Is PR24 destined to repeat the mistakes of PR19?

Over the second half of this decade the water sector faces unprecedented challenges which require a radically different way of looking at investment strategies and ways of working. However, Ofwat’s blueprint for spending plans between 2025 and 2030 offers few signs of genuinely new approaches. Ruth Williams assesses where the regulator’s final methodology for PR24 could have been bolder and what it says about where Ofwat will throw its weight in the next five-year period.

At a time of crisis for the water sector – amid hosepipe bans, sewage scandals and growing public discontent – PR24 should have been the moment to talk positively about the future and how to right the wrongs of the past. Ofwat had an opportunity to present English and Welsh companies with a framework to tackle the growing list of common challenges together.

However, in its final methodology published last month the tone was not one of recalibration but  of recrimination. The introduction from Ofwat chief executive David Black opened with a list of failures and fines and a damning verdict on customer service that “even the best in the water sector fall short of service in other sectors”.

Ofwat could have taken this moment to paint itself as helping and working with the sector to make positive environmental changes, a transformational step change to a new future with big environmental improvements for customers, communities and nature.

The regulator talks a lot about collaboration, but its tone in PR24 to date is not one of an industry pulling together to turn the ship around for the benefit of customers, the environment and communities.

In March, Utility Week hosted a roundtable where regulatory directors from water and wastewater companies were unanimous in the feeling that it was already too late for the next price review to bring about largescale change. They expressed concerns about the Department for Food, Environment and Rural Affairs (Defra)’s strategic policy statement (SPS) on which Ofwat bases its price review methodology, saying it lacked clear objectives and ambition.

Ambition is also muted in the final methodology published in December, so it looks like predictions that PR24 will resemble PR19 were on the money.

Angry customers, politicians and environmental groups, fuelled by media coverage, may be placated with the headline “A healthier environment and better customer services” but the methodology remains vague on crucial details. Companies must pitch their business plans without a clear picture of what cost models will look like, what performance models they will be expected to target, what the size of investment might look like, or where bills could go.

Commentators warn that Ofwat’s nod to “levelling the playing field” between green and grey infrastructure projects does not go far enough. The move towards putting nature based solutions at the centre of plans is welcome, however fears remain that in reality setting a ten-year ongoing operational expenditure allowance for such solutions, which are wholly or primarily based on ongoing operating expenditure, would not be sufficient for the life of large projects.

Where are Ofwat’s priorities?

There have been no great shifts between the draft and the final methodology however there were a few telling points that show where Ofwat will be throwing its weight in the next five year period.

Sewer overflows hit the headlines through the year and leading up to the methodology the regulator stressed that companies should not be waiting for 2025 to begin improving rivers and waterways where overflows release. Public and political anger fuelled by media coverage of combined sewer overflows (CSOs) means, unsurprisingly, reducing harm from them is prominent in the final methodology. At this stage in PR19, overflows were not mentioned but now the methodology contains 32 references.

Demand and supply likewise came into a sharp focus in 2022 with the first hosepipe ban in a decade imposed as drought was declared across the country. CCW and others highlighted that water efficiency had not been granted the resources that new large-scale infrastructure projects had been under RAPID, which came in at PR19. The regulator responded by introducing a fund of up to £100 million to stimulate “transformative, sustained and measurable reduction in water demand nationally” through water efficiency.

The methodology for the first time emphasises that smart water metering should be considered over ‘dumb’ meters and business cases presented for why smarter technology isn’t used.

Affordability could not be more relevant for households and businesses alike. However, the need to invest is also concentrated, with many criticising previous reviews for limiting companies’ resilience spending.

Therefore the sector must stretch itself a long way and persuade customers that bill hikes are worthwhile to deliver transforming service.

Ofwat’s senior director Aileen Armstrong told investors: “Good service does not need to cost more”, and called for more stretch of current allowances. Ofwat said there will be close scrutiny of base and enhancement spending. It wants a focus on improving asset maintenance and strengthening resilience, without customers having to foot  the whole bill.

Stepping up on environmental performance

It is of course core to regulation to hold the industry to account so Black’s consistent message that companies should act now rather than wait for 2025 to step up on environmental improvements and transparency is a firm call to action to get ahead on the mammoth hurdles.

On top of tackling CSOs, expectations in the Water Industry National Environment Programme (WINEP), Drainage and Wastewater Management Plans (DWMP) have been predicted to add billions to spending, so with companies being required to undertake more it is inevitable it will cost more.  Bill rises will never be a popular message so the regulator leans into talk of efficiencies and getting the basics right before allowing enhancement spending. This will leave companies to deliver a difficult message to billpayers that they have to pay more at a time when trust and satisfaction are low.

Stakeholders feel let down by and untrusting of their water suppliers, according to research form Ofwat and CCW. An inquiry by the Lords’ Industry and Regulators Committee investigating the powers of Ofwat shone a light on failures by companies, regulators and policymakers alike, but shifting the blame and pointing fingers will not improve the environment or services for consumers.

There is a lot to achieve by the whole sector, which is gifted with passionate people working to make the water environment a better place and deliver improved customer service.

The old adage that the best time to plant a tree was 50 years ago and the second best time is now rings true. Will it be too late for transformation in PR24? Ofwat has set the challenge for companies to interpret the challenges as they see fit in the best way for their customers and communities. This may not be the methodology some in the sector hoped for, but it is a building block towards a greener future leading on net zero and doing the right thing for billpayers, communities and the environment.

Now is the moment to build on the work in motion to transform the sector, restore rivers and streams and ensure resilience of water for people and nature in the face of a changing climate.