Enhancement costs 54. Enhancement cost allowances provide for expenditure required to serve new customers through population growth and/or to meet new service levels and comply with new legal requirements specified in Water Resource Management Plans (WRMPs) and water quality standards required by the Drinking Water Inspectorate (DWI), EA and Natural Resources Wales. 55. In the case of enhancement costs, the concerns raised by the Disputing Companies largely relate to Ofwat’s use of benchmarking models and ‘deep dive’ reviews of requested allowance claims in determining allowances.
In addition, the Disputing Companies have asked us to update certain allowances to take account of new information and to make changes to the delivery mechanism, the large scheme gated process and other adjustment arrangements. Benchmarking models 56. The Disputing Companies have raised specific concerns in relation to the performance of Ofwat’s phosphorus removal, water supply interconnector and bioresources industrial emissions directive (IED) costs models. 57. We will consider whether these models provide a reliable basis for setting the relevant cost allowances. 58.
If we consider that the concerns raised are valid, we will consider making changes to the specification of the relevant models and/or benchmarking approach. If we find that there are changes that can be made that would remedy the concerns raised, we would expect to update the models and calculate revised allowances for all Disputing Companies. If we are unable to improve the models or benchmarking approach, we will consider carrying out a company-specific assessment of the relevant enhancement cost claims as set out in paragraph 65 below. 59. In addition, Northumbrian claims that Ofwat made unambiguous errors in several models (eg in the CA55 Storm overflows model).
Ofwat agrees that these are errors. It has itself corrected some and asked the CMA to update the allowances accordingly in the redeterminations. As set out in paragraph 36 above, we intend to fix the errors and update the allowances within the models. Individual assessment allowances (shallow and deep dives) 60. The Disputing Companies have raised concerns in relation to over 30 bespoke or individual assessments carried out by Ofwat in setting allowances to fund investment in wastewater monitoring, water supply, water quality, security and resilience, and environmental schemes. Some of these concerns relate to Ofwat 16