Ofwat said it would continue to set wholesale price controls using the
regulatory capital value (RCV) linked to RPI, but it would change some
of the detail of how it did so. It proposed using a mix of total revenue
and revenue yield to control revenue for wholesale supply.
Under the proposals, the sewerage wholesale control will use a
simpler total revenue control because there is not enough variation in
sewerage revenue to justify a different mechanism. However, Ofwat said
it welcomed views on this.
To bring water and sewerage in line with other sectors, Ofwat said
retail price rises would no longer be indexed to RPI. Instead, the
regulator will set two binding retail controls in 2014, one for
households and one for non-household customers.
Ofwat said it planned to encourage efficient water trading for
sellers and buyers by introducing new targeted incentives. To encourage
water companies to export water, Ofwat will increase the proportion of
lifetime profits they can keep from exporting water to up to 50 per
cent.
The regulator also said that to tackle over-abstraction and protect
against the danger that its water trading incentives might encourage
unsustainable abstraction, it would introduce the abstraction incentive
mechanism (Aim).
The Aim will cover sites where the risk of environmental damage from
over-abstraction is greatest and is designed to reward water companies
for abstracting less from these areas than they have done in the past.