X-Setting in Water Price Cap Reviews

Fri Nov 01 15:24:38 EST 2002
By Dr. William Baker with Brian Williamson and Helen Lay Jung

Water UK retained NERA to examine the process for setting the general efficiency target X for the determination of price caps at Periodic Reviews -- giving particular consideration to studies since 1999 and the efficiency target for operating expenditure. In NERA's report to Water UK, the authors consider all the factors that can affect the pre-RPI price cap level, such as anticipated changes in the volume and quantity of outputs to be delivered, and any incentive rewards and penalties for past company performance against targets.

Following an in-depth review of the economic regulation literature and experiences in setting efficiency factors for regulated companies in both the UK and internationally, the NERA team developed this one-page "fact sheet" highlighting key conclusions and recommendations.