A Total Expenditure Approach to Cost Assessment

Water and sewerage companies in England and Wales are subject to a system of price control regulation. At each price control review, Ofwat proposes constraints on the prices that these companies can charge consumers over the next five years. Similar regulatory regimes apply in Scotland and Northern Ireland. At previous price control reviews, Ofwat has assessed companies' efficiency and expenditure requirements separately for capital expenditure and operating expenditure, using different methods. There are some good reasons for making separate assessments. But there are also concerns that Ofwat's approach overlooks the interactions between operating and capital expenditure and contributes to a risk of an undue bias towards capital expenditure. This project explores the potential to introduce a total expenditure approach, which would better align the treatment of operating expenditure and capital expenditure. It identifies several different ways to do so and provides a systematic analysis of their benefits and drawbacks.

Reckon illustrative spreadsheet 03Oct2012

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