The Ofwat director heading up PR24 has urged water companies to put forward bold solutions in the next price control but emphasised these must be set in a long-term context.
Aileen Armstrong, senior director at the regulator, stressed the need to look beyond heavy infrastructure as the answer to all problems but accepted that this would come at a cost. She said she expected companies to look at spreading these costs over current and future generations.
Speaking at a Westminster Forum event on the next steps for England’s water markets, Armstrong highlighted the need for companies and the regulator to review internal processes to ensure they support the most effective solutions.
She said that where cultures remain that “believe all problems can be fixed by pouring concrete”, or where systems are in place that incentivise heavy infrastructure, this must be challenged to ensure a wide range of solutions are considered.
The challenges of adapting to and mitigating climate change balanced with a commitment to affordability means alternative approaches must be considered, Armstrong said.
“We’re talking about real transformation where how the sector solves problems now could seem alien to us in 30 years’ time. Some of that will come at a cost, which is exactly why a long-term strategy is needed to identify the best strategies over longer period and to sequence key investments at the right times and spread the costs fairly between current and future generations.”
The regulator’s initial framework for PR24 set Ofwat’s ambition as moving towards focusing on the long term. However, Armstrong clarified that this would not mean a change to the traditional five-year length of a price review. Instead, the onus would be on companies to design their business plans as staging posts in their longer-term strategies.
“This would give greater confidence that business plans will deliver against the companies’ long-term ambitions. We would be able to stand back and see if companies are sequencing their investments to get the best value outcomes,” Armstrong said.
She added that this would provide greater clarity at future price reviews about the outcomes that the companies have already committed to and been funded for. This, Armstrong said, could be used to hold them to account and show stakeholders how long-term goals are being met.
Ofwat is currently exploring what information it can provide in advance of business plans being submitted to provide a wider context. Armstrong pointed to the early indications on cost of capital in PR19 as a successful example of this.
The regulator is now considering doing the same in other areas, such as base costs, performance commitment levels and outcome delivery incentives.