Menu incentives in water

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Client Ofwat
Dates 2012
Service(s)Policy & Economics, Regulation & Competition

CEPA was retained by Ofwat to investigate the case for moving to a totex approach to improve efficiency in the water sector, with the work covered involving analysing of potential approaches to (i) cost assessment; (ii) cost recovery; and (iii) incentives.

The first stage of this work involved bringing together existing work on totex (including work by Ofwat on the three areas, and also external work, e.g. an UK Water Industry Research (UKWIR) report on cost assessment) and undertaking a peer review of this work.

Following the peer review work, we developed a set of recommendations for menu-based regulation. This acted as a framework for Ofwat’s approach for the August 2012 Future Price Limits consultation on the appropriate methodology, and will also inform approaches in the longer term.

In developing the recommendations, we:

  • adopted assessment criteria for analysing a range of packages;
  • undertook modelling to analyse existing incentive strengths; and
  • calibrated illustrative menus for each package.

We analysed these packages against each of the characteristics of a menu and on a holistic level, with evidence utilised from experiences in other sectors, to deliver our recommendation. CEPA's report was published alongside Ofwat's consultation. It can also be found here.