Northumbrian Water Limited

Northumbrian Water Limited ___________________________________________________________________

Ofwat review of price controls A Northumbrian Water Limited response to Ofwat discussion papers 1. Introduction
Key points We welcome the opportunity to respond to Ofwat‟s discussion papers This response covers four of the discussion papers because the issues are interlinked We have set out theprinciples that we believe should govern regulatory change or market reform Vertical separation would be a major and costly change and, therefore, it is essential it is evaluated against these principles and compared with other options This paper describes our views on the form of price control, risk and incentives in the context of Ofwat‟s market reform proposals We also propose an alternativeapproach, building on the current price setting methodology

The issues raised in four of Ofwat‟s discussion papers published in the latter part of 2010: „The form of price control‟; „The role and design of incentives‟; „Allocating risks and managing uncertainty‟; and „The treatment of regulated and unregulated business in setting price controls‟ are so interdependent that we have decided to commenton them in one response. We agree with Ofwat that this is an appropriate point in time to review the regulatory framework and ensure it is fit to deliver sustainable water services into the future. We, therefore, welcome the opportunity to comment on the important issues raised by the discussion papers. There are a number of challenges facing the industry in the future. The specific challenges maybe different in nature but, in our view, they are no more challenging than those the industry has successfully dealt with in the past. However, we do believe changes to the regulatory regime are necessary to ensure continuing effectiveness and efficiency in meeting customers‟ requirements. We are open to well justified and deliverable change, whether this is market reform or changes in regulation,or both. We believe any changes should be: - beneficial to customers; - demonstrably cost beneficial; - a definite improvement over current arrangements and viable alternatives; - tested fully for unintended consequences. - consistent with the sector continuing to attract finance at competitive rates; - practical and deliverable; - consistent with aims to reduce regulatory burden; and -consistent with Government policy. The thread running through Ofwat‟s discussion papers is that vertical separation of the industry is required in order to address the future challenges. This would be a radical and costly change, fundamentally affecting how the delivery of water and sewerage services is planned, delivered and financed. This being the case, it is essential that this course of action isevaluated against the principles for change

1

Northumbrian Water Limited ___________________________________________________________________ listed above and compared against other options to identify the best way forward for customers. This paper describes our views on the form of price control, risk and incentives in the context of Ofwat‟s market reform proposals. We also propose analternative approach, building on the current price setting methodology. The paper is set out as follows: Section 2: Section 3: Section 4: Section 5: Section 6: Section 7: Section 8: The drivers for change Risks Incentives The length of the price control period Disaggregation of price limits Upstream market reform Conclusions

2

Northumbrian Water Limited___________________________________________________________________

2. The drivers for change
Key points Ofwat has set out a number of important challenges to be met in the future We provide evidence that these are not more challenging than those in the past Required outcomes could be achieved through evolutionary developments of the current regime combined with some market reform

Ofwat lists a number of future challenges in its...