Ofwat proposes changes to price control process for PR24

Ofwat is considering changes to the draft determination process and pushing for national, standardised customer research in the PR24 price control.

The regulator has this morning (27 May) published its early ambitions for the next price review, which will run from 2025-2030, in which it also suggests slashing the number of outcomes to focus on areas with long-term significance.

The launch document centres on four key ambitions:

• Increasing focus on the long term
• Greater environmental and social value
• Clearer understanding of customers and communities
• Delivering improvements through efficiency and innovation

Senior director for company performance and price reviews Aileen Armstrong told Utility Week: “These are familiar challenges but they haven’t gone away.”

Ofwat says it will consider providing greater clarity on its approach to later price controls, including what companies are expected to deliver in future periods from their current allowances and what additional incentives the regulator may provide.

It also moots a move to combine the assessment of business plans and draft determinations to create a “two-step process”.

Armstrong said: “Would we get benefits from combining those stages so that you’ve got fewer staging posts in the review itself and you’re creating space for the explanation and the conversation to be about the long-term strategy?

“If you’ve got short periods between different phases and it all feels a rush to the next deadline, can we ease that somewhat?”

Meanwhile, a more long-term focus on the outcomes of the price control may be needed, Ofwat has proposed. This could see higher incentives focussed on a smaller group of outcomes that are recognised as having the most enduring impact for customers. Armstrong cited areas such as asset health and customer service delivery.

She added that Ofwat was keen to ensure companies still had the flexibility to make their own commitments at a local level.

Recognising that a longer timeframe is likely to introduce greater uncertainty, Armstrong said that companies could be asked to set out different scenarios to reach certain goals. She added: “The important thing is to be clear about the goal itself.”

Understanding customer needs

In its launch document, Ofwat recognises the “cultural change in the sector over the last decade” which has seen greater engagement with customers. It says the focus for PR24 should be on “a simpler, more targeted and more effective approach to capture customers’ views”.

Ofwat’s suggestion, which matches calls from consumer watchdog CCW, is that the sector conducts collaborative, nationwide research to complement companies’ own engagement.

It is proposing not to require companies to have a customer challenge group for PR24 but acknowledges these may still prove useful for engaging with consumers outside the price control process.

Armstrong said: “This is about allowing us to make sure the research is telling us the differences between customers, their focuses. In PR19 we got some information where it wasn’t clear why there were differences.”

She added: “We also look elsewhere and of course we look at what Ofgem is doing. Is there an additional thing we could do in PR24 that would enable some sort of challenge panel in looking at business plans, included within the process?

“Customers are so essential, and understanding community needs is so essential, that it warrants quite a lot of investment in getting the engagement right up front.”

Lower-cost solutions aren’t always right

The launch document reflects the increasing expectation from customers that company decisions are driven by a broad range of environmental and social factors.

To that end, Ofwat is considering how to better incentive nature-based and other opex-based solutions over capital-based plans.

Armstrong said: “A concrete-heavy solution isn’t necessarily the best one. We want to ensure there’s a real understanding of the options available to deliver the right outcomes.

“It’s about avoiding being squeezed into a lower-cost solution which might not always be the best one.”

Ofwat’s vision stresses the need for companies to drive efficiency on several levels, including through partnership working and by embracing open data.

Developing markets

It emphasises the role of markets in pushing forward innovation and efficiency. It envisages the further development of markets for developer resources, bioresources and water resources in PR24, as well as the provision of large infrastructure.

Armstrong cited the example of introducing standardisation to some contracts to “get rid of some of the friction” for bidders who intend to pitch for multiple large infrastructure projects over time.

Ofwat is now seeking responses to the document and will conduct workshops and working groups over the next year. The draft methodology for PR24 will be published in summer 2022.

Launching the document, Ofwat’s interim chief executive David Black said: “’We want the price review to drive the change needed to meet the demands from climate change, customers’ rising expectations, and affordability concerns. We think that the sector can deliver more for customers, society and the environment, but we all need to work differently to unleash this potential.

“Collaborating with others inside and outside the sector can deliver better, more sustainable outcomes. We’re sharing ideas now to explore with others how the price review can make a difference for customers and the environment, into the future.”

Comments on the launch document can be sent to PR24@ofwat.gov.uk.