The new approach to cost assessment marks a shift from the separate opex and capex assessment to totex (total expenditure) and will feed into the totex menu that Ofwat will implement in PR14. CEPA advised Ofwat on a set of viable econometric models that could be used in forecasting company costs for the next price control period (AMP6) and determining the menu baseline. The models may potentially be used in the risk-based review of company business plans by informing the cost corridors.
CEPA’s analysis identified viable totex models for the water services, where as for sewerage such models were only viable for the network part of the value chain and would be supported by simpler models and disaggregated econometric models for the rest of the sewerage services.
Some of the key improvements on the models used previously by Ofwat include the use of panel data, exploring different functional forms and estimators, and triangulation.
The publication can be found here.