by Janet Wood
The service incentive mechanism (SIM) will be used throughout the next price review, despite changes in customer consultation in the water industry.
That reassurance came from Ofwat senior director of finance and networks Keith Mason when he spoke to Utility Week about the next steps in the price-setting process.
Asked where the new emphasis on outcomes set by customers would leave the SIM, he said it “measures the customer experience”, rather than outcomes such as leakage management or water efficiency that could vary between companies if set by customers.
He said that although “all these things have a life cycle … for the next price review, to 2020, it will be there”.
Mason acknowledged that there had been a mixed response from companies to Ofwat’s document setting out long-term changes, but he said both Ofwat and the companies had moved and the regulator would be holding company and cross-industry workshops to discuss the changes. On the coming price review, he said the long-term discussions meant there was more visibility of Ofwat’s plans than in other years, and he said companies had a clear view of Ofwat’s methodology in advance of the details due later in the year.
On replacing capital and operating costs with so-called totex, he said cost recovery was “a concern we are quite alive to”. In response to companies’ “trepidation”, he promised transitional arrangements such as a cap and collar, saying that transition might be throughout the next price review period, or mean there was little change before the end of the decade.
Do companies optimise their networks?
One area where Ofwat and the water companies do not see eye to eye is network optimisation. Ofwat wants companies to make sure they optimise their networks so that if third parties are granted access, or if there is more interconnection, the incomers will not be forced into the worst times and areas.
Companies said they do optimise. But Mason said: “It’s not clear how it is done, and it wouldn’t be clear to new entrants.”
This article first appeared in Utility Week’s print edition of 1 June 2012.
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