Ofwat sets the regulatory contract that we will deliver in each five-year period

Key facts

5-year

regulatory contracts set by Ofwat for Asset Management Plan (AMP) periods

AMP6

covers 1 April 2015 to 31 March 2020, with four of these five years now delivered

AMP7

covers 1 April 2020 to 31 March 2025, with business plans already well progressed and final determinations due in December 2019

Setting our regulatory contract

Water and wastewater companies in England and Wales operate within five-year regulatory periods known as Asset Management Plan periods (AMPs). Price, service and incentive levels are set by our economic regulator, Ofwat, prior to the start of each regulatory period following a period of consultation and planning known as a price review.

During the price review, Ofwat consults with stakeholders, including water and wastewater companies, and sets out its methodology, which details its key areas of focus and an indication of how prices, service and incentive levels will be set.

Companies consult with customers and other stakeholders, including environmental and quality regulators, and prepare a detailed business plan that sets out the proposed price and service package they will deliver over the period.

These plans are submitted to Ofwat, which scrutinises and challenges them and ultimately sets a regulatory contract for each company, known as the final determination (FD). The FD sets the price, in terms of total expenditure (totex) and customer bills, level of service, and incentive package that companies must deliver over the period. It gives an allowed return companies can earn, which is expressed as a percentage of Regulatory Capital Value (RCV).

We base our plan on continuous customer insight and bespoke research and consultation on customer priorities, factoring in long-term planning as well as what is needed in just that five-year period. This means we can submit a robust and balanced plan to Ofwat. This helps ensure we receive a regulatory contract that targets the best overall outcomes for our customers and all our stakeholders, and which effectively incentivises us to continually improve our performance.

We have just delivered the fourth year of the sixth asset management plan period (AMP6) that covers the 2015–20 regulatory period. The 2019 price review (PR19) that will set the regulatory contract for the 2020–25 period (AMP7) is well under way. Key dates in the PR19 process can be seen on the timeline below.

Delivering that contract

In order to incentivise companies to deliver sustainably better and more efficient performance, Ofwat gives companies the opportunity to earn a higher return where they outperform their regulatory contract, and the risk of earning a lower return where they underperform. The opportunity for outperformance allows us to create further value for customers, shareholders and wider stakeholders. We can outperform through:

  • Totex – delivering the agreed outcomes while spending less than the allowed totex through innovation and efficiency initiatives. Totex outperformance is shared roughly 50:50 between customers and the company.
  • Outcome delivery incentives (ODIs) – beating the stretching target levels agreed for an assortment of measures, mainly of customer service and environmental performance.
  • Customer satisfaction – delivering a great level of customer service that is favourable relative to the other water and wastewater companies, currently measured through Ofwat's quarterly service incentive mechanism (SIM) surveys.
  • Financing – raising debt finance at a cost below the industry allowed cost of debt, which forms part of the overall allowed return.
  • Household retail – minimising the cost to serve our household customers relative to the allowed revenue for household retail activities.

We include our performance against each of the above areas in our operational KPIs, including our targets for the 2015–20 regulatory period. Since the start of AMP6 we have published an Annual Performance Report (APR), which reports our regulatory performance in a format that helps customers and other stakeholders understand it and compare it with other companies in the sector. This includes reporting of Return on Regulated Equity (RoRE), which is made up of the base allowed return and any outperformance/underperformance in the above areas.

3 Sept 2018

Submission of company business plans to Ofwat

31 Jan 2019

Publication of Ofwat’s initial assessment of company business plans

11 Apr 2019

Publication of draft determinations for fast-track companies

18 July 2019

Publication of draft determinations for slow-track and significant scrutiny companies, and update on Ofwat cost of capital assessment

11 Dec 2019

Publication of final determinations for all companies

Jan 2020

Companies announce whether they accept their final determination

April 2020

Start of AMP7 period

AMP7 Planning and preparation

AMP7 Delivery – Year 1 of 5

AMP6 Delivery – Year 4 of 5

AMP6 Delivery – Year 5 of 5

31 March 2018

31 March 2019

31 March 2020