Water UK pushes back on Ofwat’s price re-opener position

(by Karma Loveday)

Water UK has set out three concerns with Ofwat’s draft determinations on the 2026 cost change process, despite welcoming the additional proposed investment of £3.4bn. The trade body noted the allowance will support housing and growth, and has successfully demonstrated that new investment can be flexibly unlocked outside of the five-yearly price review cycle. But its concerns were:

• Certain expenditure areas have been ruled out of scope "for no good reason”. Water UK offered the example that investment proposals through the asset health reopener have been “arbitrarily disallowed for some companies where assets are deemed to have been out of service prior to October 2023 (the initial PR24 business plan submission deadline). As a direct result, vital investment proposals in boreholes and water network storage assets have been disallowed. Such a decision would be difficult to understand in normal times. During a time in which England is facing one of the worst droughts on record and near 30m people are suffering from hosepipe bans, blocking any investment simply because the asset in question was out of service before the drought is impossible to justify.” 

• Companies must be able to finance the approved investment. Water UK questioned here the decision to rule out in-period revenue adjustments for growth requests, and pegging returns to the PR24 position for companies that did not appeal, despite market movements and the Competition and Markets Authority (CMA) redetermination. 

• Ofwat is weakening incentives for companies to operate efficiently, through the introduction of a new clawback mechanism on top of existing mechanisms.

The trade body made the following recommendations:

• Ofwat must change its definition of ‘out of scope’ cost items, especially for out of service assets. Investment cases should be assessed on the strength of evidence provided by companies, and current need cases, rather than being pre-judged against process-driven cut-off dates or exclusion rules.

• Ofwat should enable in-period revenue adjustments for growth requests submitted in the 2026 cost change process. Ofwat has the time and powers to change licences, and it should use them.

• Ofwat should focus on spend against overall total expenditure allowances when assessing a company’s delivery performance, rather than a subset of allowances with price control deliverables.

• Ofwat should satisfy itself that the investment it approves is financeable, including by revising its approach to setting and estimating the allowed return on capital with latest market data and the approach taken by the CMA in the PR24 redeterminations. Ofwat should revisit its approach to allowed returns and financeability to ensure that it is grounded in the reality of accessing finance efficiently. 

• Ofwat should remove its new clawback mechanism, which retrospectively weakens efficiency incentives against base cost allowances.