Supplementary Memoranda from the Office
of Water Services (Ofwat)
THE REVIEW OF THE 1999 PERIODIC REVIEW (MD164)
I set out in MD160 (21 March 2000) my intention
to review the overall approach to the 1999 Periodic Review (PR99).
The process of reviewing PR99 included a MORI questionnaire survey
and interviews. I am grateful to all those who contributed to
the review. This letter sets out the results of that review and
some learning points for the future.
The overall response has been that the PR99
process was a successful one. It was a large and complex project.
It presented considerable challenges to all those involved over
a period of almost three years. Those challenges were all met
on time and delivered a positive outcome for customers and the
The review of PR99 focused on the process aspects
rather than the methodology or outcome. It considered three key
what could and should have been done
what lessons can be learned for the
It covered all of the key stakeholders in PR99
in order to yield a full assessment. Details on the scope and
responses to the review are provided later in this letter.
The main conclusions and learning points arise
from the review under four key headingsachievement of objectives;
timing, planning and direction; consultation and information and
Ofwat intended the PR99 process to be predictable
with no surprises, to be consistent throughout, to be transparent
in decision making and for decisions to be seen as credible.
Almost half of respondents rated the overall
process as successful or highly successful with a further third
considering it to be at least adequate but it was noted that for
some groups the process is too complex for them to participate
Ofwat was considered to have acted predictably
by a large majority of respondents. Ofwat was also seen to have
been consistent throughout the process by most respondents. The
water companies, however, were critical on this point.
There were divergent views on Ofwat's success
regarding transparency in decision making. The increase in the
number of published papers was widely welcomed. Only a very small
number of respondents considered that they did not assist the
process and many respondents were content with the degree of transparency
overall. However, companies in particular were critical of their
lack of access to Ofwat's financial model and to all the data
used by Ofwat.
The calculations and workings of the financial
model had been exposed at an early stage (The Financial Model
Rule Book was published in October 1998) but Ofwat will consider
the issue of transparency in this respect for the next Periodic
Review in 2004.
The credibility of the process was viewed differently
by different groups, although most, with the exception of water
companies, viewed it positively. There were some concerns regarding
the degree of customer research carried out by Ofwat itself although
on the whole respondents felt that customers' views were properly
reflected in the price limits. Ofwat will consider this at the
next Periodic Review.
Overall, many respondents felt that the length
of the Periodic Review was too long, absorbing three years of
a five year cycle. There are many factors which contribute to
this, not least the need to carry out extensive consultation and
the demands of establishing the quality programme. Responses suggest
that a more appropriate period would be around two years. The
period required for the next review will depend on, amongst other
things, the extent to which the methodology needs to change, guidance
from Ministers on the environmental programme required and the
associated efforts on transparency and consultation.
Some respondents questioned the strength of
communication and co-ordination with the Department of the Environment,
Transport and the Regions, the Environment Agency and the Drinking
Water Inspectorate. Each had their own aims and priorities throughout
RP99. Generally the joint working went well, but a review of these
arrangements prior to the Periodic Review in 2004 would be useful.
The communication of the process and the timetable
for the PR99 was considered successful by respondents. Ofwat was
also seen to be leading the direction of the Review. It was also
considered that Ofwat clearly planned and sign posted the PR99.
More importantly, Ofwat was seen to have adhered to its timetable.
Water companies, however, questioned the appropriateness of the
timetable and found it difficult themselves to adhere to it in
The timing of the announcement of price limits
(November 1999) is acceptable to most (despite its proximity to
Christmas) but companies have some concerns about the short period
in which to convert the price determinations into the following
year's charges (requiring approval by Ofwat) and the preparation
This is recognised but late Autumn seemed the
most appropriate time because of the valuable information gained
by waiting for the full year results for the fourth year of the
period (1998-99 for PR99).
Nearly two thirds of respondents felt that the
publication of a wider range of documents made the process more
effective than in the previous Periodic Review. The majority of
stakeholders recognised the importance of Prospects for Prices
and the draft and final determination documents. However, not
all stakeholders were aware of the more technical papers. The
publications appear to have been more useful for customer, trade,
environment and City stakeholders than for the water companies
A number of stakeholders with an interest in
the PR99 process but who do not have a continuous involvement,
expressed a need for more simple documents. These should outline
Ofwat`s position and invite them to respond to the main issues,
perhaps set out as a series of questions. For future Periodic
Reviews, Ofwat will consider publishing "layman's" versions
of key published documents.
