Water 2020: more detail, little change

May 25, 2016

Ofwat has this morning published Water 2020 decisions that are largely unchanged from its December proposals, but with more flesh on the bones.

The key points, and the main points of additional detail that have emerged since December, are as follows:

 

RPI-CPI

Policy: Ofwat has confirmed it will index prices from 1 April 2020 to a new inflation measure – either CPI or CPIH (it will confirm which in summer 2017). It has stuck with its transition plan for RCV indexation. 50% of RCV will remain indexed to RPI, with the remainder and all new investment to be indexed to CPI/CPIH.

New detail: The regulator has published a statement of principles it will apply when it assesses the speed of further transition to CPI at PR24, in a bid to provide some reassurance to investors (it notes the average debt maturity profile across the industry is 17.8 years) but without painting itself into a currently unforeseeable corner. These principles include maintaining prior commitments, avoiding unnecessary complexity and not distorting incentives for companies to raise debt efficiently (see page 84 of document).

 

Sludge

Policy: A market for sludge (rebranded bioresources, presumably to make it sound more appealing) will be opened, with a separate price control that will use an average revenue control approach to regulate treatment, transport, recycling and disposal. RCV will be protected up to 31 March 2020 after which a proportion will be allocated to sludge on a focused basis, meaning the value allocated is equal to the modern replacement value of assets to provide sludge services.

New detail: Information disclosure requirements have been simplified and Ofwat has said it will not establish an independent information platform but proposes standardised information is published by companies to enable third parties to aggregate and present data. There will be a link from the regulator’s website to those of companies. Ofwat will not publish bid information but only limited information on successful contracts.

 

Water resources

Policy: A market for water resources will be opened, with a separate price control based on a total revenue control approach. RCV will be protected up to 31 March 2020 after which a proportion will be allocated to resources on an unfocused basis, meaning the proportion of RCV allocated is equal to the proportion of companies’ assets associated with water resources as proportion of total assets. Ofwat will develop rules for access prices and companies will be required to publish and apply access prices that are consistent with these rules.

New detail: Each company will be able to propose how its historical RCV is allocated between the water resources and network plus price controls, subject to review by Ofwat to ensure outcomes are in the customer interest. The regulator will issue further guidance on what it expects from companies on this in late 2016 and expects to ask for allocations from companies in 2017 to be finalised as part of PR19.

 

On information, companies are to host resources information on their websites with Ofwat providing a webpage that signposts where that information is held (rather than a central market database run by a third party). It is not proposing to require registration of third parties or formal bid verification. Access prices will be linked to the funding for new investment in developing new water resources.

 

Direct procurement will be facilitated for projects worth £100m or more.

 

Customer engagement and outcomes

Policy: As signalled and roundly supported, companies will develop the approach employed at PR14, with closer and ongoing customer engagement, continued and improved use of customer challenge groups and a focus on outcomes.

New detail: Ofwat has clarified the role of the CCG, providing more detail on: the principles for good quality customer engagement; the role of the environmental and drinking water quality regulators in the CCG process; and governance expectations. It has confirmed it will publish early indications on the WACC and outcome RoRE ranges before business plans are submitted.

 

Implementation

Policy: Ofwat will seek to implement the required licence changes as a package, to ensure consistency.

New detail: The regulator said it saw merit in in-period adjustments rather than end-of-period reconciliations but will only seek a licence modification for ODI rewards and penalties for PR19. It will keep open the option of an in-period adjustment for debt indexation.

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