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Water regulator Ofwat has ruled out setting price controls for a three-year cycle, despite admitting the decision will mean less flexibility to adjust to changing circumstances.
In its PR19 methodology, published yesterday (13 December), Ofwat said it had considered the argument for having price controls that were shorter than five years for all retail controls.
However, it decided a five-year control is the most appropriate for PR19. “Although a three-year control could allow us to reflect new information revealed following the introduction of competition in the business sector in England on 1 April 2017, we consider that the benefits would not be sufficiently large in comparison to the costs,” the regulator added.
It said a three-year control would “impose a greater regulatory burden” on water companies and other stakeholders, as it would need to set new controls to take effect by 2023. “Even if the subsequent control was a relatively light touch process, it would still require evidence from companies and other stakeholders and assessment.”
Aside from the business retail controls in PR14 and PR16, water and wastewater sector price controls have always been set for five-year cycles. The regulator insisted it reflects the longer-term approach that is important for infrastructure businesses and the time required to realise efficiency gains within a price review period.
But a disadvantage of longer-term controls is that they allow less flexibility to adjust to changing circumstances over time. They can expose incumbents and customers to risks which controls are no longer appropriate for as new information becomes available.
In PR14, Ofwat set business retail controls for a two-year period, followed by a three-year period in PR16. For residential customers, it set controls for a five-year period.
For PR19, it said it had also considered a five-year control with the option of a reopener, to reflect any new cost information from the retail business market. However, it decided reliance on a reopener would present similar challenges to a three-year control.
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