Yorkshire proposes regulatory revolution

Regulatory reform to accommodate the changing needs and challenges of the water sector has been proposed by Yorkshire Water, with a focus on regional partnerships for common strategies.

The company has called for at least a decade of investment in infrastructure to prepare for population growth and a changing climate. It also wants a regulatory framework that allows companies to plan strategically.

Richard Emmott, Yorkshire’s director of corporate affairs, told Utility Week the company had begun high-level discussions for regulatory reform with different part of government and those ideas will be fleshed out into proposals.

He said it was important that companies come up with ideas independently of what the regulators prescribe. “Our definition of a water company’s role in society is quite different to others and it defines our approach to social value. We don’t need lectures from anybody on how that should be articulated.”

The paper, which will be the first in a series from Yorkshire, highlights areas that regulation could be more flexible. It says the framework worked well while the sector was stable but needs “significant adaptation” to meet new challenges and allow working beyond regions.

Yorkshire said it is developing ideas for submission to the review of economic regulation as announced in the National Infrastructure Strategy. These include:

• Earlier guidance and governmental direction to give clarity and consistency for regulators, investors and companies.
• More effective alignment between economic and quality regulators – it said RAPID and WINEP are a promising start but they need to go much further. Greater use of partnership approaches needs more alignment beyond the regulatory ecosystem and into local authorities.
• Greater use of outcome regulation: Yorkshire said the focus on value for money and protecting consumer interests needs adapting because it is inherently biased towards traditional engineering solutions which can be easily evaluated and provide more certain results.  It said greater flexibility over how outcomes are achieved would drive innovation and efficiencies.
• Asset flexibility: climate change response, partnership working and the increasing use of nature-based solutions and unorthodox assets, some of which will be shared with other partners – are harder to regulate, the company said, because “regulatory accounting can’t recognise this kind of asset”. Yorkshire noted there is a disincentive to invest and innovate in this way.
• Simplification of the current system that is described as elaborate, complex and thus costly. The complexity makes it hard for customers to understand so trust and accountability are reduced. Yorkshire said the last periodic review cost industry and regulator more than £200 million and has taken four years to complete – which ultimately is a cost to the customer.
• Widening considerations of benefit and value: nature-based solutions, green spaces that benefit community and serve a function, wildlife and biodiversity benefits that aren’t measured by traditional regulatory framework. The paper suggests that regulation should be designed in such a way as to take account of wider societal benefits when assessing the cost-benefit of interventions.
• Greater recognition of the net-zero challenge and trade-offs between ecological benefit and carbon impact. Yorkshire said current regulation prioritises measurable outcomes and short-term delivery timescales, which incentivises end-of-pipe solutions over nature-based, despite the high carbon impact and marginal ecological benefits of the ‘preferred’ schemes.

As in its appeal against Ofwat’s PR19 final determination, the company highlighted the issue of intergenerational fairness as young adults entering the workforce now are suffering the biggest economic impact of Covid-19 and are likely to bear the costs of climate change most heavily. The paper argues that delaying investment would increase that burden further.

Emmott explained the ideas will form the basis for the company’s PR24 business plans, regardless of changes to the regulatory framework.

“The extent to which you can develop organic partnerships is determined by the way the regulatory rules work but there is much being discussed this year in the early methodologies and with the review of economic regulation going on, so we are hopeful there will be receptive ears in government for our ideas.”

He said mutual partnerships are already in place in Hull, Don Valley and with landowners and that the infrastructure is ready for joint operational and strategic plans.

Formalising those partnerships will be part of PR24 planning. Emmott explained that if regulatory accounting challenges can be overcome, joint ventures with shared staff, investment plans, assets, and working to the same implementation timeframes could be a reality.

“That would be a fabulous integration because it’s about us collaborating to give a better service to our shared customers,” Emmott said. “We think in similar ways to local and combined authorities, which makes it easier to work in partnership with them and we see that partnership growing.”

Although the suggestions would be a significant step change, the company recognises there is much that currently works very well in regulation.

Emmott said: “You’re not going to achieve that much radical reform in one go, it’s more a change over time we would like to see. You do need continuity as well as change, but unless there are radical ideas to stimulate thought then you’ll never change anything.”

The company is awaiting a final decision from the Competition and Markets Authority on its PR19 final determination, which Emmott said was “similar but different” to the basis for the reform ideas.

“This is the way we have been thinking about ourselves for a while now and our decision to ask for a referral was because our view was the last price determination didn’t allow sufficient investment to deal with some of the issues in the programme,” he said. “It was a principled stance and it’s a principle we stick to.”