PAC probes how the transition from old to new regulation will affect PR29

(by Karma Loveday)

Defra and Ofwat have assured the Public Accounts Committee (PAC) that PR29 will remain on track despite parallel work to create a new regulator.

Ofwat’s interim chief executive Chris Walters said: “We need a clear idea by the end of this year of what the methodology for the next price review will look like. That is what we are aiming to include in the transition plan, which we are expecting in March.”

He explained: “It took us around 15 months of analysis, scrutiny and board-level decision making to conclude PR24. We share the Government’s ambition to reduce the administrative burden of that process by 25%. That would take it down to a year, let’s call it, so for PR29, the new regulator will need to begin its scrutiny of proposals in 2028. Experience suggests that it takes the companies around a year to finalise those proposals and get them signed off and assured by their boards, which takes us to the start of 2027.”

The MPs remarked on the tightness of this timetable, and that the “turmoil” involved in creating a new single regulator could affect price setting. Defra’s director general for strategy and water 

David Hill assured: “In any big structural change, of course you have to manage disruption to the organisations affected. I am confident that we have good arrangements in place with my colleagues here from Ofwat, as well as the chief execs of the other regulators involved in this process, to do two things in parallel.”  

Defra preparations

Hill then explained how Defra is preparing for the regulatory transition: 

• “Running this well does mean quite a big shift in capabilities in the core Department, so we are getting support from NISTA, the National Infrastructure and Service Transformation Authority, around how we set this up, because it will be a major programme in the Government’s portfolio.”

• There is a “critical workstream” that is supported by the Department’s DDaT function to set up digital systems that will move into the new regulator. 

• There is regular dialogue with trade unions and the staff in involved organisations, about how to transition “in an orderly way”.

Under questioning on resourcing for the new regulator, Hill said: “This programme of reform is one of the top priorities for the Department; the secretary of state has been very clear about that. It was reflected in all our spending review discussions with the Treasury, and indeed our ongoing conversations with the Treasury. We are therefore reprioritising resources within the Department to make sure that we can do this well.”

Ofwat preparations

Walters set out the preparatory position for Ofwat:

• Separate leads for transition (himself) and day-to-day delivery (Helen Campbell) reporting in to the Ofwat board. 

• Re-profiled spending and the re-prioritisation of work that is not mission critical for the new regulator.

• Replacing old data systems and piloting data sharing with the Environment Agency and DWI. 

However, the toll the upheaval has taken on Ofwat’s staff was already apparent. Walters said staff turnover is at 25%, up from the general rate of 15% (or 20% after price reviews are concluded). There are 110 vacancies in a 460 total headcount. Walters said Ofwat is developing a retention and engagement plan for staff, providing support for those going through change, and putting money aside for “recognition payments and priority pay adjustments for mission-critical roles”. It is also recruiting: “We are prioritising recruitment around areas that we know are going to be important for the new regulator. We mentioned engineers earlier; we have as many engineers as we do economists and data experts, but we will need more engineers and more data experts.”

Hill also confirmed on questioning about regulatory board capability: “Current non-executive leadership of any of the regulators in scope to go into the single regulator cannot transfer automatically; there is no automaticity. They cannot simply transfer into the new body. Government would run a fresh campaign to recruit new leadership at non-exec level to the new regulator.”

Investors, debt and risk 

Committee member Tristan Osborne argued: "The transition plan needs to be quite tight in terms of its scale, scope and remit if investors are to maintain confidence in the sector – which has had a decline in confidence for five years… The overall sector has been downgraded, and many individual companies are on a Baa1 rating. That is making it very difficult for them to raise capital. There is a conversation out there regarding several companies and mutualising debt. Is there validity to that conversation and mutualising some of this debt so that we can get better confidence from the market in terms of investment if we were to lose a private sector option?”

Hill said the White Paper made provision to guard against “unmanageable levels of debt” as well as to bolster financial resilience more widely. “On mutualisation, I think we would expect the new regulator to be guided by what the best model is for the customers of any individual company.”

PAC chair Sir Geoffrey Clifton-Brown suggested: “It seems to me that what we need, as part of your PR29 process, is a constantly updated risk register of all water companies and their highest risks, so that you can start to direct investment to try to prevent these sorts of things from happening again. As you say, what has happened, particularly in the south-east, is completely unacceptable for water consumers anywhere in the country.” Walters replied: “We agree, and some of the proposals that we have been putting into the Department on what supervision looks like in practice do exactly that.”

Bonus frustration

As in last week’s Westminster Hall debate, PAC members criticised water company circumvention of regulatory measures to restrict bonuses. Ofwat explained it does not regulate parent companies, through which some of the bonuses in question were paid – and that this is unlikely under the reformed regime to follow.

Walters said: “It is common in economic regulation, across all sectors, for the regulator’s power to be, self-evidently, at the level of the regulated company. Here that means controlling the money that leaves the regulated company to go somewhere else. It is not common, and would be a very significant shift in economic regulation generally for that to expand to holding companies. Say it expands by one level of holding company; what is to stop organisations setting up holding companies for the holding companies, and the regulations expanding?”

This view cut little ice with Committee.