt. The company has undertaken this cross check and has not
changed its allocation of doubtful debts following this. We have accepted the
company’s allocation based on debt write-offs. This is because we agree that this is
a more suitable proxy cost driver for the allocation of doubtful debts than the
movement in outstanding debt, in the absence of the direct attribution that our
guidance prescribes.
However, we note that from 2015-16 all companies will need to have the systems in
place to be able to directly attribute their annual doubtful debt charge between
household and non-household on a customer-type specific basis. We will confirm
this in the regulatory accounting guidelines for 2015-16, which we will publish early in
2015 following consideration of responses to other matters covered in our recent
consultation on regulatory reporting.
The company has also made a representation on the allocation of its forecasts of
efficiency improvements between base costs and the additional costs to serve
metered customers. The company has proposed a reallocation of its forecast
efficiency improvements to the additional cost to serve metered customers from base
cost to serve. The net effect of this is that the forecast additional cost to serve
metered customers is lower than at draft determination.
We accept the reallocation of these forecast efficiency improvements. The allocation
of efficiency improvements included in the draft determination business plan made a
simplifying assumption that all efficiency improvements would be made on base
costs, and none on the additional cost to serve metered customers. We consider that
the company’s revised allocation provides a more reasonable forecast of where in
the business future efficiency improvements will be made.
31
Final price control determination notice: company-specific appendix – Affinity Water
A3.3.2
Adjustments
Affinity Water did not propose any ACTS adjustments except for pension deficit
recovery costs.
Table A3.5 Adjustments included in final determination
2015-16
2016-17
2017-18
2018-19
2019-20
Total
Adjustments included in final determination
Pension deficit
repair costs
0.120
0.120
0.120
0.120
0.120
0.600
Adjustments
included in
final
determination
0.120
0.120
0.120
0.120
0.120
0.600
Pension deficit repair costs
In the final determination we have included an adjustment for all companies to reflect
the pension deficit recovery costs that our modelling shows is appropriate for
household retail as set out in IN 13/17 “Treatment of companies’ pension deficit
repair costs at the 2014 price review”.
A3.3.3
New costs
Affinity Water did not propose material household retail new costs. The value of any
modification for immaterial new costs is quantified in table A3.6.
Table A3.6 New household retail costs (£/customer)
Value
Modification made to 2013-14 cost to serve for ACTS calculation
32
0.00
Final price control determination notice: company-specific appendix – Affinity Water
Note: There will be no automatic indexation for retail price controls to RPI.
A3.4 Calculating the allowed revenues
As set out in policy chapter A5, total allowed household retail revenues are
calculated taking account of our assessment of the cost to serve per customer (after
the impact of our efficiency challenge), the projected customer numbers in the
company’s revised business plan and the household retail net margin.
The company proposed net margins of 1%. This is in line with our risk and reward
guidance and our further consideration of margins following representations on draft
determinations. We have therefore accepted the company’s proposals.
The table below shows the household retail net margin over 2015-20.
Table A3.7 Household retail net margins (%)
2015-16
Household retail net
margin
1.0%
2016-17
2017-18
1.0%
1.0%
2018-19
1.0%
2019-20
1.0%
Table A3.8 below sets out the components of the allowed household retail revenue.
Table A3.8 Components of the allowed household retail revenue (nominal prices)
2013-14
2015-16
2016-17
2017-18
Company cost to serve (£/customer)
Unmetered
single service
customers
16.0
Metered water
only customers
24.2
Industry ACTS (£/customer)
Unmetered
single service
customers
21.47
Metered water
only customers
27.26
33
2018-19
2019-20
Final price control determination notice: company-specific appendix – Affinity Water
2013-14
2015-16
2016-17
2017-18
2018-19
2019-20
Allowed cost to serve1 (£/customer)
Unmetered
single service
customers
15.5
15.3
15.1
14.8
14.7
Metered water
only customers
23.1
22.3
21.5
20.6
20.5
Cost to serve
(excluding net
margin)
26.5
26.4
26.2
26.0
26.4
Forecast
household
wholesale
charge
(including
forecast RPI2)3
241.3
248.1
250.9
255.8
261.7
28.9
28.9
28.8
28.6
29.0
Total allowed (£m)
Household retail
revenue
(including an
allowance for
the net margin)4
Notes:
There will be no automatic indexation for retail price controls to RPI. However, the wholesale price controls are
indexed linked to RPI. This will affect the retail net margins.
1. Allowed cost to serve includes pension deficit repair costs.
2. The household wholesale charge includes forecast RPI so that the total household retail revenue can be
displayed in the same price base as other retail costs.
3. The allocation of allowed wholesale revenue to different wholesale charges will be at the company’s
discretion, subject to charging rules and licence conditions, however, our assumed allocation of wholesale
revenue is binding for the purposes of determining the allowance for the net margin which is one component of
allowed household retail revenue.
4. This number is indicative, as allowed revenue will depend upon actual customer numbers.
A3.5 Uncertainty mechanisms
We outline our approach to uncertainty mechanisms in policy chapter A7. Affinity
Water did not propose any household retail uncertainty mechanisms beyond those
that will already form part of the regulatory framework for 2015-20.
34
Final price control determination notice: company-specific appendix – Affinity Water
A4 Non-household retail
In ‘Policy chapter A6 – non-household retail costs and revenues’ (‘policy chapter
A6’), we outline our overall approach to the non-household retail price control.
Our general policies relevant to the non-household control are set out in the policy
chapter A6. This includes our responses to representations on sector-wide issues. In
this chapter, we provide details of Affinity Water’s non-household retail price control.
A4.1 Consideration of representations on our draft
determinations
Our general policies relevant to the non-household control are set out in policy
chapter A6. This includes our responses to representations on sector-wide issues.
Table A4.1 lists the representations we have received that are specific to Affinity
Water’s non-household retail control and sets out where to find more information on
our responses in this document.
We did not formally make our draft determination of Affinity Water’s non-household
control until August. We therefore received the representations on this element of the
company’s draft determination in October, at the same time as non-enhanced
companies. These included representations on the form of the non-household
control, an issue we invited views on after we made our April draft determinations.
Table A4.1 Representations specific to the non-household retail control of Affinity
Water
Area
Company-specific
representations
Detailed commentary in this
company-specific appendix
Net margins
None
Section A4.3
Cost proposals
None
Section A4.4
Form of control
Affinity Water
Section A4.5
35
Final price control determination notice: company-specific appendix – Affinity Water
A4.2 Indicative non-household retail total revenue
Table A4.2 below shows the indicative total of non-household allowed revenue. The
table is indicative, as it does not assume any gains or losses from competition or
impacts from the company charging customers at levels different to the relevant
default tariffs for the projected customers in each customer type. Furthermore, the
controls for each customer type that we have set will only apply for two years; there
will be a review in 2016. Years 2017-18 to 2019-20 below are shown for illustrative
purposes only.
Table A4.2 Indicative non-household retail total revenue price control including
net margins (£ million, nominal prices)
2015-16
Indicative non-household
retail total revenue price
control including net
margins
2016-17
5.3
5.3
2017-18
5.2
2018-19
5.1
2019-20
5.1
Note: There will be no automatic indexation for retail price controls to RPI. The non-household wholesale charge
includes forecast RPI so that the total non-household retail revenue can be displayed in the same price base as
other retail costs. Figures exclude retail services to developers and revenues associated with miscellaneous
charges.
A4.3 Net margins
The company proposed net margins that equal 2.5% in aggregate. This is in line with
our risk and reward guidance and our further consideration of margins following
representations on draft determinations. We have therefore accepted the company’s
proposals.
A4.4 Cost proposals
As set out in policy chapter A6, we have adjusted companies’ costs to align to the
2013-14 base year. Historical costs are therefore presented in 2013-14 prices, and
all future costs and revenues in nominal prices. All cost figures (unless otherwise
specified) are five-year totals. As set out in 'policy chapter A6 – non-household retail
costs and revenues’, we expect our decisions on the total level of non-household
retail costs now, will still apply for years 2017-18 to 2019-20 – the 2016 review will
focus on the allocations between different non-household customer types.
36
Final price control determination notice: company-specific appendix – Affinity Water
In the draft determination, we noted that the company’s 2013-14 costs were
significantly higher than the preceding three years. We requested as part of its
representations that the company provide us with a clear explanation as to the cost
increase, and to explain why the increase should not be treated as an exceptional
one-off event.
In its representations, the company explained that this was due to a reallocation
between household and non-household retail. We were able to observe a
corresponding decrease to the company’s household retail costs. We therefore did
not intervene with the company’s base-year cost proposals.
In ‘IN 13/17: Treatment of companies’ pension deficit repair costs at the 2014 price
review’ we explained how we would treat the costs associated with water companies
reducing the deficits in their defined benefit pension schemes at PR14. Where
companies’ proposals have differed from our calculations, we have over-written their
proposals in line with our overall approach. This resulted in the company’s proposals
being adjusted from £0.105 million over the control period, to £0.096 million.
In total, this resulted in the company’s proposed costs being adjusted from £18.182
million over the control period to £18.174 million.
A4.5 Form of control
In ‘Setting price controls for 2015-20, Draft price control determination notice:
technical appendix A5 – non-household retail’, we recognised that some companies
could benefit from having further time to consider and address any issues ahead of
the introduction of competition into the non-household retail market in April 2017.
Our final determination on the form of control is set out in the policy chapter A6. In
that document we confirm the basic form of control set out in our final methodology
statement, but with a two-year initial duration and with a review carried out in 2016.
A4.6 Average revenue controls
The allowed average retail cost component (£) and the allowed net margin (%) for
each customer type are shown in the table below for Affinity Water.
The average retail revenue per customer – £ (r) – has also been shown. For the
avoidance of doubt, it is the average cost component and the allowed net margin
37
Final price control determination notice: company-specific appendix – Affinity Water
that make up the non-household retail control. The average retail revenue per
customer is shown only to help comparisons to be drawn.
Table A4.3 Non-household retail average controls per customer
Customer type
Affinity Water Measured
Half Yearly, no volume
band, water, metered
Affinity Water Measured
Monthly, no volume band,
water, metered
Affinity Water
Unmeasured, no volume
band, water, unmetered
Affinity Water Assessed,
no volume band, water,
unmetered
Affinity Water Special
Agreements, no volume
band, water, measured
Units
2015-16
2016-17
2017-18
2018-19
2019-20
£
51.86
50.88
49.96
48.84
47.50
%
1.0%
1.0%
2.4%
2.4%
2.5%
£ (r)
57.03
56.18
63.03
62.45
61.65
£
182.53
179.10
175.84
171.88
167.20
%
4.4%
4.4%
2.6%
2.6%
2.5%
£ (r)
653.98
666.53
464.02
459.65
454.96
£
44.14
43.31
42.52
41.57
40.43
%
1.0%
1.0%
2.4%
2.4%
2.5%
£ (r)
48.35
47.60
53.13
52.56
51.86
£
28.63
28.09
27.58
26.96
26.22
%
1.0%
1.0%
2.4%
2.4%
2.5%
£ (r)
29.61
29.09
30.03
29.49
28.85
£
154.27
151.37
148.62
145.28
141.31
%
3.0%
3.1%
3.1%
2.7%
2.5%
2,028.29
2,085.39
2,104.75
1,905.66
1,803.16
£ (r)
38
Final price control determination notice: company-specific appendix – Affinity Water
A5 Appointee financeability and affordability
In this section, we discuss at an appointee level:
•
•
•
•
bills and K factors;
RoRE;
financeability; and
affordability;
However, we first consider the responses to our draft determinations that are specific
to Affinity Water’s treatment in these areas below.
