PR19 - Innovation and Efficiency Gains from the Totex Framework

Objectives and Scope

Since PR14 water companies and their suppliers have had time to gain experience and adapt to the totex and outcomes framework. Different companies have adapted to the new framework at different pace. For PR19, we consider that all water companies should be able to take full advantage of the new framework and deliver significant efficiency savings.

The overall objectives of this work are to identify the potential scope and range for efficiency savings from the full utilisation of the totex and ODI approach. The principle objective of this work is to deliver a measure of efficiency challenge that Ofwat can apply to baseline costs at PR19. This is to be robust and supported by a broad range of evidence which the Contractor may collect from a variety of sources, amongst which may be:

• Examining totex performance in the water sector, and particular examples of best practice of innovations and efficiency savings through using a totex approach.

• Examining totex performance in the energy sector, and the potential scale of any outperformance that can be attributed to innovation and improved efficiency.

• Examining cost performance in other sectors to identify the range of cost reductions that might be available, particularly where there have been significant changes such as cost shocks, competition and the introduction of price controls.

• Examining the performance of other sectors abroad that either have or have introduced regimes similar to totex/ODIs.

• Developing a conceptual bottom-up assessment, based on sound engineering principles, of the potential that totex/ODIs provide companies.

We are seeking support to identify the potential scope and range for efficiency savings from the full utilisation of the totex approach in the water sector.

The expenditure allowances we set to water companies are largely determined through cost benchmarking models which rely significantly on historical cost information. However, historical information will not reflect the full benefits of the totex approach. In setting efficient cost baselines for PR19, we are seeking to understand, what potential efficiency gains from the totex approach we might apply to our cost baselines for PR19.

We think this work could be divided into two main tasks:

Task 1: Evidence of savings from a totex approach

Task 2: Potential application of totex savings to Ofwat's baselines for PR19