In preparation for the 2009 periodic review of prices (PR09), Ofwat has proposed several options for developing its approach to expenditure and incentives. The approaches are designed to encourage water companies to submit carefully considered and justified business plans, including accurate economic expenditure requirements. The objective of the project was to assist Ofwat in gaining a clearer understanding of the implications of each approach considered, and in reaching a decision about which areas to take forward in its work programme for PR09. The options examined were an ‘evolution’ of the RPI – X approach taken at PR04; making use of comparisons between companies’ business plans; and menu regulation—the principles of which are used, for example, in Ofgem’s sliding scale mechanism. The focus of the project was a detailed assessment of menu regulation, including its incentive properties and practical implications for other parts of the regulatory framework. Oxera designed a prototype model to help Ofwat assess the properties of menu regulation, and to provide insights regarding the impact of different configurations of the menu on key regulatory variables of interest. In addition, the model enables a comparison of outcomes with the standard RPI – X approach to setting expenditure allowances. The report and the model were used by Ofwat in preparing consultation papers on its approach for PR09.