Water Services Regulation Authority

The CMA is due to redetermine the PR24 price controls of five English water companies by 17 March. Provisional determinations in October provided they could seek to recover an additional 3% (£556m). The conclusion of the PR24 process will signal the future direction for these companies and the sector more generally, as well as affecting the position of Thames Water and having implications for ongoing enforcement action in relation to the environmental performance of a number of companies.

The solution found for Thames Water will be watched closely by the sector. While there may need to be some relaxation of Thames Water’s current targets and Ofwat’s enforcement action, the sector can expect increased regulatory oversight of water company ownership and governance (a major focus of the IWC’s recommendations). The government is also considering including water companies within the mandatory notification requirements under the UK’s national security and investment regime, further increasing the level of regulatory scrutiny of corporate ownership and governance.

A key issue will be how this new regulator is structured and how its new “integrated teams” with the current Ofwat, Drinking Water Inspectorate, Environment Agency and Natural England personnel will operate and function. We can expect there to be a period of uncertainty through this organisational change. This risks being disruptive, and potentially impacting on predictability and effectiveness. It is also a process that is likely to take time. By way of example, the creation of Ofcom combined five different regulators, taking three years and two pieces of primary legislation.

The IWC identified over 100 pieces of legislation affecting water in England and Wales. It concluded that the current legislative and regulatory framework was “overly complex, difficult to navigate, and lacking in clarity and focus on key priorities and outcomes”. By way of example, and having considered the recent concerns with wastewater pollution, the IWC noted that the framework for wastewater and drainage consisted of six pieces of legislation. Nearly 40 of the IWC’s recommendations would require primary legislation, meaning major legislative reform. Interested parties will want to be sure they are on top of the details, and that the government fully appreciates the implications of its proposals. They may also want to engage through industry groups, many of which have already begun lobbying.

Attracting investment into the sector was a key concern for the IWC. On price control, the IWC recommended the CMA adopting a common weighted average cost of capital (WACC) methodology, a longer-term approach to capital investment planning as part of the five-year review periods and making CMA appeals a standard appeal process rather than a redetermination. The IWC also recommended that the current water regulators conclude their long-running investigations and enforcement cases as soon as possible as part of a sectoral reset. While PR29 still feels some way off, there are therefore some important features of the price control process that will be up for discussion now.