The next regulatory settlement could deter investment from the water sector and make it more difficult to achieve resilience, Anglian Water has warned.
In its response to Ofwat’s consultation on the framework for PR19, which closed last week, Anglian has urged the regulator to look at the impact of its proposals in the round, saying: “Ofwat has not provided evidence that it has assessed whether it is striking an appropriate balance between costs, risk and tougher service performance incentives.”
Anglian’s regulation director Alex Plant told Utility Week: “It’s a tougher regime, which is fine, but it’s also suggesting increased risk in areas from an investor return point of view but nevertheless saying the cost of equity should come down, and that collectively felt like it was not necessarily the best framework to attract investment to the sector, during a period in 2020-25 when we feel as sector we might need a significant level of investment to address those resilience shortcomings, whether that be investment in demand management or investment in infrastructure.”
Anglian Water joined forces with Northumbrian Water and Affinity Water to commission a report from consultant KPMG which challenges the financial assumptions underlying Ofwat’s proposed total market return, a key element of the cost of equity.
Plant added: “It’s intended to be a constructive challenge, but I think it’s definitely a challenge.”
Anglian also raised concerns about the lack of glidepaths in the proposed framework, saying: “The PR19 methodology proposes a series of significant changes that impose additional burdens on companies without appearing to offer any glidepaths from current to new approaches. Regulatory precedent would suggest that it would be appropriate for glidepaths to be provided in such circumstances, rather than cliff-edge shifts.”
The company proposes an alternative model for direct procurement, which would see a third party appointed to handle the tender process for major projects, allowing the incumbent to compete.
It supports the proposal for more stretching outcome delivery incentives (ODIs) with greater potential for risk and rewards, but argues that ODIs should be recalibrated, because “an average company would be in penalty even if they improved, and that seems to be a fairly difficult regime.”
Anglian also called for ODIs to recognize when a company is already a frontier performer – as it is on leakage. Plant said: “If you’ve invested heavily to get a good position already, we think some recognition of that should be factored into the ODI calculation.”