A5.1 Consideration of representations on our draft
determinations
In policy chapter A1, we provide a list of the respondents to the draft determinations
published in April, May and August of this year. We have fully considered all of the
responses received, and where appropriate, we have made either consequential
adjustments to our industry-wide approach or company-specific interventions.
Table A5.1 lists the representations we have received that are specific to Affinity
Water at an appointee level and sets out where to find more information on our
responses in this document.
Table A5.1 Representations specific to issues at an appointee level for Affinity Water
Area
Company-specific
representations
Detailed commentary in this
company-specific appendix
Bills and K factors
None
Section A5.2
Appointee level uncertainty
and gain share mechanisms
Environment Agency
Section A5.3
RoRE range
None
Section A5.4
Financeability
Affinity Water
Section A5.5
CCWater
Affordability
CCWater
Section A5.6
Financial modelling
Affinity Water
Section A5.7
39
Final price control determination notice: company-specific appendix – Affinity Water
A5.2 Bills and K factors
Table A5.2 below sets out the allowed revenues we have assumed in our final
determination for Affinity Water to deliver for its customers on its:
•
•
statutory duties; and
associated PCs.
It also sets out the average customer bills on the basis of the final determination.
These figures reflect the changes made to PAYG rates to target the company’s
desired final determination wholesale revenue.
Affinity Water received financial benefits as an enhanced company in the form of an
initial reward and an enhanced totex menu with enhanced sharing rates. It chose to
recover its initial reward, of £4m, through its allowed revenues.
Table A5.2 Affinity Water’s enhanced final determination – K factors, allowed
revenues and customer bills1
2015-16
2016-17
2017-18
2018-19
2019-20
Wholesale water –
allowed revenues (£m)2
254.0
253.5
248.0
245.5
244.0
1,245.0
Wholesale water – K
(%)3
0.0%
0.4%
-2.1%
-1.2%
-0.8%
-
28.9
28.9
28.8
28.6
29.0
144.1
Retail non-household
expected revenue (£m)
5.3
5.3
5.2
5.1
5.1
25.9
Average household bill –
water (£)4
165
164
160
157
156
-
Retail household allowed
revenue (£m)
Total
Notes:
1. Wholesale figures in 2012-13 prices as revenue will be affected by inflation and retail figures in nominal prices
as revenue will not be affected by inflation.
2. The allowed revenue for our final determination is based on an implied menu choice. The company will have
the opportunity to make its own menu choice, which will impact on its allowed revenues and customers’ bills from
2020. Customer bills in the regulatory period from 2020 will also be affected by Affinity Water’s performance in
the forthcoming regulatory period in relation to costs and the regulatory incentives in place for performance
delivery and revenue projection performance.
3. It should be noted the average household bill illustrated above reflects a notional allocation (by Ofwat but
based on the company’s split of household and non-household customers) of the overall wholesale revenue
requirement across Affinity Water’s household and non-household customer base. In practice, this will depend
upon the structure of wholesale charges implemented by Affinity Water.
40
Final price control determination notice: company-specific appendix – Affinity Water
As discussed in policy chapter A3, K is set to zero for 2015-16 for wholesale water
and wastewater because there are no directly equivalent wholesale revenues for
2014-15 (on account of the new price review structure). As such, there is no existing
reference point against which to express a change in K.
The base (2014-15) revenue allowance we have set is the financial year average
revenue for 2015-16 adjusted for inflation. We set this out for Affinity Water in the
table below.
Table A5.3 Affinity Water's allowed wholesale revenue for 2014-15
Affinity Water
Wholesale water
Allowed wholesale revenue 2014-15 (£ million)
268.0
A5.3 Uncertainty and gain share mechanisms
We outline our approach to uncertainty mechanisms and “pain and gain share” in
policy chapter A7.
Affinity Water has not proposed any appointee level uncertainty mechanisms beyond
those that will already form part of the regulatory framework for 2015-20.
A5.4 RoRE range
Affinity Water has estimated the range of returns on regulatory equity (RoRE) that it
could earn dependent on its performance and external risk factors over the price
control period. The RoRE range reflects the company’s views and is based on an
efficient company with the notional capital structure 3. We have identified the RoRE
impact separately for ODIs, totex performance, financing and the SIM. We note that
Affinity Water's actual returns may differ from notional returns due to differences
between notional and actual capital structure and notional and actual cost of debt
and level of cost efficiency compared to allowed totex and household retail ACTS.
3
The notional capital structure is the capital structure that reflects Ofwat’s assumption of an
appropriate level of gearing to use in determining the allowed WACC.
41
Final price control determination notice: company-specific appendix – Affinity Water
Table A5.4 Whole company RoRE range
Lower bound (%)
– appointee
Upper bound (%)
– appointee
Overall
-5.2%
+3.4%
ODIs
-1.9%
+0.5%
Totex
-2.6%
+2.7%
Financing
-0.2%
+0.2%
SIM
-0.6%
+0.0%
Commentary:
In our draft determination for Affinity Water, we published the company’s RoRE ranges for
each element of the price control, but not at the appointee level. We continue to consider
that the analysis carried out by Affinity Water was robust, for the reasons set out there.
Subsequently, Affinity Water has not made any representations in this area. Affinity Water
has updated this calculation to reflect the latest version of the risk assessment.
The whole company RoRE range is from 0.9% to 9.5%, with a base case of 6.1%, with
overall impacts from -5.2% to +3.4%. The overall impacts are unchanged from the draft
determination but the range is modified to reflect a continued allowed wholesale cost of
capital of 3.7% associated with enhanced status (when the notional cost of new debt has
fallen) and to exclude additional returns from non-household retail control to be consistent
with approach in our risk and reward guidance. The overall impacts are broadly in line with
other companies and we consider that it represents an appropriate balance of risk and
reward.
The totex risk range is -2.6% to +2.7% of notional equity. We are satisfied that Affinity Water
has appropriately taken into account historic cost variability to arrive at this estimate, and
therefore this represents a sufficiently considered company view of its potential totex risk.
The ODI risk range proposed by Affinity Water was from -1.9% to +0.5%. Affinity Water was
awarded enhanced status so we have made no changes to its ODIs.
Affinity Water has assessed financing impacts using a scenario of ±50 basis points on the
cost of new debt.
The composition of the RoRE range for Affinity Water at an appointee level is shown
in figure A5.1 below.
42
Final price control determination notice: company-specific appendix – Affinity Water
Figure A5.1 Affinity Water’s RoRE range – appointee
RoRE range – whole company
10.0%
Financing outperformance
0.2%
9.0%
Totex outperformance
2.7%
8.0%
SIM outperformance
7.0%
0.0%
0.5%
6.0%
5.0%
1.9%
4.0%
0.6%
Base
case
6.1%
ODI outperformance
ODI underperformance
SIM underperformance
3.0%
Totex underperformance
2.6%
2.0%
Financing underperformance
0.2%
1.0%
0.0%
Source: Ofwat calculations based on information from Affinity Water
Note: Numbers presented based on calibration of the ODIs against an assumed menu choice of a 50% sharing
factor
A5.5 Financeability
Table A5.5 Representations specific to Affinity Water’s financeability
Respondent
Affinity
Water
Summary of comment
Ofwat response
We used our own profile in Affinity
Water’s draft determination. For its
final determination, in line with the
‘do no harm’ principle, we have used
the company’s proposed totex
profile. The company requested an
opportunity to understand its final
year-by-year totex and revenue
profile (and tax implications), as a
consequence of this change.
As Affinity Water is an enhanced
company, we have used PAYG rates
to target its desired final
determination wholesale revenue.
43
Final price control determination notice: company-specific appendix – Affinity Water
Ofwat has a statutory duty to secure that a company is able to finance the proper
carrying out of its functions. We interpret this financing duty as requiring that we
ensure that an efficient company with a notional capital structure is able to finance its
functions. A company’s actual capital structure is a choice for the company and it
bears the risk associated with its choices. An efficient company is assumed to be
able to deliver its plans based on the expenditure allowance in our final
determination.
We set out our approach to assessing financeability in policy chapter A8.
A company’s actual capital structure is a choice for the company and it bears the risk
associated with its choices.
In table A5.6, we set out the notional financeability ratios associated with Affinity
Water’s business plan, draft determination and final determination.
Table A5.6 Company and Ofwat financial ratio calculations based on the company
business plan and financial ratios based on our final determination
Financial ratios for
notional company
Financial ratio calculations
based on the company
business plan (average
2015-20)
Financial ratio calculations
based on Ofwat calculations
(average 2015-20)
Company
calculation
Ofwat
calculation
Draft
determination
Final
determination
Cash interest cover
(ICR)
3.52
3.70
3.67
3.56
Adjusted cash
interest cover ratio
(ACICR)
2.11
2.29
2.21
2.17
Funds from
operations(FFO)/debt
11.70%
12.80%
12.43%
12.08%
Retained cash
flow/debt
7.31%
10.26%
9.71%
9.51%
Gearing
62.50%
62.50%
61.20%
63.49%
1.41
2.63
2.25
2.00
Dividend cover (profit
after tax/dividends
paid)
44
Final price control determination notice: company-specific appendix – Affinity Water
Financial ratios for
notional company
Financial ratio calculations
based on the company
business plan (average
2015-20)
Financial ratio calculations
based on Ofwat calculations
(average 2015-20)
Company
calculation
Ofwat
calculation
Draft
determination
Final
determination
Regulatory
equity/regulated
earnings for the
regulated company1
17.48
14.33
17.02
16.61
RCV/EBITDA
8.96
8.66
9.27
9.47
Commentary:
For the draft determination, the company satisfied itself and us that ratios remained at levels
consistent with a company that is financeable.
The company did not raise any issues relating to financeability in its representation on its
draft determination (apart from in relation to totex phasing which we have amended as part
of our final determination). The financial ratios from our final determination are at levels
consistent with those at draft determination. We consider that the final determination is
financeable.
Note:
1. The regulatory equity/regulatory earnings ratio is now defined on the basis of earnings after real
interest and tax; previously, this has been defined on the basis of nominal interest for the early draft
determinations. The use of real interest is more consistent with this measure as an economic
measure of equity returns.
