Editor's letter: What to expect from PR19
Ellen Bennett sets out five expectations for the next water price control
On your marks, get set – the starting whistle has been blown on PR19. As noises come out of Ofwat on the shape of the next price review, here are our top five predictions for what’s ahead:
1. It’s going to be tough. Well, you didn’t expect it to be easy, did you? Ofwat chairman Jonson Cox gave a glimpse of what’s ahead at last week’s City Conference, with a pointed reference to a Moody’s report from last year that suggested the Wacc could fall as low as 2.5 per cent. Don’t be surprised if it falls even lower – there was a mention of the cost of capital of the Thames Tideway Tunnel (2.497 per cent). Could Cox be looking to beat his own record?
2. Bills will come down. Cheaper capital will make room for lower bills, and Cox made his expectation here clear. If customers want cheaper water rather than increased investment in infrastructure, then that’s what they’re going to get.
3. Resilience is top of the agenda. And not just physical resilience. Ofwat will be looking at resilience in the round – including company resilience. Expect companies to be pushed to make some tough decisions – water scarcity in the South got a mention in Cox’s speech, as did the idea of an independent system operator to join up that patchwork quilt of southern companies.
4. Companies may change shape. Divestments are on the agenda. Cox has repeatedly challenged the notion that a water company should be a vertically integrated monopoly, and has occasionally displayed a tinge of impatience with the sector’s slow pace of change. He may welcome, then, the divestments of non-household retail businesses seen to date, and anticipate more to come – and not just in retail. Meanwhile, he called on companies to see sludge as an “energy business rather than a disposal problem”. The Water 2020 reforms are coming and the introduction of bio-resources markets will arguably be a more fundamental change than non-domestic market opening.
5. There will be a focus on innovation. Ofwat will be looking for innovation across the board, with a particular focus on customer service. But don’t expect an equivalent of Ofgem’s dedicated fund for innovation in energy networks – Ofwat has shown little enthusiasm for such an approach, with alternatives such as using the cost of equity as a lever to reward greater risk-taking a more likely solution.
PR19 may be less controversial and less high profile than PR14, coming as the last price review did after a challenging stand-off between the regulator and the companies, and under the auspices of a new chair and chief executive. But it will be no less significant.