Regulator scrutiny and pressure on water companies intensifies following PR19's August deadline

As August came to an end, so did the period in which water companies, which were classified as ‘slow track’ and ‘significant water scrutiny’, could make representations on the draft determinations. Ofwat, the industry’s regulator, will now have until 11 December to make any final determinations.

Some companies may struggle to meet the high hopes set by Ofwat. Any representations made would have had to address any concerns over financeability. Water companies which failed to do so may now find it difficult to appeal or review any determinations made by Ofwat later down the line.

The Price Review 2019 aims to encourage water companies to find more efficient ways of delivering their services between 2020 and 2025. It sets new, higher standards for efficiency, customer service and resilience to both short- and long-term struggles.

These new regulatory benchmarks include a 40% reduction in sewer flooding, a 64% drop in supply interruptions and support for almost 2 million more vulnerable customers. They are designed to help water companies across England and Wales adapt to population growth and climate change.

All water companies received draft determinations from Ofwat outlining any extra work needed on their plans earlier this year. Those plans which weren’t accepted had until the end of August to respond and the pressure was on to revisit the original plan and create something more compelling that fit Ofwat’s objectives. Alternatively, companies could also respond by choosing to stick to the content of the original plan.

Shortfalls in previous plans

Following initial submissions, Ofwat grouped the companies into four categories to describe how much work they needed to do to their plans.

Three companies (South West Water, Severn Trent Water and United Utilities) achieved ‘Fast-track’ status and had plans ready to implement. The rest either had further work to do on their plans or needed to substantially rework them. No company was regarded as ‘Exceptional’.

Ofwat stated that companies needed to be more specific and ambitious in their plans to help customers pay for bills. They also needed to reassess their environmental and financial resilience, to be clearer about specific risks and how they will respond. Ofwat has future plans to align risk and reward closer to customer service, so companies’ returns will be more directly reduced if they underperform for customers.

Additional pressures

Not only are water companies under pressure to meet more challenging regulatory demands, they may also be hit with lower investment to action their plans if they fail to deliver.

Ofwat has proposed to allow funding for companies that promise real improvements to resilience and value for money in their plans. On the other hand, companies that fail to show such improvements will not be offered higher funding limits, further wounding the financeability of their proposals.

Companies’ options for review

Some companies may have found it particularly challenging to meet Ofwat’s draft determinations. They’ll be able to appeal to the Competition and Markets Authority (CMA) for a fresh determination if they believe the standards are unattainable, for instance if they do not think they can make their plans financeable.

However, there is no guarantee that Ofwat will subsequently provide a more favourable determination. The target pricing could go down as well as up, leaving companies with more challenging demands to meet and less resources to meet them with.

This approach carries risk but may be the only option for companies that have already presented their best plans.

Companies with concerns about the feasibility of draft determinations should raise them now to be in a better position for appeal in the future. If they believe the determinations “will prevent them from delivering for customers and the environment” they may have a reasonable cause for appeal.

Regulator scrutiny

At the same time, the National Infrastructure Commission (NIC) has issued a call for evidence into whether regulation is succeeding or failing in water, energy and telecoms. It questions if there should be a multi-utility regulator, and Ofwat’s PR19 review is likely to come under scrutiny.

Water companies may want to respond to the call with their own views and experiences of the regulator, perhaps on an anonymous basis. However, in my view, if evidence is called and companies have some reasonable and compelling points to make, it might be better to make those points openly as part of the wider debate as to how utilities are economically regulated. All companies will no doubt be anticipating NIC’s findings, which are expected to be released in Autumn.

Impending change

Now is an unpredictable time for regulators and water companies. We will be closely watching the outcomes of the PR19 process and the NIC review.

Regulators won’t stop putting pressure on water companies as they seek to improve customer service and limit environmental impacts. However, the role of regulators could become more collaborative, which could affect the extent of regulations and the ways in which they are enforced. Their positions may even become further entrenched, leading to a yet more hurdles for utilities companies to jump over.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.