Ofwat’s Future Price Limits consultation was published last week. If all the proposals are implemented (and assuming they are at least directionally in line with the forthcoming DEFRA Water White Paper) then this would represent a major change in water regulation.
Customer support for investment has renewed emphasis. See our recent post on getting customers engaged in setting the strategic direction of regulated utilities. [1]
The combination of a focus on outcomes and the choice of the right incentives to achieve them presents an opportunity to simplify the line of sight between company targets and investment. However, getting agreement of which outcome measures each company will employ, with both customer panels and directly with Ofwat, would require substantial effort.
The potential introduction of separate wholesale and retail price limits will be seen as a precursor to facilitate future water trading and retail competition, rather than an end in itself.
Although the proposals are sensitive to investor pressure not to rock the boat in the water sector (forgive the analogy!), the approach being considered raises a significant question of how best to determine the proportion of total investment that would be allocated to each company’s Regulatory Capital Value.
It will be interesting to see how the pace of market reform in the water sector will be influenced by austerity pressures. Arguments for accelerated change may include the innovation and efficiencies that competition could create. But, although estimates vary, implementation is expected to incur at least some cost. Concerns aired by water companies at October’s Water 2011 conference were that retail / wholesale separation could cause distraction from key issues including network investment and security of supply.
As this is the start of a consultation process which is not expected to conclude until publication of a final methodology in spring 2013, there is a clear risk to companies who are currently developing their approach to the next price review in 2014, Although the overall intention is to reduce data collection requirements, the risk-based approach to regulation could also be expected to result in increased scrutiny in targeted areas. Water companies will be considering how to balance preparation for every eventuality with management of their day-to-day concerns.
While attention can be expected to shift onto the White Paper soon, how this consultation plays out will be key for water companies. Signals from the parallel, but earlier, RIIO process for energy networks will be watched closely; including the use of totex, definition of measures and incentives, and customer support.
[1] Getting customers engaged in setting the strategic direction of regulated utilities: http://www.baringa.com/baringa_blog/item/getting_customer_engaged_with_the_strategic_direction_of_regulated_utilities/
