Portsmouth Water scopes out effective supervision

(by Karma Loveday)

Portsmouth Water has published Introducing effective supervisory regulation, a report by Frank Grimshaw of Fast Track Squared, which incorporates the company’s own thoughts on the subject. This is presented as a contribution to the post White Paper debate.

Portsmouth Water said it strongly supports the introduction of supervision, sees lots of benefits, but appreciates risks that need to be guarded against. These include extra complexity if supervision is simply bolted on to the existing regime; the high cost of large numbers of staff at the regulator (and at companies to interface); supervisor micromanagement; and the risk that “the supervisor becomes a decision-maker, clouding accountability and blurring regulator/regulated company lines”.

The report went on to set out ideas on measures to deliver an efficient approach and minimise any overall increase in regulatory costs. These included: 

• Efficient implementation – the intensity of supervisory engagement at each company should be based on current performance, delivery against plans and future plans, across four performance areas: overall performance, asset maintenance, expenditure and financial resilience.

• Scaling back existing regulation that supervision compensates for – for instance, adopting a simper approach to econometric modelling; reducing ODIs (those that are no longer required because of the new approach to asset maintenance, or which overlap with other regulatory functions, or over which company has limited control); adopting a more sophisticated approach to Price Control Deliverables (by defining appropriate outputs below programme level but less detailed than current PCDs); and staggering future price reviews company to company.

• Improving other unrelated aspects of regulation – such as by reviewing the number of price controls and general data requirements. 

In his foreword, Portsmouth Water’s chief financial officer Chris Milner also set out three suggested measures of success for the supervisory model: 

• A measurable increase in customer and stakeholder trust in the sector, and an improvement in relationships between the regulator and regulated companies. He suggested a tracker survey is established to measure delivery against this objective.

• No increase in the overall cost of regulation for either the regulator or regulated companies - “with a reduction in regulatory burden for the best performing companies, and a concomitant greater focus on those who require support to improve. This should be tracked based on the regulator budget and company regulatory costs reported in the Annual Performance Report.” 

• Better regulatory decision-making that reflects the diversity of company and regional circumstances, "with determinations that deliver the outcomes that customers want and which represent a ‘fair bet’ for shareholders. Fewer regulatory appeals and a narrow range of shareholder returns around the allowed cost of equity would demonstrate this.”