Price controls should be used to fund special asset maintenance projects, report finds

Analysis by Economic Insight for Water UK has proposed two reforms to the regulatory framework for PR24 to promote investment in asset maintenance while ensuring efficiency.

First, price control deliverables (PCDs) should be part of the package to deliver specific asset maintenance and replacement projects identified by companies. Economic Insight noted: “Ofwat has proposed to use PCDs at PR24 as a way of creating additional funding for specific projects or outputs. We propose that PCDs could be used by companies to fund specific asset maintenance and replacement activities over and above the volume of asset maintenance and replacement activities that have historically been achieved (and implicitly funded) through base costs.”

The report, Options for a sustainable approach to asset maintenance and replacement, noted this was the highest scoring of five options considered and that as PCDs are already part of the PR24 framework, they could be introduced without disrupting the process.

Second, dedicated cost allowances for asset maintenance and replacement activities, with a specific under/outperformance sharing rate, should be introduced to encourage a step change across the industry.

The Economic Insight report pointed to the need for a step change in funding at PR24 and beyond for investment in asset maintenance and replacement to achieve operational resilience, but limitations of the current arrangements. Presently, the analysis suggested Ofwat can observe overall tooted spend, but “cannot easily identify whether any underspend reflects ‘efficiency’ or ‘cuts’ (or, indeed, whether overspend represents 'inefficiency’ or ‘increased output / outcomes’).”