Regulatory strategy and price controls
We have extensive experience in advising policy makers on sector policy, as well as the development of implementation strategies, including setting targets and proposing monitoring mechanisms. Implementation of a proposed policy may involve the formulation of suitable regulations to govern the relevant areas of a sector, such as access regulation, regulated pricing, tariff modelling and design.
We were engaged by Ofwat as its “Delivery Partner” to support the implementation of price limits in the England & Wales water and sewerage sector as part of the Price Review 2014 ("PR14). PR14 was the most innovative price control in the water industry since privatisation, which will delivered enhanced services for customers, and an average reduction in customer bills of 5%.
As Ofwat’s Partner, our role involved us working in close collaboration with Ofwat and our subcontractors (CEPA and Jacobs) as a seamless team, managing multiple stakeholders and workstreams.
We worked with Ofwat across all aspects of PR14 over an 18 month period and had substantial responsibility for ensuring policy decisions within individual workstreams (e.g. outcomes, wholesale costs, retail, risk and reward, financeability and affordability, and PR09 legacy) were cohesive and integrated with the overall methodology and objectives for PR14. We did this via a “cross-cutting” policy team and extensive input from our leadership team.
The PwC Delivery Partner leads were standing members of the PR14 Delivery Board and had joint accountability for the programme with Ofwat’s Senior Director.
Cost of capital estimation
We have advised both regulators and regulated companies on the appropriate cost of capital to include in price controls and other regulatory contexts. Our assessment of the appropriate cost of capital is always technically robust, but we approach regulatory cost of capital setting as much more than a purely technical exercise. As part of our assessment, we take account of the commercial realities within which a business operates, drawing upon our broader valuation, corporate finance and business advisory expertise. We believe this gives our work added credibility.
We advised the UK Civil Aviation Authority on setting the appropriate cost of capital for two air traffic control companies for the price control review period (RP2), which set the revenue allowance for the 5 year period 2015-2019. The analysis required development of an appropriate methodology for assessing the cost of capital, a review of the regulatory approach, risk benchmarking, analysis of market data and determination of an appropriate range for the overall cost of capital.
We provided the regulator with a detailed final report setting out our views on the appropriate cost of capital.
Efficiency and cost benchmarking
Within sectors and across sectors, using a range of techniques (including econometric modelling). In addition to our team of analysts and econometricians, we can draw on a range of individuals who are have expertise in relevant aspects of regulated sectors. We also have a dedicated global benchmarking group – PwC Saratoga. We hold one of the world’s largest and most robust database of people and functional performance metrics, with benchmark information from over 2,600 international organisations.
We worked with Ofwat as the regulator’s delivery partner throughout the PR14 process. Our support spanned all areas of the price control, including the assessment of efficient wholesale and retail costs. Through this work we:
- Reviewed the operation of Ofwat’s wholesale cost econometric models, to confirm they were robust and complied with best practice.
- Supported Ofwat’s work to assess company-specific claims for additional wholesale costs (to cover expenditures which the companies considered were not adequately captured in Ofwat’s models).
- Reviewed the allocation costs between regulated businesses, most notably the way that the companies has allocated costs to the competitive retail business.
- Reviewed company claims for additional retail costs, including claims for new costs associated with market liberalisation.
- Developed and reviewed econometric models to assess the efficient costs associated with managing bad debts.
- Advised on the interaction between company promises to deliver services to customers (outcomes) and their cost base.
The assessment of efficient costs resulted in a saving of £3 billion compared to the companies’ business plans. PR14 also delivered a robust basis of allocating costs to the retail business, which will underpin the success of the competitive retail market.
Our work in support of PR14 was delivered on time and within a fixed budget.
Regulatory impact assessment
We have extensive market reform experience, including cost benefit assessments of regulatory proposals. We have our own methodology for assessing economic, social environmental and fiscal impacts which aligns with the regulatory impact assessment standards of the regulators.
We were commissioned by Monitor to conduct an Impact Assessment of Monitor’s licence conditions in accordance with government guidance. We first defined the appropriate baseline to provide the benchmark against which to assess the incremental impact of the licence conditions. For each licence condition, we defined an impact pathway which identified the stakeholders who were affected. We then gathered evidence from workshops, interviews and secondary research. We found the benefits of the licence conditions to outweigh the costs with modest impacts compared to the expected policy impacts of the Act.
We cooperate closely with PwC’s Competition Economics Group in advising operators, regulators and competition authorities on a wide range of regulatory and competition policy issues, including ex-ante market assessments and ex-post competition investigations.
Regulators and competition authorities perform assessments of profitability when considering whether competition is effective. In this context we have extensive experience in analysing data and applying relevant adjustments to calculate the actual and competitive benchmark levels of economic profitability. We use an established approach of making adjustments to accounting figures in order to obtain reliable economic profit estimates.
On behalf of our client, a TV broadcaster, we prepared an independent response to a Competition Commission working paper which examined the profitability of our client. This involved:
- understanding the background to the CC’s profitability work;
- examining the working paper and the earlier papers on which it was based;
- analysing spreadsheet models from other consultants and interviewing key client employees; and
- carrying out our own analysis to produce a report which commented on the CC working paper and set out our own views.
Advice on regulatory compliance
We understand the regulatory landscape and work with businesses to help them identify and manage their regulatory compliance risks. We assess business processes in the light of compliance obligations, assisting businesses in implementing safeguards such as staff training and business processes designed in such a way that the risk of non-compliance is minimised.
Our client was a port operator subject to a complicated statutory framework and unclear regulatory framework. We developed a methodology for assessing the appropriateness of the charges levied by our client, in light of the principles laid out within the Harbour Act (1964) and other relevant guidelines for port authorities. Our goal was to assess and provide quantitative support for a position on whether or not the charges levied were consistent with the principles outlined in the legislation and guidance.
Regulatory due diligence
We provide advice on the implications of regulation as part of any merger or acquisition transaction involving a regulated entity. We have performed this role both as a standalone service and also as part of a fuller financial and commercial due diligence service in conjunction with other PwC experts.
We provided financial and regulatory advice to an international consortium bidding to acquire a train operator. This involved understanding the key determinants of regulated charges and how charges might continue to evolve, and what impact this could have on the consortium’s valuation of the operator. The work also included assessing key risks, potential competition, and possible future changes to European legislation affecting the setting of track access charges.