Ofwat yesterday published its guidance for companies on how it will go about setting price limits for customers' water and sewerage bills for five years from 2010-15. It takes account of responses to its consultation paper published last October.

The approach has its foundations in the robust challenges that Ofwat has always brought to its scrutiny of companies' business plans. Ofwat will set price limits that deliver best value now and in the future. The guidance also supports Ofwat's work in developing competition in customers' interests.

#Ofwat Chief Executive Regina Finn said:

"We are setting price limits at a time when the water sector is facing demanding challenges, including climate change, population growth and rising energy costs. Companies will need to be innovative and creative if they are to meet these challenges while delivering water and sewerage services at prices that customers regard as fair.

"At present our price limits are set for these monopoly businesses to protect customers who cannot choose their supplier. But we are moving towards an approach that promotes real competition and this might include setting separate price limits for different parts of the water and sewerage businesses in the future."

Much of Ofwat's approach is tried and tested. But the water regulator will also be seeking to set price limits that take account of the long-term needs of consumers, and the pressures on the water sector. The process will include a new form of incentive-based regulation for capital expenditure that encourages each company to submit a realistic business plan.

Regina Finn said:

"We asked companies to develop and publish 25-year strategic direction statements, encouraging them to set out how they plan to meet their customers' long-term needs. This innovation will help each company to develop a business plan that will safeguard high-quality sustainable services for its customers today and for future generations."

The next step in the 2009 price review process will be for each company to submit a draft business plan to Ofwat by 11 August 2008. The PR09 methodology paper published  by Ofwat, 'Setting price limits for 2010-15: Framework and approach' is available on the Ofwat website.