As explained in policy chapter A8, companies have been allowed to use new tools in
the form of PAYG rates (the proportion of totex recovered in the period 2015-20) and
RCV run-off rates (depreciation of the RCV). Both PAYG and RCV run-off rates can
be adjusted to change the proportion of costs recovered within the 2015-20 period
and the amount added to the RCV and recovered over a longer period.
Table A5.7 sets out the PAYG and RCV run-off rates, which shows whether revenue
has been brought forward compared to the December plan and the impact that this
has on RCV growth and longer-term affordability and financeability.
As Affinity Water is an enhanced company, we have amended PAYG rates to target
the company’s proposed bill profile.
45
Final price control determination notice: company-specific appendix – Affinity Water
Table A5.7 Impact of changes in cost recovery rates on RCV growth
PAYG rate
RCV run-off
RCV growth
(%) –
1 Apr 2015 to
31 Mar 2020
Company December plan
76.6%
4.0%
4.2%
Company April plan
76.3%
4.0%
2.9%
Draft determination
77.4%
4.0%
4.8%
Final determination
76.2%
4.0%
5.4%
A5.6 Affordability
We set out our approach to assessing affordability in policy chapter A8. Table 5.8
sets out the change in household bill profile between the company’s December
business plan, its March update, the draft determination, the company’s
representation on targeting its proposed revenues and associated bills, and the final
determination.
Table A5.8 Household bill profile
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
Company December
plan
165
164
163
162
161
160
Company March
update
165
159
158
157
155
153
Ofwat calculation for
draft determination –
pre-reprofiling
165
165
165
159
156
155
Ofwat calculations for
draft determination
165
165
165
159
156
155
Company
representations
165
165
164
160
157
156
Ofwat calculations
for final
determination
165
165
164
160
157
156
46
Final price control determination notice: company-specific appendix – Affinity Water
The final determination leads to a reduction in bills in 2015-20. As Affinity Water is an
enhanced company, we have reprofiled bills in line with the company’s desired
profile.
The following text sets out the reasons why this final determination is assessed as
affordable. It describes key changes in relation to Affinity Water’s December
business plan that we assessed as affordable.
A5.6.1 Acceptability
Table A5.9 Ofwat response to representations
Respondent
Summary of comment
Ofwat response
CCWater
Affinity Water should work
closely with its associated
sewerage companies, in
particular Thames Water, to
explain the impact of the
Thames Tideway Tunnel and
to make sure that customers
are able to access any
available affordability
packages.
In its business plan, Affinity Water
committed to devising an effective
communication programme so that it could
inform customers of potential price
changes and take steps to mitigate the
impact on vulnerable and low-income
customers. We consider that this is
reasonable.
CCWater1
CCWater conducted research
on the acceptability of the draft
determination to customers.
CCWater did not seek to
produce comparable results to
the company. The CCWater
research suggests 67% of
customers find the draft
determination acceptable after
they have been provided with
information on bills, inflation
and what the water company
will deliver.
We note that the CCWater research was
not intended to be comparable. It has
produced a significant difference to the
research that the company undertook on its
revised business plan, which was that 87%
found the plan acceptable. The company’s
plan has been developed with input from its
CCG. The CCG’s role was to help ensure
the business plan reflected the views and
priorities of customers. We have reviewed
the company’s acceptability research,
which included reviewing the transparency
and accuracy of the bill and inflation
information. We consider that the
acceptability that the company reported is
sufficiently robust. We also consider that
the CCWater survey results indicate the
importance of continued engagement with
customers.
47
Final price control determination notice: company-specific appendix – Affinity Water
Respondent
Summary of comment
Ofwat response
CCWater
CCWater made a comment in
response to the smoothing of
Affinity Water’s bill profile
through an adjustment to its
PAYG rate. CCWater want to
understand over what period
customers pay for the
proportion of investment that
has been added to the RCV
following PAYG adjustments.
As set out in the draft determination, totex
additions would have an average life of 25
years.
CCWater
Price adjustments via the RCM
may be stored up for the next
price review, because of the
compulsory metering
programme.
The Wholesale Revenue Forecasting
Incentive Mechanism (WRFIM) replaces
the RCM in 2015-20. WRFIM incentivises a
company to accurately forecast revenue by
penalising the company if its forecasts are
outside a predetermined range. The
WRFIM revenue adjustments will be
applied at a future price review after 2020.
We have not found any significant effect of
metering penetration on revenue
forecasting error and confirmed that neither
the flexibility thresholds nor the penalty
rates of WRFIM are linked to metering
penetration. We have therefore found no
evidence that compulsory metering affects
the WRFIM.
Note:
1. CCWater acceptability results sourced from final version of ‘Customers’ views on Ofwat’s draft determinations
for process and service 2015-20’ October 2014.
The company conducted customer research to support its original December 2013
business plan submission. Its research found 87% of customers supported a plan
that had an associated bill increase of £1.80 before inflation. It is reasonable to
assume that the reduction proposed in the final determination of £9 by 2019-20
would remain acceptable to the majority of the company’s customers.
In its representations on our draft determination, the company has argued for a
profiling of its totex in line with its business plan proposals. This would not impact the
average reduction of bills over the period 2015-20 and so would again remain
acceptable to the majority of the company’s customers.
48
Final price control determination notice: company-specific appendix – Affinity Water
A5.6.2 Identification of affordability issues and appropriate support measures
The company has a comprehensive range of affordability measures in place, and
outlines in its business plan how it is proposing to both increase the coverage of
some schemes and to introduce new initiatives. The key measures are summarised
in the following table.
Table A5.10 Key affordability measures
Measure
Current coverage
(no of customers)
Forecast 2019-20
coverage
WaterSure
4,034
4,000
Water direct
4,400
8,000
Flexible payment plans
14,406
15,000
Debt advice – in house
Available to all customers
Available to all customers
New
100,000 (audits for all new
metered customers)
Existing scheme
30,000
549
549
Free water efficiency audits
Social Tariff
Hardship cases
A5.6.3 Longer-term affordability
Affinity Water has considered future affordability in its consideration of
intergenerational equity issues arising from setting PAYG rates and RCV run off. The
company confirms it has not altered its RCV run off rate from its original submission.
The company has also made only minor adjustments (less than 2%) to PAYG rates
to reduce bill volatility up to 2019-20 (that is, to smooth the bill profile). Longer term,
the company forecasts maintaining the average PAYG rate and the RCV run off rate
over the period 2015-20 and 2020-25 at 75% and 4% respectively. The company
highlights growth in the RCV of almost £200 million over 2015-20 and states that this
represents a reflection of the atypical investments required in the period, such as
metering, and strikes a fair intergenerational balance. The company has also applied
the £4 million reward for enhanced status to its opening RCV to recover the cost
over the long term and smooth the impact on bills.
Consistent with our original assessment there is therefore sufficient and convincing
evidence that the company’s use of cost recovery tools will not adversely affect
current or future affordability. The minor changes apply to both 2015-20 and 2020-25
and the company has taken into account the impact on customers’ bills.
49
Final price control determination notice: company-specific appendix – Affinity Water
A5.6.4 Longer-term affordability – ODIs
There is evidence that the company’s proposals for maximum ODI rewards will not
have a negative impact on overall affordability in the longer term. Results of
customer research showed that when details of the company’s proposed changes
were presented – showing that bills would remain around £5 lower after five years
(before inflation) even if maximum rewards were applied – 60% customers still
agreed the company’s approach was ‘good’.
The company’s CCG conclude that customers will accept proposed changes to
rewards and penalties associated with ODIs where they are applied at PR19 if the
result is that bills still decline in real terms. The CCG note this is in line with
customers’ preferences for ‘bill certainty’ over the 2015-20 period.
Therefore, there is sufficient evidence that the company’s proposals on ODIs will not
have a significant impact on affordability in the longer term when taken in the context
of the reduction in bills in real terms.
A5.7 Financial modelling
In response to company-specific representations, we have made some adjustments
to our financial model. The representations, and our response, are set out in table
A5.11.
Table A5.11 Representations specific to Affinity Water’s financeability
Respondent
Affinity
Water
Summary of comment
Affinity Water noted a variance of
£4.4 million in tax liability relating to
our treatment of income from
infrastructure charges as an offset
against capex rather than revenue
(which is required by IFRS
accounting).
50
Ofwat response
We consider that the revised tax
inputs Affinity Water provided after
the draft determination are consistent
with the rest of its plan and we have
used them in the financial modelling
for final determination.
Final price control determination notice: company-specific appendix – Affinity Water
Annex 1 Wholesale costs
Establishing final determination thresholds
Enhanced companies’ draft determinations have been updated for wholesale costs,
as these do not fall under the ‘do no harm’ principle.
Our approach to establishing final determination thresholds is outlined in policy
chapter A3.
In the tables below, we provide some information on the company-specific numbers
that support these calculations.
Further information about our assessment of each claim is set out in the populated
version of final determination cost threshold models.
51
Final price control determination notice: company-specific appendix – Affinity Water
Table AA1.1 Movement from basic cost threshold to final determination threshold for wholesale water totex (£ million)
Basic cost
threshold
Policy additions1
1,015.0
Unmodelled costs
adjustment
85.5
Deep dives
-9.8
Final determination
threshold
Deep dives fully or
partially not added2
1,091.3
1.3
0.7
Notes:
1. See Table AA1.2 below.
2. Deep dives are net of implicit allowances. A value of zero means deep dives are wholly covered by IAs.
Table AA1.2 Policy additions to the wholesale water basic cost threshold (£ million)
Business rates
Pension deficit payments
Third party costs
Open market costs
Net v gross adjustments
2.8
11.1
0.9
0.0
70.8
Total
85.5
Table AA1.3 Comparison of company wholesale water totex with the final determination threshold and 2010-15 totex (£ million)
Plan1
Final determination threshold
1,033.9
Gap2
1,091.3
2010-15 v Plan
-57.5
13.3
Note:
1. Where the company’s business plan total has been adjusted by the company as part of its representations on its draft determination, this is reflected here.
2. This gap will not equal the deep dives fully or partially not added in Table AA1.1 if the company’s claims for special treatment in the costs thresholds are not equal to the gap.
52
Final price control determination notice: company-specific appendix – Affinity Water
Table AA1.4 Summary of wholesale water deep dive assessments (£ million)
Company proposal
Claim
Assessment
Amount
sought
Implicit
allowance
Need
Final determination allowance
Cost-benefit
analysis
Robust
costs
Assessment
Amount
allowed
Deep dives
Karstic Water additional treatment
costs
122.2
120.9
-
-
-
-
-
Universal Metering Enhancement
Programme
52.6
52.6
-
-
-
-
-
River Thames water treatment
works
12.8
12.8
-
-
-
-
-
Hatfield water treatment works
Group
11.4
11.4
-
-
-
-
-
Grafham reservoir – water trading
11.0
11.0
-
-
-
-
-
Ardleigh reservoir – water trading
6.6
6.6
-
-
-
-
-
24.6
24.6
-
-
-
-
-
Lead communication pipes1
Note:
1. Deep dive not required as company variables used in modelling.
53
Final price control determination notice: company-specific appendix – Affinity Water
All Affinity Water’s special cost factor claims were made in its draft business plan
(submitted in December 2013). In the draft determination, we explained that the
claims were not added as they were either covered by the implicit allowance, or the
difference was immaterial. Affinity Water did not submit any further special cost
factor claims after its draft determination.
