External support for the incentives to set efficient charges under revenue controls

All work must be completed by 30 March 2018.

Our goal

For the purpose of this project we define efficient tariffs as those that maximise the long run consumers' (developers and end-customers) welfare. In doing this, we abstract from important policy considerations, such as addressing concerns related to vulnerable consumers or affordability and the impact on the competition that may now occur for some services.

Objectives of this work

Given the above background we would like the Supplier to explore further the incentives regulated water companies currently have under the current regulatory regime (PR14) or will have under the new regulatory regime (PR19) to set tariffs as close as possible to those that would be set in a well-functioning market.

We expect the Supplier to produce a report highlighting the conclusions of its analysis. The conclusions of the report should be based on the key features of the water sector and its regulatory regime but do not require detailed knowledge of the regulatory regime, nor an analysis of past and current tariffs.

We consider that the role of the form of price controls is particularly in understanding the water companies' incentives, though it may not be the only factor to consider. We have undertaken some initial work on the incentives created by different types of price controls.