New SPS urges Ofwat not to neglect Wales as regulation is reformed

(by Karma Loveday)

The Welsh Government has set out how it expects Ofwat to support the delivery of water reform in Wales while continuing to deliver its core functions for Wales in the meantime.

A new Strategic Priorities and Objectives Statement (SPS) has been issued, to supplement the existing 2022 SPS.

Subject to agreement with UK Government around the devolution of further legislative competence and executive functions to Wales, the Welsh Government said there would be three phases of change:

• Phase 1 – Legislative change: 2026 to around 2028/2029

• Phase 2 – Establishing new Welsh economic regulator and system planning function for water: 2028–early 2030s

• Phase 3 – Economic regulator for water established and undertaking role: mid 2030s onwards. 

This will give rise to two transition periods: from now until Senedd legislation to create a new regulator is passed; and from then until the new regulator is operational and takes over from Ofwat. 

The new SPS is specifically concerned with Welsh Government priorities during the first period of transition “which, in summary, is to ensure continuity of essential services while preparing for the next price review and laying the foundations for a future Welsh economic regulator for the water sector and the national system planning function”. The Welsh Government told Ofwat and its successor body to:

• Maintain effective regulation of companies based wholly or mainly in Wales as it simultaneously works with the UK Government on transitioning regulation in England. “This includes close collaboration in the design and implementation of a new supervisory approach and creating approaches which are proportionate.” The regulator must “take steps to ensure there is an appropriate structure and resourcing to ensure that Wales and Welsh water companies have a sufficient level of focus. This should include ensuring there is appropriate technical expertise and strategic leadership capacity to fully engage in informing water reform for Wales.” 

• Support and facilitate the transition to a new economic regulator for water in Wales. 

• Continue to carry out the functions of the independent economic regulator for water in Wales until such a point that these functions are taken on by the new economic regulator for water in Wales.

• Prepare effectively for PR29 for companies based wholly or manly in Wales before the role is taken on by the new integrated regulator. This must include transparent collaboration with key parties through a Wales PR29 Forum that will be convened in the model of the PR24 Forum; delivery “in a way that reflects Welsh priorities for affordability, resilience, and environmental outcomes”;  and fostering a “stable and predictable” investment environment. The Welsh Government also specified: “Ofwat should ensure that the methodology for PR29 is set taking account of reforms set out in the forthcoming Joint UK and Welsh Government Transition Plan. This includes withdrawal of the Quality and Ambition Assessment (QAA) and rationalising the framework for performance commitments and Outcome Delivery Incentives (ODIs). We expect performance commitments and the ODI framework to be specific to Wales and Welsh companies in future.” Welsh Government priorities must also be reflected, including clear long-term investment planning, maintaining the confidence of ratings agencies; and having “a greater focus on maintenance investment and the promotion of asset health, including steps such as ring-fencing base capital maintenance allowances”.

• Ofwat’s regulatory decisions should take account of the Welsh Government’s policy positions – such as fairness, sustainability and public value in the context of Ofwat’s duties – and strengthen accountability for delivery of environmental and social outcomes. 

The Welsh Government said, given transition to a new regime will take longer in Wales than in England, it will issue a series of SPSs for Ofwat/the new regulator, to provide further clarity and guidance along the way.