54
Final price control determination notice: company-specific appendix – Affinity Water
Annex 2 Household retail
Details on our assessment of proposed adjustments to the ACTS
Our approach to setting the industry ACTS is outlined in policy chapter A5.
Affinity Water did not propose any ACTS adjustments except for pension deficit
recovery costs.
In the final determination we have included an adjustment for all companies to reflect
the pension deficit recovery costs that our modelling shows is appropriate for
household retail as set out in IN 13/17 “Treatment of companies’ pension deficit
repair costs at the 2014 price review”.
Table AA2.1 Household retail adjustments (£ million, nominal prices)
2015-16
2016-17
2017-18
2018-19
2019-20
Total
Adjustments proposed in Affinity Water’s April business plan
Pension deficit repair
costs
0.140
0.140
0.140
0.140
0.140
0.698
Adjustments included in
business plan
0.140
0.140
0.140
0.140
0.140
0.698
Adjustments included in draft determination
Pension deficit repair
costs
0.120
0.120
0.120
0.120
0.120
0.600
Adjustments included in
draft determination
0.120
0.120
0.120
0.120
0.120
0.600
Adjustments proposed in Affinity Water’s representations
Pension deficit repair
costs
0.140
0.140
0.140
0.140
0.140
0.698
Adjustments included in
final determination
0.140
0.140
0.140
0.140
0.140
0.698
0.120
0.120
0.120
0.600
Adjustments included in final determination
Pension deficit repair
costs
0.120
0.120
55
Final price control determination notice: company-specific appendix – Affinity Water
Adjustments included in
final determination
2015-16
2016-17
2017-18
2018-19
2019-20
Total
0.120
0.120
0.120
0.120
0.120
0.600
Household retail revenue modification
We outline our approach to revenue modification in policy chapter A5.
Table AA2.2 sets out the amount per customer, by customer type, that allowed
revenues will be modified by if outturn customer numbers differ from forecast
customer numbers and table AA2.3 sets out the baseline number of customers.
Table AA2.2 Household retail allowed revenue modification factors by class of
customer (£/customer)
Revenue modification
per:
2015-16
2016-17
2017-18
2018-19
2019-20
Unmetered water only
customer
16.94
16.74
16.51
16.30
16.20
Metered only water
customer
25.22
24.38
23.51
22.66
22.57
Note: There will be no indexation for retail price controls.
Table AA2.3 Assumed number of customers for household retail total revenues (000s)
Number of customers
2015-16
2016-17
2017-18
2018-19
2019-20
Unmetered water only
655.5
590.4
517.6
446.5
387.7
Metered water only
705.2
778.9
860.0
939.2
1006.1
56
Final price control determination notice: company-specific appendix – Affinity Water
Annex 3 Reconciling 2010-15 performance
When we last set price controls in 2009 (PR09), we included a number of incentive
mechanisms designed to encourage companies to improve and deliver services
more efficiently, and, to manage uncertainty. Consistent with the approach set out at
the time of the final determinations in 2009 we have made adjustments at this price
review (PR14) to 2015 to 2020 revenues to take account of company performance in
the 2010 to 2015 period.
Enhanced companies’ draft determinations have been updated for adjustments to
reconcile 2010-15 performance, as these do not fall under the ‘do no harm’ principle.
We set out our methodology for calculating the adjustments to 2015-20 wholesale
price controls resulting from the company’s actual performance during the 2010-15
period in policy chapter A4.
In this annex, we set out the final determination adjustments to 2015-20 price
controls for Affinity Water resulting from the company’s actual performance during
the 2010-15 period.
As part of the final determination of the 2010-15 adjustments, we have undertaken
detailed calculations within our models for the RCM, OIA, CIS and serviceability
shortfalls. While we provide an explanation of our updates within this annex, each
model contains the detail of the specific calculation.
We make a “midnight adjustment” to the closing RCV from the previous period
(ending on 31 March 2015) to obtain the opening RCV for the next period (starting
on 1 April 2015). Our detailed calculations are contained within the RCV midnight
adjustment model published alongside these final determinations.
In this annex, we provide an overview – comparing the company’s view of the
required revenue adjustments included in its revised business plan for each of the
incentive tools for water services, with our own view. We then consider each
adjustment mechanism in turn.
However, we first consider the responses to our draft determinations that are specific
to Affinity Water’s treatment in these areas below.
57
Final price control determination notice: company-specific appendix – Affinity Water
Consideration of representations on our draft determinations
In policy chapter A1, we provide a list of the respondents to the draft determinations
published in April, May and August of this year. We have fully considered all of the
responses received, and where appropriate, we have made either consequential
adjustments to our industry-wide approach or company-specific interventions.
Where representations have addressed issues that are common to a number of
companies, these comments and any consequential changes to our approach are
discussed in policy chapter A4. Representations that are specific to reconciling 201015 performance for Affinity Water, and any consequential impact on our final
determination, are summarised in the table below.
58
Final price control determination notice: company-specific appendix – Affinity Water
Table AA3.1 Representations specific to reconciling 2010-15 performance for Affinity Water
Area
Respondent
Summary of comment
Ofwat response
RCM
Affinity Water
The company provided an updated view of its
RCM adjustments to reflect 2013-14 actuals
and 2014-15 forecasts in its June submission.
This reduced the RCM revenue from £2.5
million to £0.8 million.
We reviewed the company’s updated data and identified
inconsistencies in the forecasted 2014-15 tariff basket
revenues, FD09 assumptions and outturn financial year
average RPI. We raised a query with the company from
which we agreed an approach to take for the final
determination.
Service
standard
outputs
Affinity Water
The company provided evidence in its
response to query AFW/LEGACY/001 to
confirm that the all the service standard outputs
have been achieved except for the reduction of
1000 contacts per annum. This service
standard output relates to the Blackford and
Roydon Manganese removal scheme, where
the company is expected to clean 1080 km of
distribution and trunk mains by 31 March 2015.
Having considered the evidence provided in the company’s
response to query ref AFW/LEGACY/001, we are satisfied
that all the service standard outputs have been achieved
except for the ‘reduction of 1000 contacts per annum’, which
would not be achieved by the required date, 31 March 2015.
We have reviewed the query response and are satisfied with
the explanation provided by the company in relation to the
delay to the network cleaning scheme. These include the
drought in 2012, which resulted in the imposition of
restrictions on water use and therefore made flushing
operations untenable; and a further delay caused by heavy
rainfall in the 2013-14 winter, which prevented flushing
activities from taking place. We also note that the
serviceability performance (customer contacts –
discolouration (nr / 1000 population) linked to this service
standard output has already been achieved. We have
therefore not applied a shortfall to this service standard.
However, we require the company to report on the progress
The company noted that it had completed
cleaning of 70km of trunk mains and 10km of
distribution mains and provided reasons for the
delay. It also stated that “The full benefit in
terms of a reduction in customer contact by
1,000 per year will not be realised until
completion of the cleaning programme”.
59
Final price control determination notice: company-specific appendix – Affinity Water
Area
Respondent
Summary of comment
Ofwat response
of this network cleaning scheme in 2015-16.
Therefore, for the final determination, there are no shortfall
adjustments for the service standard outputs.
CIS
Affinity Water
The company submitted updated 2013-14 and
2014-15 information based on our published
methodology.
60
As explained in policy chapter A4, we have corrected a minor
error in the CIS model for all companies with respect to the
discount rate used when calculating the future value of the
revenue adjustment in the 2010-15 period. This minor
change had no material impact of the final revenue
adjustments.
Final price control determination notice: company-specific appendix – Affinity Water
Summary of 2010-15 adjustments
All companies were required to put in business plans their own adjustments for PR09
reconciliation. Table AA3.2 below sets out for each of the incentive tools for water
services:
•
•
the company’s view of the required revenue adjustments included in its
business plan, updated for its June information submission; and
our view.
Our view reflects our understanding of the company’s performance using these
incentives, based on information provided in its revised business plan, subsequent
query responses and representations on our draft determinations. The table also
shows other adjustments, such as those relating to tax resulting from the company’s
actual performance during the 2010-15 period.
Table AA3.1 notes the comments that we have received that are specific to this
aspect of the wholesale water control of Affinity Water and outlines how our
interventions have been influenced by our consideration of these responses. The
changes we have made in the final determination compared to our draft
determination, are mainly as a result of including the company’s updated actuals for
2013-14 and forecasts for 2014-15 and correcting data inconsistencies in the RCM
model.
Table AA3.2 Revenue adjustments 2015-20 (£ million)
Company view
Ofwat view
SIM
0.000
0.000
RCM
0.820
2.259
OIA – post-tax
0.000
0.012
-10.697
-10.602
-4.000
-4.000
Other tax adjustments
0.000
0.000
Equity injection clawback
0.000
0.000
Other adjustments
0.000
0.000
-13.877
-12.330
CIS
Tax refinancing benefit clawback
Total wholesale legacy adjustments
61
Final price control determination notice: company-specific appendix – Affinity Water
Notes:
For the CIS mechanism, there is a corresponding adjustment to the RCV made at 1 April 2015 (part of the
‘midnight’ adjustments’). The impact on the RCV can be seen in Table AA3.14. This adjustment is net of any
logging up, logging down or shortfalls. A full reconciliation showing all of the midnight adjustments to the RCV,
including the impact of logging up, logging down and shortfalls, can be seen in Table A2.7.
Totals may not add up due to rounding.
Adjustments by 2010-15 incentive mechanism
RCM
Table AA3.3 below shows the company’s view and our view of the company’s RCM
adjustments. Table AA3.4 summarises our updates in relation to Affinity Water’s
proposed 2010-15 RCM adjustments.
In its revised business plan, the company updated its view of the RCM adjustment
from £2.465 million to £0.820 million to reflect updated 2013-14 actuals and 2014-15
forecasts. We consider that this change is caused by an inconsistency between the
2014-15 revenues in the company’s business plan table (W17) and its populated
RCM model for Veolia Central. We issued a query to the company to check that it
agreed that there was a data inconsistency, which they confirmed (on 29 September
2014). We have not required the company to resubmit revised data. Instead, we
confirmed that we would correct the data inconsistency for the final determination.
Our final determination therefore reflects the company’s updated RCM adjustments
following updates to 2013-14 actuals and 2014-15 forecasts, and the data correction.
