Direct procurement projects to get interim determinations and incentives in PR19

Interim determinations will be used to deal with uncertainty, and an Outcome Delivery Incentive (ODI) applied, to Direct Procurement for Customers (DPC) initiatives in AMP7.

In a consultation, the regulator weighed up options for an uncertainty mechanism to cover a material change in circumstance (for example, a financial market disruption or a change in applicable legislation) following its PR19 final determinations (FDs), which would mean a scheme earmarked for DPC had in fact to be delivered by a traditional in-house route. Its preference is to use the interim determination mechanism because “we believe this provides stronger incentives for companies to manage costs and project risks, and also negates the need for detailed ongoing monitoring of costs.”

It also outlined an ODI structure which would only apply to companies with DPC projects included in their PR19 FDs. Ofwat suggested under-performance payments should be set within the range of 3-15% of the allowed cost of the development, with a similar but distinct approach to over-performance payments.

Ofwat is consulting on these proposals until 15 November and will issue final decisions alongside its draft determinations on 11 December.