by Megan Darby

A plethora of wholesale incentive options for the 2014 price review (PR14) and beyond was unveiled last week, as Ofwat expounded its thinking.

In a consultation, the regulator outlined four packages of options, representing a trade-off between levels of flexibility for companies and implementation risk.

Ofwat did not settle firmly on preferred options, but expressed the opinion that its “package A” would be the most effective and would have the most benefits for customers.

However, this package entails the most significant changes to regulatory approach and assumes that high-quality information would be available from company business plans.

Richard Laikin, UK water sector lead at PwC, said package A would “expose a divide” between companies that welcomed the flexibility and rewards for doing well, and “more cautious companies” preferring tighter controls.

Ofwat added options to reward companies for outperformance as well as penalise them for under­performance, in response to criticism that a one-sided approach could lead to risk-averse behaviour. It also ruled out some of the options considered most radical or least likely to be effective.

Rob Wesley, policy adviser at Water UK, said there were signs Ofwat had listened to industry views and was focusing more on the practicalities. “Key questions now will be: what is practicable and what will really benefit customers?”

Robin Cohen, partner in economic consulting at Deloitte, said it was important to examine the direction of travel, not just which options were best for PR14.

“It is more than an incremental change away from the existing regulatory framework,” he said. “It is all part of a transition to a much less vertically integrated industry.”

This article first appeared in Utility Week’s print edition of 7th September 2012.

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