Independent Review of Financial Model

In setting price limits every 5 years, we have regard to our duties laid down in section 2 of the Water Industry Act 1991 as amended by subsequent Acts. In summary our main statutory duties are to: • protect the interests of consumers, wherever appropriate by promoting effective competition; • secure that the companies properly carry out their functions; • secure that the companies can finance the proper carrying out of their functions, and • secure long-term resilience.

To enable us to meet our duties and set price limits Ofwat uses a bespoke financial model. For PR14 Ofwat developed its financial model in partnership with PwC. The PR14 financial model had three purposes: • To determine the wholesale price controls. • To calculate the revenues arising from the retail price controls. • To help assess financeability of the appointee, with the ability to refine the wholesale price control limits until target financeability indicators are satisfied. The model went through significant development during the price review process, with six versions of the financial model being published. We are currently developing a new financial model to use at PR19. We released a draft of this model in July 2017, alongside our consultation "Delivering Water 2020: Consulting on our methodology for the 2019 price review". The draft consultation financial model and rulebook is available here: https://064f1d25f5a6fb0868ac-0df48efcb31bcf2ed0366d316cab9ab8.ssl.cf3.rackcdn.com/wp-content/uploads/2017/07/Draft-PR19-financial-model.xlsm We received a number of comments on the model and are currently preparing a revised version of the model for publication on 13 December 2017. Objectives and scope of the work The objective of the work is ensure the W2020 Senior Responsible Officer and other stakeholders will have independent assurance that the revised PR19 financial model is fit for purpose. This will help create trust and confidence in the PR19 financial model, and allow stakeholders such as water companies to have greater assurance in the results generates.

The scope of the work is to provide advice on:

a) whether the methodology used in the model fits with Ofwat's policy requirements outlined in the final methodology document b) whether the formulae in the model have been implemented correctly c) how to correct issues found with the model and to ensure it complies with best practice with Ofwat's policy requirements

It should be noted that the contractor will not be expected to implement any of the changes or recommendation that are identified.

Ofwat expects to publish the finished external review report on our website. By tendering for the work the Contractor accepts that the final report will be publishable.

Additional information: For further information, please contact: [email protected]