Table AA3.3 RCM annualised adjustments for 2015-20 (£ million)
2015-16
2016-17
2017-18
2018-19
2019-20
Total
Company view
0.164
0.164
0.164
0.164
0.164
0.820
Ofwat view
0.452
0.452
0.452
0.452
0.452
2.259
Table AA3.4 Updates to proposed 2010-15 RCM adjustments
Area
Forecasted 2014-15
tariff basket revenues
What we did
Our assumption for the final
determination uses the data the
company submitted in business
plan table W17 to calculate our
view of the RCM adjustment.
62
Why we did it
There are inconsistencies with
2014-15 forecast revenues
between business plan table
W17 and Veolia Central’s
populated RCM model.
Final price control determination notice: company-specific appendix – Affinity Water
Area
FD09 assumptions –
Measured Nonhousehold’s revenue
for the Measured Nonhousehold group
immediately above and
below the 50 Ml
(megalitre) threshold
What we did
Why we did it
The final determination includes
our view of the FD09
assumptions for the inputs to the
RCM model.
There are differences
between the company’s and
our view of the FD09
assumptions used in the
populated RCM model. The
company applied different
assumptions for ‘FD09
Measured Non-household’s
revenue for the Measured
Non-household group
immediately above and below
the 50ML threshold’ compared
with our view of its FD09
assumptions for Veolia
Central, Veolia South East
and Veolia East.
Our view of the company’s
revenue assumptions for the
measured non-household group
immediately below and above the
50 Ml tariff basket threshold
originate from the company’s
FD09 revenue forecasts that
come from the tariff basket
model, which we used for PR09.
Our assumptions for the final
determination include the
FD09 revenue forecasts as
contained in the PR09 tariff
basket model in accordance
with our published
methodology ‘Setting price
controls for 2015-20 – further
information on reconciling
2010-15 performance’.
FD09 assumptions –
number of nonhousehold billed
measured properties
The final determination includes
our view of the FD09
assumptions for the inputs to the
RCM model.
Our view of the company’s
number of non-household
properties is consistent with the
company’s FD09 revenue
forecasts which come from the
tariff basket model that we used
for PR09.
63
The company applied different
assumptions for the number of
non-households billed
measured properties for
Veolia Central compared with
our view of its FD09
assumptions.
Our assumptions for the final
determination correct the
company’s data
inconsistencies between its
FD09 and its populated RCM
model.
Final price control determination notice: company-specific appendix – Affinity Water
Area
What we did
Why we did it
Outturn financial year
average RPI
Our assumptions for the outturn
financial year average RPI at the
final determination uses the data
that the company submitted in
business plan table A9 to
calculate our view of the RCM
adjustment.
There are inconsistencies with
the outturn financial year
average RPI between table
A9 and the company’s
populated RCM model. Our
assumptions for the final
determination correct the
company’s data
inconsistencies.
Net revenue movement
out of tariff basket in
2009-10
Our assumption for the final
determination uses the data the
company submitted in business
plan table W17 to calculate our
view of the RCM adjustment.
There are inconsistencies with
the amount submitted
between business plan table
W17 and the Veolia South
East’s populated RCM model.
Our assumptions for the final
determination are based upon
the data within the company
business plan table W17.
OIA
Table AA3.5 below summarises the company’s view and our view of the incentive
allowances for 2015-20. There are no changes from our draft determination. Table
AA3.8 summarises our updates in relation to Affinity Water’s proposed 2010-15 OIA
adjustments.
Table AA3.5 Operating expenditure incentive allowances for 2015-20 (£ million)
Incentive
allowance
(post-tax)
2015-16
2016-17
2017-18
2018-19
2019-20
Company
view
0.000
0.000
0.000
0.000
0.000
0.000
Ofwat
view
0.012
0.000
0.000
0.000
0.000
0.012
64
Total
Final price control determination notice: company-specific appendix – Affinity Water
Table AA3.6 Changes to proposed 2010-15 OIA adjustments
Area
PR09 error correction
What we did
Why we did it
The company included a logging up adjustment in a
calculation in an attempt to correct for the error we
made at PR09 in relation to logging up of metering
opex. We removed this adjustment from the
calculation in favour of a direct input to the overall
incentive revenue allowance based on our
calculations of what the incentive value should have
been. This indicated that at PR09, the former Veolia
Southeast company should have received an
incentive revenue allowance of £0.0216 million
rather than £0.0111 million (post tax and in 2007-08
prices). We have therefore included £0.0123 million
(that is, the difference of £0.0105 million indexed to
2012-13 prices) as a post-tax incentive revenue
adjustment in 2015-16.
65
At the price review in 2009 (PR09) we confirmed to
the company that we would correct this error at the
price review in 2014. We have made a direct input
to the overall incentive allowance (post tax), which
correctly acknowledges the value of the allowance
that the company should have received during this
period.
We made this change because it is in customers’
interests to ensure that the final determinations are
accurate and it is important for the credibility of the
price review process.
Final price control determination notice: company-specific appendix – Affinity Water
Change protocol (logging up, logging down and shortfalls)
Table AA3.7 and Table AA3.8 below summarise Affinity Water’s view and our
baseline view of total adjustments to:
•
•
capex included in the CIS reconciliation; and
the FD09 opex assumptions used in the calculation of the opex incentive
revenue allowances.
There are no changes from our draft determination and there are no interventions in
this area.
Table AA3.7 Summary of post-efficiency capex for logging up, logging down and
shortfalls included in the CIS reconciliation (£ million)
2009-10 to 2014-15 – post-efficiency capex
Company view
Ofwat view
Logging up (two-sided)
0.000
0.000
Logging down (two-sided)
0.000
0.000
Shortfalls (one-sided)
0.000
0.000
Note:
We exclude shortfalls for serviceability from the CIS reconciliation, but instead make direct adjustments to the
RCV in 2015-16. We do this to allow the actual capex the company incurred in seeking to maintain serviceability,
to be reflected in the rewards or penalties earned through the scheme. But to also ensure customers are not
required to pay for the regulatory output the company has failed to deliver.
Table AA3.8 Summary of post-efficiency opex for logging up, logging down and
shortfalls included in the OIA calculation (£ million)
2009-10 to 2014-15 – post-efficiency opex
Company view
Ofwat view
Logging up
0.000
0.000
Logging down
0.000
0.000
Shortfalls
0.000
0.000
Shortfalls for serviceability
0.000
0.000
66
Final price control determination notice: company-specific appendix – Affinity Water
Service standard outputs
Service standards are regulatory outputs that we set out in the FD09 supplementary
reports 4. Where companies have not reported progress on these service standards
before submitting business plans, we would have expected them to do so within the
price review process.
After Affinity Water's draft determination, we raised a query regarding service
standards for resilience and exceptional items because the information available to
us did not provide sufficient evidence that the service standards had been achieved.
In October 2014, the company provided satisfactory evidence that it has achieved all
of its service standard outputs except for the reduction of 1000 contacts per annum.
The reduction of 1000 contacts per annum output relates to the Blackford and
Roydon Manganese removal scheme, where the company was expected to clean
1080 km of distribution and trunk mains. The company provided reasons why it
would not be able to complete the Manganese removal scheme by the required
completion date, 31 March 2015. We have reviewed the information provided by the
company and are satisfied with the limiting factors set out by the company. These
include the drought in 2012, which resulted in the imposition of restrictions on water
use and thus made flushing operations untenable; and a further delay caused by
heavy rainfall in the 2013-14 winter, which prevented flushing activities from taking
place. We have therefore not applied a shortfall. However, we require the company
to report progress on this activity in 2015-16.
Serviceability performance
Table AA3.9 below summarises our serviceability assessments for Affinity Water and
Table AA3.10 quantifies the value and impact of any serviceability shortfall on the
RCV. Table AA3.11 summarises our changes in relation to Affinity Water’s proposed
adjustments for serviceability.
There are no changes from our draft determination and although there are no
interventions in this area, this is conditional on the company demonstrating stable
performance in 2014-15.
4
In the final determination supplementary reports, we said: “Both the project activity (as proposed in
your final business plan) and the service standard are the defined output. You must demonstrate
delivery of the stated service standard output through the June return. We recognise that companies
may decide to prioritise activity differently in order to achieve the service output in a more efficient
manner. All material changes to the project activity must be reported and explained through your June
return.”
67
Final price control determination notice: company-specific appendix – Affinity Water
Table AA3.9 Serviceability assessments for 2010-15
2010-11
2011-12
2012-13
2013-14
2014-15
Water
infrastructure
Company view
Marginal
Stable
Stable
Stable
Stable
Ofwat view
Marginal
Stable
Stable
Stable
Stable
Water noninfrastructure
Company view
Stable
Stable
Stable
Stable
Stable
Ofwat view
Stable
Stable
Stable
Stable
Stable
Note:
Assessments are based on actual and forecast performance submitted in the company’s revised business plan.
Assessments for 2014-15 are based on forecast data and are subject to review once actual performance data
becomes available.
Table AA3.10 Impact of serviceability shortfalls on the RCV (£ million)
2009-10 to 2014-15
Total
Amount subtracted from RCV
Company view
0.0
Ofwat view
0.0
Table AA3.11 Updates to proposed 2010-15 serviceability adjustments
Area
Discolouration
contacts per 1,000
population
What we did
Why we did it
For the purposes of the final
determination, there is no
intervention for this indicator.
This is conditional upon the
performance in 2014-15 being
improved to a position such that
it could be considered as stable.
We will consider a shortfall
adjustment if this is not
achieved. Serviceability
performance in AMP5 is due to
be reviewed in 2015 once actual
data is available for the whole of
the 2010-15 period. Any
shortfalls arising from this
review will be applied at the next
price control.
The company (South East region)
has had two breaches of the upper
control limit in 2011-12 and 201213. However, 2013-14 was below
the upper control limit and 2014-15
performance is expected to improve
to below the reference level. The
company has provided evidence on
mitigation measures taken to
improve performance. We consider
that the improvement can be
sustained and have therefore not
applied shortfall adjustment for the
final determination. However, we
would expect projected 2014-15
performance to be achieved. If this
is not achieved, we will consider a
shortfall adjustment.
68
Final price control determination notice: company-specific appendix – Affinity Water
The 2009 agreed overlap programme
Table AA3.12 below confirms the 2009 agreed overlap programme assumptions
relating to combined operational security included in the final determination. These
are unchanged from our draft determination and there are no interventions in this
area.
Table AA3.12 PR09 agreed overlap programme adjustments and assumptions (£ million)
2010-15
2015-20
Two-sided adjustments
for inclusion in the CIS
Expenditure forecasts to
complete the projects
Capex
Opex
Capex
Opex
Company view
0.000
0.000
7.355
2.651
Ofwat view
0.000
0.000
7.355
2.651
The 2014-15 transition programme
Table AA3.13 below confirms Affinity Water’s proposed transition programme. There
are no interventions in this area.
