Yorkshire Water has called for an independent body to be established to set the cost of capital for each regulated sector and a simplification of performance commitments in the PR24 price control.
The water company set out its proposal in response to the strategic policy statement (SPS) to Ofwat from the Department for Environment Food and Rural Affairs (Defra) ahead of the next price review in 2024. The draft SPS, published in July, includes government priorities for the water sector until 2030.
The cost of capital was one of the most contentious areas of the appeals by four water companies, including Yorkshire, to the Competition and Markets Authority (CMA) last year over PR19 plans.
The CMA granted the appellants a higher weighted average cost of capital (WACC) for 2020-25 compared to the rest of the sector. Yorkshire proposed in future the WACC be set by an independent body to remove the debate from the “already-complex” process.
The company said government should provide an “explicit steer” on how Ofwat prioritises the objectives set out in the SPS to give clarity to water companies and their investors.
Yorkshire said it broadly supported Defra’s SPS for the next price review in 2024, but said further steps were needed to clarify how Ofwat should manage trade-offs between competing priorities and duties.
Balancing necessary investment with keeping bills low was repeatedly cited by appellants to the CMA, with companies saying customers wanted to see investment.
Yorkshire said government should step in to provide the stability necessary to invest and innovate around the challenges the water sector faces, including climate change.
The company also suggested a greater governmental involvement was needed to scrutinise how Ofwat is delivering on the statement and how it balanced competing priorities.
“Increasing the accountability of Ofwat to bodies that represent the public is more important than ever as the current direction of travel appears to be taking away the regional customer voice in favour of a centralised process,” Yorkshire said.
It said to do this, the SPS could include targets for Ofwat to achieve as well as stronger roles for the National Audit Office and Public Accounts Committee to hold Ofwat to account. The to-be-created role of Office for Environmental Protection, which will be established when the Environment Bill becomes legislation, should have “an explicit role” within the price control process.
The company advocated for “straightforward” regulatory changes to be made to support the use of partnerships where there are common goals, for example in catchment management.
These changes, Yorkshire suggested, could include emphasising the wider societal benefits of investments; not disincentivising projects where the payback does not match the price review period; and permitting allowances mid-AMP cycle to negotiate new partnerships that do not fit with the water sector’s review cycle.
It suggested a simplified approach to regulation would let customers and stakeholders fully engage with water companies’ plans and help boost public confidence.