TEPLODOM Manual PR24 (EN)

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Contents Introduction .......................................................................................................................... 4 Invitation to submit views ..................................................................................................... 5 Next steps ............................................................................................................................ 6 Background .......................................................................................................................... 7 Issues and approach............................................................................................................

8 Fairly, efficiently, at proportionate cost within the statutory timetable .......................... 8 Approach to prioritising ................................................................................................ 9 Base costs ................................................................................................................. 12 Econometric benchmarking ................................................................................... 12 Sector-wide cost adjustment claims involving mains renewal, meter replacement and network reinforcement .......................................................................

14 Disputing Company-specific cost adjustment claims ............................................. 14 Other claims involving asset health ....................................................................... 14 Frontier shift .......................................................................................................... 15 Other base costs issues ........................................................................................ 15 Enhancement costs ................................................................................................... 16 Benchmarking models ...........................................................................................

16 Individual assessment allowances (shallow and deep dives) ................................ 16 Other enhancement costs issues .......................................................................... 18 Outcomes .................................................................................................................. 18 Outcome delivery incentives ................................................................................. 19 Price control deliverables ...................................................................................... 20 Risk and return ..........................................................................................................

20 Allowed return ....................................................................................................... 21 Balance of risk ....................................................................................................... 22 Retaining unchallenged aspects of Ofwat’s PR24 FD ....................................................... 23 Approach to use of new evidence and updated information .............................................. 24 Appendix: Timeline and principles for deciding water PR24 redetermination references .. 25 Timeline of water PR24 redetermination references .................................................

25 Principles for deciding water references .................................................................... 25 3

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Introduction 1. Every five years, Ofwat decides how much revenue companies are allowed for providing and improving water and sewerage services. This, in turn, impacts the customer pricing, business and investment decisions of individual companies. Companies that disagree with Ofwat’s price control decisions can ask the Competition and Markets Authority (the CMA ) to reassess and form conclusions on the price control decisions for those companies (known as ‘redeterminations’). 2. The CMA has been asked to redetermine price controls by five companies: Anglian Water; Northumbrian Water; South East Water; Southern Water; and Wessex Water (together the Disputing Companies ).

1 While it is open to us to reconsider any aspect of the price control decisions for these companies, in practice we need to focus our work and resources to complete the redeterminations fairly, efficiently and at proportionate cost within the statutory timeframes (which we refer to as our ‘overriding objective’). 3. Having considered initial submissions and information from the Disputing Companies, Ofwat and third parties (including customer and investor groups), we are publishing this document to explain how we propose to approach the redeterminations, including in particular the issues we intend to prioritise and deprioritise.

We invite views on our proposed approach and prioritisation to inform the focus of our work on the PR24 redeterminations . 4. The framework for our redeterminations is set out in our procedural rules and guide. 2 In particular, the guidance sets out our overriding objective to carry out the redeterminations fairly, efficiently and at proportionate cost within the statutory timeframes. 3 5. The main parties in these redeterminations are Ofwat and the five Disputing Companies. The five Disputing Companies have rejected Ofwat’s determinations and have provided extensive and differing reasons for doing so.

Given the nature and scale of the work involved in these five redeterminations and the associated procedural complexity, and the time we have available in which to carry out our redeterminations, we intend to adopt a proportionate approach to the prioritisation of issues. 4 1 Anglian Water Services Limited ( Anglian ), Northumbrian Water Limited ( Northumbrian ), South East Water Limited ( South East ), Southern Water Services Limited ( Southern ) and Wessex Water Services Limited ( Wessex ). 2 See New rules and guidance for water references (10 December 2024) . 3 Competition and Markets Authority Water Reference Rules (CMA204), December 2024 , ( Rules ) Rule 4.1.

4 Competition and Markets Authority Water Reference Guide (CMA205), December 2024 , ( Guide ) paragraphs 3.13– 3.16. 4

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6. In our Guide, paragraphs 3.13 to 3.16, we set out the CMA’s approach to the prioritisation and deprioritisation of issues in water redetermination references. 5 In particular, we have been mindful of whether in respect to specific issues: (a) any concerns have been raised by any main or third party; (b) we have identified any potential concerns, for instance in Ofwat’s approach; (c) there is any impact on other parts of the redeterminations; and/or (d) there is a significant scale of impact on current and/or future customer bills and/or other outcomes, including but not limited to service quality and resilience. 7.

In doing so, we have been mindful of the degree to which there are points of principle common across the Disputing Companies. Invitation to submit views 8. We welcome submissions from main and third parties, including from those representing customers’ interests, on our proposed approach. Submissions are most useful when they are supported by evidence. 9. We invite views in particular on: (a) whether we have prioritised appropriately; and (b) other aspects of our approach, including:

(i) our proposal to explore a data-driven approach to variable selection using econometric tools for base cost modelling (ie to use modelling techniques to review which inputs should be included in the models) (see paragraphs 43 to 44); (ii) the treatment of new evidence, data and information, including data cut-offs (see paragraphs 83 and 95 to 98 below); and (iii) the treatment of certain issues raised by several parties as common issues (paragraphs 27 to 28). 10. For the avoidance of doubt, we do not require restatement of arguments or evidence covered in the substantial volume of submissions already provided to us. 5 See footnote 4 above. 5

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