Cost assessment for PR14

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Client Ofwat
Dates 2013
Service(s)Policy & Economics, Regulation & Competition
Ofwat requested CEPA to undertake work on cost assessment in the lead up to PR14. The primary focus of this work was testing the viability of totex modelling for cost assessment.

Part of the analysis focused on running various econometric models on totex, opex plus base capex, and enhancement capex at the aggregate levels for water and sewerage. Modelling methods explored included cost frontiers, OLS, panel, and translogs. These models took into account the shift in the water industry framework towards outcomes, regional differences between companies, quality measures, as well as core water and sewerage service indicators.

We used the results from these models and other non-econometric approaches to check the viability of using this approach to cost assessment for setting corridors and menu baselines for companies. We explored several approaches of doing that, including triangulation, which mixes the results of several models to yield allowed costs. In addition, we identified the information flow implications associated with the recommended approaches.

The final output of the project were the econometric models that Ofwat used to forecast efficient wholesale costs for 2015-2020, prior to making any special claim adjustments if substantiated by the companies.

During the project, CEPA also provided seconded staff and several training sessions to facilitate knowledge transfer.

CEPA's reports on cost assessment, published alongside Ofwat's methodology consultation and risk-based review, can be found here.