Financeability tests and their role in price regulation - IPART - NSW ...

C CEPA note on UK legislative requirements
C.1 The legal basis for financeability testing in the UK
C CEPA note on UK legislative requirements
Statutory regulators in the UK are charged to protect the interests of consumers. In
order to sustainably achieve this goal, their legislative duties have usually required
them to ensure that licence holders are allowed sufficient revenue to fulfil their
regulatory duties.
Current primary legislation in the industries considered in this note does not require
for licensees to achieve certain financial benchmarks, as might be implied by the
financeability tests they have been conducting, but instead gives a set of broad
objectives to be interpreted by the regulators and implemented in the manner they
see best fit.
This note briefly presents the legal basis for financeability testing for 4 UK
regulators:
� The Water Services Regulation Authority (Ofwat).
� The Office of Gas and Electricity Markets (Ofgem).
� The Office of Rail Regulation (ORR).
� The Postal Services Commission (Postcomm).
Ofwat
Ofwat’s responsibilities as an economic regulator are derived from the Water Industry
Act 1991 28 (amended by the Water Act 2003 29). Their legislative remit requires them
to ensure that companies are able to “finance the proper carrying out” of their
regulated functions. They make explicit reference to the requirement that in
particular, they should ensure that they can secure reasonable returns on capital. As
with the duties of the other regulators included in this note, this does not provide
explicit guidance on how this might be achieved or assessed. Instead the onus is on
the regulator to provide its own actionable definition with which it can best fulfil its
duty.
28 http://www.opsi.gov.uk/acts/acts1991/ukpga_19910056_en_1
29 http://www.opsi.gov.uk/acts/acts2003/ukpga_20030037_en_1
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