Ofwat has updated licence terms to allow water companies to increase bills if their revenue was lower than expected in the previous year.
The water regulator will set a price control formula as part of the price review for each company, in a bid to prevent bad debt. The company can recover shortfalls based on that calculation during the following year instead of waiting until the end of the five-year period.
This will allow companies to cover their costs in cases where customers cannot afford to pay a water bill.
The amount a company can recover will be set by Ofwat in the 2019 price review for 2020-25, with an amount calculated using the Revenue Forecasting Incentive (RFI).
The changes are intended to help companies realise and correct forecasting errors more quickly than if there was no licence change.
Ofwat said: “We consider that it is appropriate to allow companies to ‘true-up’ for under- or over recovered revenues during price control periods, rather than at the end of the review period, to help smooth changes in customer bills.”
The regulator said the modification applied to future price controls beyond 2025 and reflected its approach to reduce the need for future licence changes.
Companies will be incentivised to match revenue with their business plan, and may be given a penalty from Ofwat if there is a “significant imbalance” between its allowed and actual revenue.
Ofwat will publish its final determinations on 16 December and the price review will come into effect in April 2020.
Following the final determinations published by Ofwat in December, companies can appeal to the Competitions and Markets Authority (CMA), should this happen, the CMA would have the power to change the price control formula.