Richard Laikin, water sector leader, PwC Company strategy, Policy, Policy & regulation, Regulation, Strategy & management, Water, Opinion, Rachel Fletcher

Richard Laikin sums up what water companies should expect this year.

While most of us were sitting around the Christmas tree or otherwise enjoying the festive period, out in the real world thousands of water company workers were making sure that we continued to have clean water and that the system didn’t seize up in all the snow and ice. And in a few water company head offices the lights blazed as the finer points of Ofwat’s PR19 final methodology were being absorbed and business plans for the next five years continued to be developed.

Looking forward, alongside business-as-usual operations, PR19 will dominate everything in the water sector in 2018. Many companies will be testing their plans with customers early in the year, cost adjustment claims, and other data must be submitted to Ofwat in May, and final business plans are due in September. Ofwat will spend the rest of the year assessing the submissions, although we won’t see any white smoke until early 2019. There will be plenty of commentating, lobbying, signalling and updates from all sides between now and then.

The non-household retail market will be a year old in April, and will continue to mature and evolve.  There are already moves to refine elements of the market arrangements – for example, operational messaging and credit arrangements. New issues will be identified that need to be tackled, for example through the ongoing market audit. Potentially, we will see the first retailer failure and some heavyweight market entry from outside the sector. I expect that Ofwat will be busy with the first competition-related enforcement cases from this market in 2018.

Other new markets will also emerge this year. PR19 business plans will likely expose some innovative proposals for direct procurement, inter-company water trading, and sludge management, all of which Ofwat will need to opine on. The new arrangements for connections charging will be finalised and implemented, alongside trialling D-MeX and other KPIs for developer-related services. Expect a lot of noise on all these topics, if not much real change in the short term.

This detailed work is being undertaken against the backdrop of two major political currents that will continue to play out over the year. Both are completely outside the industry’s control, but could have significant long-term consequences – the Brexit negotiations and the party-political complexion of government.

Brexit is an ongoing opportunity for the industry to press its case for changes to environmental regulation and policy, and we should see some movement on this in 2018. As the withdrawal legislation progresses through Parliament, government may put more flesh on the bones of Michael Gove’s recent pronouncements around “gold standard” post-Brexit environmental policies. Defra’s 25-year environmental plan is due to be published soon, and they are already consulting on the establishment of a new body for setting environmental standards, alongside the Environment Agency.

Defra and the EA will also be busy this year with their reviews of the companies’ Water Resource Management Plans, and it will be interesting to see whether they call-in many for public inquiries. Just before Christmas they published a joint plan on reforming abstraction management, neatly sidestepping the need for primary legislation which has been crowded out by Brexit. They will be engaging with stakeholders on all these issues this year.

The biggest political question for the water companies in 2018 is around ownership and the possibility of nationalisation, or at the very least a major shake-up of economic regulation, if Labour comes to power. I expect to see lots of debate on the ways in which the water sector brings value to society, the economy, the environment, and customers directly, and the relative merits of different forms of ownership and regulation in delivering that.

There is clearly plenty for the new Ofwat chief executive to get her teeth into. The industry will be looking forward to getting to know her better and to see how she addresses some of these big challenges and tasks as the year unfolds.

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