Table AA3.13 Transition programme in 2014-15
2014-15
(£ million)
5.0
Proportion of forecast in
2014-15
Proportion of capital programme in
2015-20
5.5%
0.9%
CIS
Table AA3.14 provides details of the CIS ratios and performance incentive. It also
gives the:
•
•
•
monetary amounts of the CIS performance reward or penalty;
true-up adjustment to 2015-20 allowed revenues; and
adjustment to the opening RCV.
Table AA3.15 then sets out the profiled values of the revenue adjustments in each
year 2015-20, Table AA3.16 shows the components of the opening RCV which are
69
Final price control determination notice: company-specific appendix – Affinity Water
included in the CIS adjustment, and Table AA3.17 summarises our minor update to
Affinity Water’s proposals.
In carrying out the CIS assessment for the final determination, we have used the
updated information on 2013-14 and 2014-15 submitted after the draft determination
in accordance with the process for a company with enhanced status.
Table AA3.14 CIS true-up adjustments
Veolia
Water
Central
Veolia
Water East
Veolia
Water
Southeast
Total
Restated FD09
CIS bid ratio1
Company view
131.482
142.558
118.681
N/a
Ofwat view
131.482
142.506
118.681
N/a
Out-turn CIS
ratio
Company view
116.655
102.382
125.419
N/a
Ofwat view
116.669
102.400
125.431
N/a
Incentive
reward/penalty
(%)2
Company view
-4.822
-3.235
-6.124
N/a
Ofwat view
-4.824
-3.235
-6.126
N/a
Reward/penalty
(£m)
Company view
-16.861
-0.434
-2.071
-19.367
Ofwat view
-16.863
-0.434
-2.071
-19.368
Adjustments to
2015-20 revenue
(£m)3
Company view
-7.134
-0.380
-2.419
-9.933
Ofwat view
-7.070
-0.375
-2.400
-9.845
RCV adjustment
(£m)4
Company view
11.284
-1.481
5.035
14.838
Ofwat view
11.278
-1.481
5.031
14.829
Notes:
1. The restated FD09 CIS bid ratio takes account of the adjustments for the change protocol (Table AA3.7) and
the 2009 agreed overlap programme (Table AA3.12).
2. The reward/(penalty) is adjusted for the additional income included in the 2010-15 determination and the
financing cost on the difference between actual spend and capital expenditure assumed in the 2010-15
determination to derive the value of the adjustment to 2015-20 revenue.
3. The adjustment to 2015-20 revenue values shown in this table assume a single year adjustment in the first
year, and do not include the NPV profiling used for the final determination.
4. In Table AA3.16, we show how the components of this agree to those shown in Table A2.7.
70
Final price control determination notice: company-specific appendix – Affinity Water
Table AA3.15 Profiled revenue adjustments from the CIS reconciliation (£ million)
2015-16
2016-17
2017-18
2018-19
2019-20
Total
Company view
-1.987
-2.060
-2.136
-2.215
-2.297
-10.695
Ofwat view
-1.969
-2.042
-2.118
-2.196
-2.277
-10.602
Table AA3.16 CIS components of the opening RCV adjustment (£ million)
Total
Adjustment for actual expenditure 2010-15
14.829
Net adjustment from logging up and logging down
0.000
Adjustment for shortfalls
0.000
RCV adjustment
14.829
Table AA3.17 Adjustments to proposed CIS adjustments
Update
What we did
Why we did it
Methodology
We have used the post-tax
basis of the PR09 cost of
capital for the discount rate
when calculating the future
value of the revenue
adjustment in the 2010-15
period.
As explained in policy chapter A4, to
address these issues we have changed
the CIS model.
Change protocol
adjustments
N/a
N/a
Data inconsistencies
While the pre-tax discount
rate has not been used in
the final determination, we
have corrected the input
values for the PR09 pre-tax
cost of capital.
The company applied the published
Ofwat methodology using its updated
2013-14 and 2014-15 information,
however we noticed the pre-tax cost of
capital values used by the company for
calculating the future value in its CIS
assessments were not aligned with the
PR09 values.
71
Final price control determination notice: company-specific appendix – Affinity Water
Other adjustments
Table AA3.18 below confirms the assumptions included in this final determination
with respect to the following revenue adjustments:
•
•
•
•
tax refinancing benefit clawback;
other tax adjustments;
equity injection clawback; and
other adjustments.
These are unchanged from our draft determination and there are no interventions in
this area.
Table AA3.18 Other revenue adjustments 2015-20 (£ million)
Company view
Tax refinancing benefit clawback
Ofwat view
-4.000
-4.000
Other tax adjustments
0.000
0.000
Equity injection clawback
0.000
0.000
Other adjustments
0.000
0.000
Table AA3.19 and Table AA3.20 below confirm the assumptions included in this final
determination with respect to other adjustments to the opening RCV.
In the draft determination, we used the company view of the opening RCV. For final
determination, we have used our feeder model calculations.
Table AA3.19 Other adjustments to the opening RCV (£ million)
Company view
Ofwat view
Land sales
0.000
-5.181
2009-10 adjustment
0.000
24.366
Enhanced rewards
4.000
4.000
Other adjustments
-21.359
0.000
72
Final price control determination notice: company-specific appendix – Affinity Water
Table AA3.20 Updates to proposed adjustments to the opening RCV
Area
What we did
Why we did it
Land sales
We calculated land sales using This provided a consistent
the business plan sales figures approach with all companies.
in our RCV midnight adjustment
model.
2009-10 adjustment
The company did not show an
adjustment in its business plan
for this. We have made this
adjustment.
Other adjustments
We calculated the component
This provided a consistent
parts of the midnight adjustment approach with all companies.
as if the company was nonenhanced. Therefore, this
balancing figure was irrelevant
for the final determination.
73
This provided a consistent
approach with all companies.
Final price control determination notice: company-specific appendix – Affinity Water
Annex 4 Outcomes, performance commitments and ODIs
We set out our methodology for PCs and ODIs in policy chapter A2.
In this annex, we provide an overview of the PCs and ODIs for Affinity Water. We
then set out in detail these PCs and ODIs for the company’s wholesale water and
household retail outcomes, presented in that order.
The company has used a cost-sharing rate of 50% to calibrate the reward and
penalty rates included in this annex. On 4 April, we stated that the company had
achieved enhanced status and that its cost-sharing rate at 100 would be 55% rather
than 50%. Once the company has chosen its position on the enhanced menu we are
requiring it, in line with the methodology, to recalibrate its ODIs with the cost-sharing
rate associated with that position, and provide us with the updated incentive rate
calculations. The company must do this alongside its menu choice on 16 January
2015 so that the recalibrated ODIs can be included in the regulatory reporting
framework for 2015-16.
However, we first consider the responses to our draft determinations in relation to
the PCs and ODIs for Affinity Water.
Consideration of representations on our draft determinations
Having considered representations on the draft determinations, the determinations
for the enhanced companies have not been changed to reflect the comparative
assessments since we continue to consider that it is appropriate to accept the
enhanced companies’ business plans in the round. However, both enhanced
companies have recognised that even though their financial incentives are not being
changed, they face reputational incentives to improve their performance in areas
where they are not yet delivering upper quartile performance. The companies are
continuing to engage with their CCGs on how they will track performance against the
upper quartile during the period, and both have recognised the reputational impacts
in the latter years of the price control if their performance is below upper quartile.
In policy chapter A1, we provide a list of the respondents to the draft determinations
published in April, May and August of this year. We have fully considered all of the
responses received, and where appropriate, we have made either consequential
adjustments to our industry-wide approach or company-specific interventions.
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Final price control determination notice: company-specific appendix – Affinity Water
Where representations have addressed issues that are common to a number of
companies, these comments and any consequential changes to our approach are
discussed in policy chapter A2. Representations that are specific to PCs and ODIs
for Affinity Water, and any consequential impact on our final determination, are
summarised in the tables below as follows.
•
•
•
•
•
Table AA4.1 considers representations received on our draft determination as
a result of comparative assessments in six areas for wholesale water.
Tables AA4.2 considers representations received on our draft determination
as a result of our company-specific assessment assessments for wholesale
water.
Table AA4.3 considers representations received on our draft determination as
a result of our company-specific assessment assessments for household
retail.
Table AA4.4 lists the PCs that were proposed by companies but that have
been removed as part of our final determination.
Table AA4.5 lists PCs excluded from the commentary tables above because
we received no representations on them.
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Final price control determination notice: company-specific appendix – Affinity Water
Table AA4.1 Representations specific to the comparative assessments on wholesale water
PC/ODI
affected
Unplanned
interruptions
to supply
over 12
hours
What we did at draft
determination/subsequent
comparative assessments
No intervention
Representations
What we did at final
determination
In its representation, Affinity No intervention
Water said that it
considered whether to align
its PC definition with
Ofwat’s analysis, based on
the comparative
assessment of interruptions.
It decided not to make any
changes, but to keep this
PC under review.
76
Why we did it
The comparative assessments
were carried out after the
enhanced draft determinations.
As an enhanced company, Affinity
Water is not affected by our
comparative assessments as we
consider that it is appropriate to
accept the enhanced companies’
business plans in the round in
order to maintain the incentive on
companies to produce the highest
quality business plans. The
company decided not to change
the definition of the PC and we
have not intervened.
Final price control determination notice: company-specific appendix – Affinity Water
Table AA4.2 Representations specific to the company-specific assessment assessments on wholesale water
PC/ODI
affected
What we did at draft
determination
Representations
What we did at final
determination
Why we did it
Asset health
index 5
No intervention
Affinity Water provided further
detail on how the index will
operate by monitoring
availability and criticality of
failure at an asset, community
and company level.
Accepted the company’s
developed proposals (no
intervention)
The company demonstrated that
its asset health index, combined
with its ongoing monitoring of
PC and a further suite of KPIs,
is sufficient to ensure
appropriate maintenance of its
assets.
Water
available for
use
No intervention
The Environment Agency
considers that Affinity Water
needs to re-align its PCs for
water available for use
(WAFU) with the water
resources management plan.
Confirmed our draft
determination position
Affinity Water has a PC for
water available for use (WAFU)
that is more stretching than its
water resources management
plan proposals. This is in line
with its customers’ priorities to
reduce the impact on the
environment.
5
The company has proposed this is a KPI, but as it was part of the pre-qualification actions, we have included in the table of PCs for completeness.
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Final price control determination notice: company-specific appendix – Affinity Water
PC/ODI
affected
What we did at draft
determination
Representations
What we did at final
determination
Why we did it
Leakage
No intervention
The Environment Agency
considers that Affinity Water
needs to re-align its PCs for
leakage with the water
resources management plan.
Confirmed our draft
determination position
Affinity Water has a PC for
leakage that is more stretching
than its water resources
management plan proposals.
This is in line with its customers’
priorities to reduce the impact
on the environment.
Average
water use
No intervention
The Environment Agency
would like to see a financial
reward associated with this
PC.
