Ofwat consults on in-period cost change mechanism – including for asset health

Water companies will be able to submit in-period cost change claims relating to asset health, under decisions out for consultation from Ofwat.

The regulator is seeking views until 1 September on the process and associated licence changes that would give effect to its PR24 decision to introduce an adjustment mechanism to make it easier for firms to access additional revenue in-period, in light of specific circumstances and uncertainty present when final determinations were issued in December 2024. This mechanism is in addition to end-of period reconciliations and will apply even if the current materiality threshold for an interim determination is not met.The PR24 documents identified the following as relevant critical cost areas:

• Projects included in the large schemes gated process because of concerns around scope, cost, deliverability, complexity, or novel elements or complex technologies.

• Development costs for major projects.

• Additional schemes to ensure the safety of drinking water with respect to PFAS.

• Cyber security.

• Changes in certain charges payable by Southern Water to Portsmouth Water in relation the development of the Havant Thicket reservoir.

Ofwat also said at PR24 that it would consider whether there were any sector-wide asset condition issues that need to, and can be, addressed in-period.

The new consultation said on asset health: “Following extensive engagement with industry, we have included asset health within the cost change process. However, we do not expect the cost change process to be the only mechanism for companies to access funding for asset health costs. For example, we are also considering whether accelerating AMP9 expenditure would be more appropriate for certain asset types depending on the scale of the work involved.”

Elsewhere, the consultation fleshed out definitions for the cost critical areas; maintained the  triviality threshold for PFAS and cyber security costs that was set out in the final determinations; and consulted on an amended annual timetable for submissions and decisions (see table).