Ofwat has issued guidance on setting leakage targets to the water and sewerage companies. The guidance is pending publication in Spring 2008 of its final reports on the outcome of its leakage methodology review.
The Ofwat guidance explains how companies should incorporate the reports' findings into their business planning process for PR09 – including recommendations on how to address variations in per capita consumption which Ofwat expects companies to take account of with progress being monitored via the June returns. their estimates of household consumption. To achieve this, we will work with the companies and other stakeholders to share in formation and improve current practices.
Ofwat have also provided practical guidance to companies on including environmental and social costs and benefits in the Economic Level of Leakage calculation, with companies expected to take full account of environmental and social costs and benefits in their ELL calculations for PR09.
Ofwat have also opted for one of four main options being considered under the alternative approaches to leakage target setting project. Ofwat’s current view is that Option D - frontier based targets for leakage - which involves normalising the leakage management performance of water companies, and driving less efficient companies to catch up with the performance of the best (or 'frontier') companies, currently has the best potential to deliver continuing efficiency improvements for all companies, with innovation from the catch-up companies leading to improvements in industry best practice.
The regulator has now commissioned consultants to carry out the work on developing a frontier with the final report due for completion in April 2008. If Ofwat concludes that the frontier approach to target setting is achievable and realistic, and that it can deliver net benefits, a full public consultation will be launched in May about the possible change in approach.
Ofwat’s aim is to enable the companies to incorporate the guidance in their final business plans and water resource management plans for PR09.
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