Water UK has welcomed the Competition and Markets Authority’s provisional findings in the appeals by four water companies against Ofwat’s Final Determinations on their AMP7 business plans.
Water UK has welcomed the Competition and Markets Authority’s provisional findings in the appeals by four water companies against Ofwat’s Final Determinations on their AMP7 business plans.
The body which represents water and wastewater service providers across the UK described the CMA findings as “going some way towards achieving the long-term orientation that we and many others see as crucial for the sector.”
Water UK said the findings also have significance to future price determinations for all water and wastewater service providers in England and Wales, to their customers, and to the environment.
However, there are areas where Water UK believes the CMA could go further, in particular ensuring that customers’ views are central to the regulation of the sector and recognising the cost of improving service and resilience.
“As well as maintaining incentives for companies to continue to improve efficiency and performance, in view of the long-term challenges facing the water sector it is in the interests of current and future customers for continued investment to be encouraged and the sector’s longer-term attractiveness to investors maintained” the response says.
Commenting on customer engagement, Water UK said the legitimacy of the sector is enhanced by customer views being reflected in outcomes from the regulatory process – including redeterminations by the CMA – to the greatest extent possible. Looking ahead towards PR24 and subsequent price reviews, greater clarity on the role of customer evidence will be important. Water UK has suggested that “in circumstances when well-evidenced customer views do not flow through to outcomes, there should be a robust and explicit rationale for this.”
The trade body has welcomed the inclusion of some additional investment to address challenges to resilience against both drought and floods. However, Water UK is warning that "a considerable gap remains in the views of required investment." Given that resilience is likely to become an even more important driver of investment in future reviews, a clearer framework to assess and reach agreement on resilience needs would be beneficial.
Water UK also welcomes the CMA’s recognition that current approaches to cost assessment are backward looking, and that potential issues with capital maintenance may be forward looking. In agreement that the current approach should be enhanced with a forward-looking element, Water UK has suggested that the CMA “should incorporate 2019-20 data into its analysis for its final decisions, consistent with the approach that is signalled in the provisional findings.”
Disconnect between cost assessment and service levels
The response also draws attention to the disconnect between cost assessment and service levels on leakage. Water UK has welcomed the CMA’s recognition that, in relation to leakage, “a step change in performance will result in additional costs, and that these additional costs should be reflected in determinations.”
Referring to the CMA’s observation that, given that leakage improvements will impose costs on customers, there will be a level of leakage below which the costs of further reduction will outweigh the benefits, including wider social and environmental costs and benefits, Water UK said that “ultimately Government policy will rightly influence this judgement.”
However, it was important that the companies are sufficiently funded to meet the outcome of the policy decision, rather than being faced with asymmetric outcome incentives. In addition, a similar logic applied to other areas of company performance, for example sewer flooding or interruptions to supply, which the provisional findings had not addressed.
Water UK said:
“While we acknowledge that higher service performance does not automatically result in increased expenditure, neither is it the case the higher service performance can automatically be achieved without increased expenditure.”
Financing the sector
Water UK goes on to “reiterate (its) support for the recognition in the provisional findings of the importance of ensuring that the sector is seen as an investable proposition, with a reasonable prospect of an appropriate balance of risk and returns - particularly in light of the substantial investment that will be needed in subsequent regulatory periods to meet the challenges of climate change and growth.”
However, “given the scale of future investment needs, even in light of the changes the CMA has proposed thus far the investability of the sector should not be taken for granted.”
Click here to read Water UK’s response in full.
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