Prospects for Prices (published in October 1998)
was an innovative document which sought to bring together the
strands of work at an appropriate time so that stakeholders could
make informed views at a relatively early and critical stage.
It also provided broad ranges of possible changes to bills. This
is widely seen to have been a successful document by most stakeholders
for whom it identified the pertinent issues to be considered in
the remainder of PR99. This was also the view of the majority
of Customer Service Committees (CSCs). Almost all respondents,
except the water companies said it was useful to publicise the
broad ranges of possible bills.
Water companies' opinions of the document are
mixed. As many felt it covered pertinent issues well as those
that thought it covered them poorly. The majority felt it was
not appropriate to publish broad ranges of changes to bills at
Almost all stakeholders groups agreed that it
was useful to publish the Draft Determinations in July 1999. Most
respondents also considered that both the quantity and quality
of information was adequate or better although a minority felt
that there was insufficient information to aid understanding and,
hence, make an informed response. There was a similar response
to the Final Determination document in November 1999.
There were, during the course of the PR99, a
considerable number of information submissions largely from the
water companies. The review highlighted companies' concerns about
the data submissions, in particular, the volume of information
required. Companies questioned whether all the data was used by
Ofwat. The number of submissions required in the Summer of 1998
was also very demanding in the companies' view and made deadlines
difficult to achieve.
There are a number of aspects concerning information
submissions that will need to be considered for the next Periodic
Review. Collecting early information submissions can add value
to the process if it provides an opportunity for Ofwat, the companies
and other interested parties to understand, refine and make changes
to the data so that the companies' Business Plans are of high
The burden of information collection on companies
is recognised by the Director, particularly for small companies.
It will be important to consult with the industry and others on
the data required for the next Periodic Review in a similar manner
to the recent consultation on the annual information requirement
in the June Return, Annual Return 2001-05: consultation paper
on monitoring companies' performanceMay 2000.
A variety of methods of communication were used
between Ofwat and interested parties during PR99. The degree and
extent of communication also varied considerablywater companies
enjoyed far greater access to Ofwat staff than other interested
groups. This is not unexpected but the balance between groups
should be appropriate.
Other than the consultation papers, the MD and
RD series of letters were seen to be effective in keeping interested
parties informed. The water companies particularly welcomed them.
The letters were also considered to have been issued with sufficient
time for action.
On the other hand, the seminars held by Ofwat
for companies and those for customer and environmental groups
were seen as less successful. It has been suggested that such
seminars would be more useful if held at a regional or local level.
Seminars held for the City (institutional investors and analysts)
and business customers on the other hand, were well supported
and highly rated.
The working level meetings between companies
and Ofwat staff and the formal meetings of the companies and the
CSCs with the Director General were well received. Companies'
responses demonstrated overall satisfaction with these meetings,
that they occurred at the appropriate stage of the process and
were effectively administered. However, it was noted that there
was no stage in the process for Ofwat to provide comments to companies
on their Business Plans.
The review covered all of the key stakeholders
in the PR99. Broadly there were 12 groups of stakeholders
Customers and consumer groups
CSC Chairmen and members
MPs and Assembly members
The Drinking Water Inspectorate
The review was carried out through questionnaires
and structured interviews between March and May of this year.
The questionnaires were tailored to each group since each had
different perspectives on PR99. However, each questionnaire had
a core set of questions so that overall conclusions can be drawn.
The target audience for the review was based
mainly on those who had responded to any of Ofwat's consultation
papers plus others who were known to have an interest in PR99
(primarily the media and the City).
The project was assisted by commissioning MORI,
an independent firm of market researchers, to carry out a large
part of the field work and analysis.
Over 500 questionnaires were sent out and more
than 200 stakeholders responded. All of the responses made to
MORI are confidential and hence a list of respondents to the review
is not available.
A number of valuable learning points from PR99
have been collected. These will be considered by the new Director
General when he begins to plan for the next Price Review.