‘paying twice’ for outcomes that have not been delivered in prior charge control periods. 39. Although we have received some representations on social tariffs from parties, the setting of social tariffs is not within CMA’s powers to determine. Defra sets the framework for customers in a vulnerable position to be protected by the establishment of social tariffs. 20 The framework envisages that these are paid for by those customers in a vulnerable position paying less and other customers paying more. Some companies’ shareholders opt to contribute such that the social tariff subsidies are, in part or in whole, funded by the shareholders as opposed to other customers.
We also note the 2019 non-statutory Water UK pledge to make bills affordable by 2030. 21 Base costs 40. Base costs are routine, year-on-year costs, which companies incur in the normal running of the business to provide a base level of service to customers and maintain the long-term capability of assets. This covers both wholesale and retail activities. 22 Within this area we propose to address the issues raised as follows. Econometric benchmarking 41. Ofwat has recommended that we deprioritise base cost modelling.
Given that modelled costs represent the bulk of base costs, and that some of the issues raised by Disputing Companies appear to be supported by substantial arguments and evidence, we do not intend to deprioritise base cost modelling. However, given the complexity of this area and the substantial amount of work conducted in PR24 to develop these models, we intend to follow a focused and proportionate approach. 42. The specific requests made by Disputing Companies about base modelled costs broadly fall into four categories. 43. First, South East and Southern have asked us to reconsider the set of explanatory variables used in these models .
We plan to explore a data-driven approach to variable selection using econometric tools such as LASSO (Least Absolute Shrinkage and Selection Operator). Starting with a set of potential explanatory variables that have economic and engineering rationale, LASSO selects the set of explanatory variables that best predict the outcome variable of interest (in this case, base costs). LASSO tends to drop variables that have low 20 Defra (2012) Social Tariffs Guidance and The Water Industry (Charges) (Vulnerable Groups) (Consolidation) Regulations 2015 . 21 Which Water UK defines as ‘affordable for all households who spend more than 5% of their disposable income on water and sewerage bills’.
See https://www.water.org.uk/sites/default/files/wp/2019/04/Public-Interest-Commitment.pdf 22 Ofwat (2025) Expenditure allowances , page 18. 12