Confirmed our draft
determination position
Affinity Water’s proposals were
in line with the water resources
management plans. We did not
see sufficient evidence, either
from the Environment Agency or
Affinity Water's own willingness
to pay data, that it was in
customers’ interests to intervene
and introduce a reward
mechanism to drive average
water use down further.
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Final price control determination notice: company-specific appendix – Affinity Water
Table AA4.3 Representations specific to the company-specific assessment assessments on household retail
PC/ODI
affected
What we did at draft
determination
Representations
What we did at final
determination
Why we did it
No representations in this area.
Table AA4.4 Performance commitments proposed by the company that we have removed from this final determination
Performance commitment
Reason for its removal
Wholesale water and household retail
N/a
N/a
Table AA4.5 Performance commitments excluded from the commentary tables because we received no representations to our
draft determinations on them
Wholesale water
Household retail
AIM
SIM
Sustainable abstraction reduction
Value for money survey
Compliance with water quality standards
Unplanned interruptions to supply over 12 hours
Number of burst mains
79
Final price control determination notice: company-specific appendix – Affinity Water
Wholesale water
Household retail
Affected customers not notified of planned interruptions
Planned work taking longer to complete than notified
80
Final price control determination notice: company-specific appendix – Affinity Water
Summary of ODIs
For each outcome proposed, companies were asked to identify one or more
measures that would provide evidence that the outcome was being delivered. On
each measure, companies had to set out the level of performance that they were
committing to deliver. Companies also had to explain why they committed to the
performance level chosen and explain why this represented an appropriate level of
stretch (as benchmarked against an upper quartile level of performance across the
sector).
Companies also had to propose ODIs. Where customers were willing to pay for
higher levels of performance and companies could demonstrate that performance
was at a high level relative to its peers, then the financial incentives could contain
rewards for over delivery as well as penalties for under delivery.
Table AA4.6 shows the balance between reward and penalty, penalty only and
reputational incentives in the package of incentives for the company, and Figure
AA4.1 shows the potential financial impact of each of the financial incentives
proposed.
Table AA4.6 The composition of the package of ODIs
Reward and
penalty
Penalty only
Non-financial
incentive
Wholesale water
3
5
3
Household retail
1
0
1
Total
4
5
4
The following graph shows the potential financial consequences of the individual
financial ODIs. The figures represent the penalties and rewards associated with the
p10 and p90 scenarios over the five years (2015-16 to 2019-20). This means there is
a 10% chance of performance being higher or lower than these assumed levels. In
most cases, the potential maximum will be bigger but is very unlikely to occur. The
p10 and p90 therefore represent a more realistic estimate of potential financial
consequences.
81
Final price control determination notice: company-specific appendix – Affinity Water
Figure AA4.1 Overview of financial ODIs
£m impact
P10 penalties
-30
-25
-20
-15
P90 rewards
-10
-5
0
5
10
Leakage
Average water use
Water available for use
Sustainable abstraction reductions
Compliance with water quality standards
Customer contacts for discolouration
Unplanned interruptions to supply over 12
hours
Number of burst mains*
Note: ODIs marked with * are financial ODIs but there is a less than 10% chance of these occurring.
As explained in the policy chapter A2, we are introducing an aggregate cap on
rewards and collar on penalties from the ODIs for the non-enhanced companies. As
an enhanced company, this cap and collar does not apply to Affinity Water. Details of
how the cap and collar will operate are set out in section [A2.4] of policy chapter A2
In the remainder of this chapter, we provide the following information on each PCs
included as part of this final determination:
•
•
•
•
the name and detailed definition of the PC;
the type of incentive;
the PC level;
for financial incentives:
– the limits on rewards and penalties (caps and collars) and neutral zones
(deadbands) as applicable 6; and
6
In general, the cap or collar is the level of service at which the maximum penalty or reward occurs
and a deadband is the level of service at which the incentive first applies. However, where a greater
than or less than symbol precedes the figure this denotes that the maximum or initial incentive only
occurs if service is greater than or less than this level.
82
15
Final price control determination notice: company-specific appendix – Affinity Water
•
– the incentive rates; and
additional details on the measure.
Appendix 1 of our final methodology statement contains a number of worked
examples that illustrate how the different incentive types will operate.
83
Final price control determination notice: company-specific appendix – Affinity Water
Performance commitments and ODIs in detail
Wholesale water outcome: making sure our customers
have enough water, whilst leaving more water in the
environment
Performance commitment: leakage
Detailed definition of performance measure: Leakage is measured on an
average megalitres per day (Ml/d) a year basis. This is consistent with the Ofwat
item reference BN2345.
Incentive type: Financial reward and penalty.
Performance commitments
Starting
level
Committed performance levels
Unit
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
PCs
Ml/d
189.3
183.9
178.5
173.1
167.7
162.2
Penalty collar
Ml/d
N/a
211.9
206.5
201.1
195.7
190.3
Penalty dead band
Ml/d
N/a
N/a
N/a
N/a
N/a
N/a
Reward dead band
Ml/d
N/a
170.2
170.2
170.2
167.7
162.2
Reward cap
Ml/d
N/a
155.9
150.5
145.1
139.7
134.3
Incentive rates
Incentive type
Performance levels (Ml/d)
Lower
Upper
Incentive rate
(£/Ml/d/year)
Penalty
162.3
211.9
0.241 million
Reward 1
170.1
162.2
0.075 million
Reward 2
162.1
134.3
0.112 million
84
Final price control determination notice: company-specific appendix – Affinity Water
Additional details
Necessary detail on
measurement units
The measurement units are average Ml/d a year basis –
Ofwat item reference BN2345.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
Timing and frequency of
rewards/penalties
Rewards and penalties will apply annually.
Form of reward/penalty
Adjustment to revenue.
_________________________________
Performance commitment: average water use
Detailed definition of performance measure: This measure is combined
measured and unmeasured per capita consumption including changes to underlying
occupancy rates. The unit of measurement is post- maximum likelihood estimation
(MLE) weighted average litres per person per day on average over the year.
Reducing consumption in all conditions is most closely aligned with the normal year
annual average (NYAA) condition as this reflects the underlying cumulative effect of
change in consumption. Therefore, this is the most suitable scenario under which to
report progress towards the outcome targets.
Incentive type: Financial penalty only.
Performance commitments
Starting
level
Committed performance levels
Unit
2014-15
2015-16 2016-17 2017-18 2018-19 2019-20
PCs
l/p/d
158.4
156.3
155.6
153.3
150.3
147.4
Penalty collar
l/p/d
N/a
N/a
N/a
N/a
N/a
N/a
Penalty deadband
l/p/d
N/a
N/a
N/a
N/a
N/a
N/a
85
Final price control determination notice: company-specific appendix – Affinity Water
Incentive rates
Incentive type
Performance levels (l/p/d)
Lower
Upper
Incentive rate
(£/year)
Penalty 1
153.4
153.4
0.750 million
Penalty 2
147.5
147.5
1.750 million
Additional details
Necessary detail on
measurement units
The unit of measurement is post-MLE weighted average
litres per person per day on average over the year
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually
Timing and frequency of
rewards/penalties
Penalties will be applied based upon a pass/fail
assessment in year 3 (2017-18) and year 5 (2019-20)
against our PC for that year.
Form of reward/penalty
Adjustment to revenue
_________________________________
Performance commitment: water available for use
Detailed definition of performance measure: Water available for use (WAFU) is
made up of deployable output (the amount that works can produce and include any
imports/exports) minus an amount for climate change, sustainability reductions and
outages (planned and unplanned site failures). The units for WAFU are Ml/d average
over the year.
The company will use its dry year annual average (DYAA) baseline forecast to
monitor its performance in achieving its outcome as this is the scenario that
influences capacity investment and corresponds to environmental benefits and these
will be most obvious in a dry year condition. The company will measure changes in
its baseline each year compared to the end year of 2010-15.
Incentive type: Financial penalty only.
86
Final price control determination notice: company-specific appendix – Affinity Water
Performance commitments
Starting
level
Committed performance levels
Unit
2014-15
2015-16 2016-17 2017-18 2018-19 2019-20
PCs
Ml/d
1114.7
1110.4
1103.5
1100.8
1068.1
1067.0
Penalty collar
Ml/d
N/a
N/a
N/a
N/a
N/a
N/a
Penalty dead band
Ml/d
N/a
N/a
N/a
N/a
N/a
N/a
Incentive rates
Incentive type
Performance levels (Ml/d)
Lower
Upper
Incentive rate
(£/year)
Penalty 1
1100.7
1100.7
0.590 million
Penalty 2
1066.9
1066.9
1.910 million
Additional details
Necessary detail on
measurement units
The units for WAFU are Ml/d average over the year.
Performance will be measured based on change from our
DYAA baseline for end of 2010-15.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
Timing and frequency of
rewards/penalties
Penalties will be applied based upon a pass/fail
assessment in year 3 (2017-18) and year 5 (2019-20)
against the PC for that year.
Form of reward/penalty
Adjustment to revenue.
_________________________________
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Final price control determination notice: company-specific appendix – Affinity Water
Performance commitment: sustainable abstraction reductions
Detailed definition of performance measure: This performance measure is the
cumulative reduction of the company’s average deployable output required by the
end of the year. This is line with the company’s water resources management plan.
Incentive type: Financial reward and penalty.
Performance commitments
Starting
level
Committed performance levels
Unit
2014-15
2015-16 2016-17 2017-18 2018-19 2019-20
PCs
Ml/d
0.0
Penalty collar
Ml/d
N/a
Penalty deadband
Ml/d
N/a
N/a
N/a
N/a
N/a
N/a
Reward deadband
Ml/d
N/a
N/a
N/a
N/a
N/a
N/a
Reward cap
Ml/d
N/a
-6.7
-12.5
-14.1
-42.1
-42.1
0.0
0.0
0.0
0.0
0.0
-6.7
-15.5
-35.7
-42.1
-42.1
Incentive rates
Incentive rate
Incentive rate (£/Ml/d/year)
Penalty
0.068 million
Reward
0.068 million
Additional details
Necessary detail on
measurement units
Measurement units are Ml/d based upon the cumulative
reduction of the company’s average annual deployable
output over 2015-20.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
Timing and frequency of
rewards/penalties
Rewards and penalties will apply annually.
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Final price control determination notice: company-specific appendix – Affinity Water
Form of reward/penalty
Adjustment to revenue.
Any other information or
clarifications relevant to
correct application of
incentive
This ODI is related to the pace of delivery, rather than
over- or under-performance of a service level. There is a
single incentive rate of £0.068 million per Ml, which will
apply as either a penalty or a reward depending on
whether the company has over- or under-delivered
against its PC in any given year.
_________________________________
Performance commitment: abstraction incentive mechanism (AIM)
Detailed definition of performance measure: Measure the effect of abstractions
on specific water sources within the communities Affinity Water serves
Incentive type: Reputational
Performance commitments
Starting level
Committed performance levels
2014-15
2015-16 2016-17 2017-18 2018-19 2019-20
Unit
PCs
TBC
TBC
TBC
TBC
TBC
TBC
Additional details
Necessary detail on
measurement units
AIM is a reputational target for 2015-20 to reflect
substantial progress with sustainability reductions.
