This report aims to assist with the development and review of potential water cost models for use at PR19 by providing a high-level framework for testing the extent to which different econometric models can be expected to capture underlying cost drivers. It identifies eleven factors as underlying drivers of water network plus botex (on-going total expenditure).
The framework provides five potential responses to the question: Does the set of explanatory variables included in the model provide an adequate means of addressing each and all of the eleven identified factors? This can be used to explicitly consider and
identify the means by, and extent to which, each factor is captured (or not) in a given model. This recognises that factors may be captured indirectly, or outside of the model (e.g. through pre-modelling adjustments), while also providing a basis for identifying where factors are significant, but not captured in one of these ways. By making this process explicit, and pre-defining a set of underlying factors, the framework aims help guard against the risk of material factors being unwittingly omitted without a clear basis to do so.