Cost of Compliance Assessments and the Water Industry in England and Wales

AbstractEnvironmental compliance cost assessments (CCAs) are being increasingly demanded and used in the water industry, in order to allow regulators to balance conflicting objectives. The 1999 periodic review of water company price limits concerned massive environmental expenditures, and consequently major use of CCAs. There were major differences between Ofwat (the economic regulator) and the water companies relating to the compliance costs submitted. The assumptions used by Ofwat vis‐à‐vis future efficiency savings and the cost of capital are notable causes of the differentials. There are a number of other reasons why this differential might have arisen, including gaming. However, the principal cause might be more a real lack of knowledge on the part of companies of future efficiencies and the actual costs of projects. The CCAs produced in the water industry have had massive impact on policy design. A number of specific improvements to CCA are identified. These changes relate to increased collaboration between industry and regulators in working groups to design/approve, inter alia, regulatory methodologies for use in the periodic review. More detailed guidance is required for preparation of a CCA. Further use of compliance cost databases is recommended. The entire process would be facilitated by increased training and awareness raising of economics for the engineers largely responsible for preparation of CCAs. Copyright © 2002 John Wiley & Sons, Ltd. and ERP Environment.