Frequency of PC
measurement and any use of
averaging
Performance will be measured once at the end of the
2015-20 period.
Timing and frequency of
rewards/penalties
Reputational incentive
Form of reward/penalty
N/a
89
Final price control determination notice: company-specific appendix – Affinity Water
Any other information or
clarifications relevant to
correct application of
incentive
This incentive is in line with the proposals by Ofwat for a
strong reputational incentive for abstraction reductions.
This PC will be developed during 2015-20.
90
Final price control determination notice: company-specific appendix – Affinity Water
Wholesale water outcome: supplying high quality water
you can trust
Performance commitment: compliance with water quality
standards
Detailed definition of performance measure: The performance measure is mean
zonal compliance. Mean zonal compliance is the average of the compliance rates (at
zone level) for 39 parameters that are tested to establish the quality of water and is
the main measure used by Drinking Water Inspectorate to demonstrate compliance.
Incentive type: Financial penalty only.
Performance commitments
Unit
PCs
%
Penalty collar
%
Penalty deadband
%
Starting
level
Committed performance levels
2014-15
2015-16 2016-17 2017-18 2018-19 2019-20
99.95
99.95
99.95
99.95
99.95
99.95
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
Incentive rates
Incentive rate
Penalty
Incentive rate
(£/year)
0.720 million
Additional details
Necessary detail on
measurement units
The unit is percentage compliance with standards a year
on a calendar year basis.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
91
Final price control determination notice: company-specific appendix – Affinity Water
Timing and frequency of
rewards/penalties
This will be a pass/fail annual assessment against the
PC.
Form of reward/penalty
Adjustment to revenue.
_________________________________
Performance commitment: customer contacts for discolouration
Detailed definition of performance measure: This is a measure of customer
contact for discolouration calculated as the weighted average (as per the current
2010-15 reference level). The unit is the number of contacts per 1,000 of population
– an index score a year (calendar year).
Incentive type: Financial penalty only.
Performance commitments
Unit
PCs
Number/ 1000/
population.
Penalty
collar
Number/ 1000/
population.
Starting
level
Committed performance levels
2014-15
2015-16 2016-17 2017-18 2018-19 2019-20
0.66
N/a
0.66
0.66
0.66
0.66
0.66
1.30
1.30
1.30
1.30
1.30
Incentive rates
Incentive rate
Incentive rate
(£/nr/1000/popn./year)
Penalty
0.438 million
Additional details
Necessary detail on
measurement units
The unit is the number of contacts per 1,000 of population
served – an index score a year (calendar year).
92
Final price control determination notice: company-specific appendix – Affinity Water
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
Timing and frequency of
rewards/penalties
Penalties will be assessed annually.
Form of reward/penalty
Adjustment to revenue.
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Final price control determination notice: company-specific appendix – Affinity Water
Wholesale water outcome: minimising disruption to you
and your community
Performance commitment: unplanned interruptions to supply over
12 hours
Detailed definition of performance measure: This is the number of properties
affected by an unplanned interruption to supply of over 12 hours. The definition is in
line with Ofwat item reference BN1008, as used for the DG3 infrastructure
serviceability measure through the 2010-15 period.
Incentive type: Financial reward and penalty.
Performance commitments
Starting
level
Unit
PCs
Number of
properties
Penalty collar
Number of
properties.
Penalty dead
band
Committed performance levels
2014-15 2015-16 2016-17 2017-18 2018-19
320
201920
320
320
320
320
320
N/a
775
775
775
775
775
Number of
properties.
N/a
505
505
505
505
505
Reward dead
band
Number of
properties.
N/a
135
135
135
135
135
Reward cap
Number of
properties.
N/a
0
0
0
0
0
Incentive rates
Incentive rate
Incentive rate (£/property/year)
Penalty
5,410
Reward
975
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Final price control determination notice: company-specific appendix – Affinity Water
Additional details
Necessary detail on
measurement units
Measurement units are number of properties affected a
year basis. The exact definition is in line with Ofwat item
reference BN1008.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
Timing and frequency of
rewards/penalties
Rewards and penalties will apply annually.
Form of reward/penalty
Adjustment to revenue.
_________________________________
Performance commitment: number of burst mains
Detailed definition of performance measure: This is measured on number of
mains bursts a year – Ofwat item reference BN1225. The number of mains bursts
(excludes ferrule bursts FE2 and FE3) to enable consistent measurement on a
unified single company basis.
Incentive type: Financial penalty only.
Performance commitments
Starting
level
Unit
2014-15
Committed performance levels
2015-16 2016-17
2017-18
2018-19
2019-20
PCs
Number
3,100
3,100
3,100
3,100
3,100
3,100
Penalty collar
Number
N/a
4,350
4,350
4,350
4,350
4,350
Penalty
deadband
Number
N/a
3,500
3,500
3,500
3,500
3,500
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Final price control determination notice: company-specific appendix – Affinity Water
Incentive rates
Incentive rate
Performance levels (nr)
Lower
Penalty
Upper
3,500
Incentive rate
(£/nr/year)
4,350
2,665
Additional details
Necessary detail on
measurement units
The unit of measurement is number of mains bursts a
year – Ofwat item reference BN1225.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
Timing and frequency of
rewards/penalties
Penalties will apply annually.
Form of reward/penalty
Adjustment to revenue.
_________________________________
Performance commitment: affected customers not notified of
planned interruptions
Detailed definition of performance measure: This is a Guaranteed Standards of
Service (GSS) measure – Ofwat item reference GSS00010. The definition is the
number of customers not notified of a planned interruption to supply of over 4 hours’
duration. The definition for ‘customer’ is that given in the Water Supply and
Sewerage Services (Customers Service Standards) Regulations 2008.
Incentive type: Non-financial.
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Final price control determination notice: company-specific appendix – Affinity Water
Performance commitments
Starting
level
PCs
Committed performance levels
Unit
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
Number of
GSS events
110
110
110
110
110
110
Incentive rates
While there is no financial ODI, every property, both domestic and non-domestic,
that is affected will receive an enhanced GSS compensation payment of £50.
Entitlement to payment will be assessed in accordance with the regulations and
subject to the same limitations and exclusions.
Additional details
Necessary detail on
measurement units
The measurement units are the number of GSS events –
as defined by Ofwat item reference GSS00010.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
_________________________________
Performance commitment: planned work taking longer to
complete than notified
Detailed definition of performance measure: This is a Guaranteed Standards of
Service (GSS) measure and is based on the overruns of planned and warned
interruptions to supply – Ofwat item reference GSS00012.
Incentive type: Non-financial.
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Final price control determination notice: company-specific appendix – Affinity Water
Performance commitments
Starting
level
Unit
PCs
Nr. GSS
events
Committed performance levels
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
550
550
550
550
550
550
Incentive rates
While there is no financial ODI, every property, both domestic and non-domestic,
that is affected will receive an enhanced GSS compensation payment of £50.
Entitlement to payment will be assessed in accordance with the regulations and
subject to the same limitations and exclusions.
Additional details
Necessary detail on
measurement units
The measurement units are the number of GSS events –
as defined by Ofwat item reference GSS00012.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
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Final price control determination notice: company-specific appendix – Affinity Water
Household retail outcome: providing a value for money
service
Performance commitment: SIM service score
Detailed definition of performance measure: Ofwat defined
Incentive type: Financial – reward and penalty.
Performance commitments
Starting
level
SIM service
score
Committed performance levels
Unit
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
SIM
score
TBC
TBC
TBC
TBC
TBC
TBC
Additional details
Necessary detail on
measurement units
Ofwat measure
Frequency of PC
measurement and any use of
averaging
Annually
Any other information or
clarifications relevant to
correct application of
incentive
Incentive is comparative
_________________________________
Performance commitment: value for money survey
Detailed definition of performance measure: A quantitative value for money
customer survey to support the specific assessment of the company’s value for
money measure. The survey will be complementary to the assessment of customer
service delivered through SIM.
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Final price control determination notice: company-specific appendix – Affinity Water
The survey will be developed in detail over the next few months with the input of
CCWater, community groups and other relevant customer representative bodies
such as the Citizens’ Advice Bureau. The first survey will establish the company’s
baseline PC against which it will measure its performance during 2015-20.
Incentive type: Non-financial.
Performance commitments
Starting level
PCs
Committed performance levels
Unit
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
TBC
TBC
TBC
TBC
TBC
TBC
TBC
Incentive rates
This is a non-financial ODI.
Additional details
Necessary detail on
measurement units
To be confirmed following engagement with key
stakeholders.
Frequency of PC
measurement and any use of
averaging
Performance will be measured against the PC annually.
Outcome delivery and reporting
In policy chapter A2, we outline a framework against which we have assessed
Affinity Water’s proposals in relation to outcome delivery and reporting.
The table below summarises Affinity Water’s approach to the measurement,
reporting and governance of outcomes and our assessment of this approach.
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Final price control determination notice: company-specific appendix – Affinity Water
Table AA4.7 Affinity Water’s outcome delivery and reporting
Affinity Water’s proposals
Our assessment
Affinity Water has a vision to be the leading
community-focused water company and has split its
region into eight local communities. To ensure it
remains accountable to the communities it serves, it
will report its operational performance at a
community level. Affinity Water has developed a
reporting tool (Navig-8) to reflect unique local issues
and report on the condition of local assets. This tool
offers communities the ability to view historical
service as well as forecasts of expected future
performance against levels of investment. Affinity
Water will provide its communities with a clear
picture of performance against its commitments
within their local area and the ability to compare
performance across the eight communities.
The company has also developed a performance
measurement framework, which incorporates the
PCs and ODIs, a wider suite of KPIs (including
customer, performance and financial indicators) as
well as the newly developed asset health index. All
performance data and recording processes will be
subject to audit by an independent Reporter and
challenged by a customer representative group.
Overall, the company will, therefore, provide
customers and stakeholders with sufficient
information to form a rounded view of the company
performance to ensure it is held to account.
101
We were impressed by the innovative
approach Affinity Water is
undertaking to engage better at a
community level. We consider this
has significant potential to increase
customer understanding of the
service they receive and further
strengthen the customer voice.
We also consider it ensures that the
company is held directly accountable
by, and maintains its focus on, its
customers and not just its regulators.
Ofwat (The Water Services Regulation Authority) is a non-ministerial
government department. We are responsible for making sure that the
water sector in England and Wales provides customers with a good
quality and efficient service at a fair price.
Ofwat
Centre City Tower
7 Hill Street
Birmingham B5 4UA
Phone: 0121 644 7500
Fax: 0121 644 7533
Website: www.ofwat.gov.uk
Email: mailbox@ofwat.gsi.gov.uk
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December 2014
© Crown copyright 2014
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