All bets are off for PR19

Final determinations from Ofwat on PR19 are one week away. Unless the political landscape is still too unsettled the industry is set to hear its fate on 16 December.

Following the draft determinations in August there were sector-wide cries that the expectations from the regulator were unworkable and unfinanceable. Ofwat has insisted on putting customers central to business plans, resulting in a greater challenge than ever before.

Although each price review has been reflected on as ‘tough but fair’, this year may be received in many quarters as simply ‘tough’. Especially on costing.

One analyst told Utility Week: “This is undoubtedly the toughest price review and it is being undertaken in the context of a very low interest rate environment. So that allows Ofwat, without changing the methodology, to simply take the latest evidence of the cost of capital and use that lower figure, as reflected in the debt capital markets, to deliver quite a demanding result from the companies point of view.”

The regulator has been accused of being overly generous towards companies in the past, particularly in the early days of privatisation but is now challenging the sector at every step.

This formerly light-handed approach has fed into customer discontent with the ownership model and calls for renationalisation. Despite Water UK and industry experts iterating the negative impact it would have and the falling popularity with the policy, it features prominently in Labour’s manifesto as well as public discourse.

Champions of nationalisation, We Own It, have suggested that Ofwat’s tougher stance only came in response to the threats of public ownership, which it said shows the regulator did not do enough for customers until the industry was under attack.

The PR19 process and details from the draft determinations suggest the regulator certainly is addressing cries for nationalisation and is keen to address underlying discontent .

One chief executive told Utility Week that public mood towards nationalisation is linked to failures around pollution and a perception that companies have earned high returns. They said despite the gains made by the sector under privatisation the concerns behind calls for renationalisation must not be ignored.

The sector has been very responsive to public perceptions and, broadly speaking, performance targets have been accepted by the companies. Ofwat chief executive Rachel Fletcher told Utility Week in October there is an acceptance to make “a significant step change across the full gamut of performance”.

However, cost allowances and the stretching targets caused points of friction, which Fletcher insisted were inevitable.

Public interest commitments and greater emphasis on environmental targets than ever before show the need to make these priorities. This feeling is backed by Ofwat, CCWater, and the Environment Agency, however in the draft determinations several companies stated Ofwat’s conditions would not allow them to carry out the wishes of their customers.

SES Water said Ofwat had failed to take into account or recognise its efforts and the draft determination did not reflect the priorities of SES customers.

Yorkshire brought in an independent economist but still was unable to marry up Ofwat’s view of efficient costs and its own.

Numerous companies have been mooted as ready to approach the CMA if the sizeable gaps between their own business plans and Ofwat’s expectations cannot be bridged.

Following the draft determinations, both Wessex and South Staffs Water raised questions of legality in the restrictions the determinations would impose, with South Staffs calling the plan “unfinanceable” and in need of work to not involve the CMA. While Wessex said it would not be able to meet its legal obligations nor its economic, environmental or responsibilities to its customer.

Thames recently told Utility Week it was “cautiously optimistic” it can proceed without knocking on the door of the CMA, but neither Thames nor other water companies have completely ruled it out, showing it will go down to the wire.

With a week to go before FD-Day, companies remain tight-lipped on constructive discussions taking place between the regulator and the companies for months. The outcome of the toughest determinations yet is sure to include a few surprises.