The General Efficiency Assumption: Setting X in RPI-X

The Situation

In 2002 Water UK, which represents water and sewerage companies in the UK, commissioned NERA to examine the current practice for setting the efficiency factor X at Periodic Review, and to propose a transparent methodology as the basis for setting X at future reviews.

NERA's Role

A NERA team consisting of Director Dr. Bill Baker, former NERA Senior Consultant Brian Williamson, and former NERA Analyst Helen Lay Jung reviewed the approaches to setting the efficiency factor X employed by the UK and international regulators. On the basis of this review, the authors set out a number of recommendations for setting X to ensure that allowed prices track expected company costs.

The Result

The authors' proposed recommendations for setting X in an index-linked, price-capped regime were subsequently adopted by the UK water industry. The recommendations provided the basis for industry forecasts of the efficiency factor X at the 2004 price review.