Ofwat has launched a new consultation on proposed guidance and proposed licence modifications to the licences of Portsmouth Water and Southern Water to facilitate the development, construction and operation of the Havant Thicket reservoir.

The reservoir is being built by Portsmouth Water to generate an additional 21Ml/d of available water to be traded with Southern Water.

This will facilitate a water transfer to Southern Water under a Bulk Supply Agreement which will see Portsmouth increase its transfers to 60Ml/d, thereby making a significant contribution to Southern Water's ability to meet the water needs of its customers.

Ofwat’s final determination in the 2019 Price Review established a separate Havant Thicket price control for Portsmouth Water‘s allowed revenues – the company will be responsible for the design, build, finance and operation of the reservoir.

Both companies have now entered into a Bulk Supply Agreement. As part of their discussions with Ofwat to ensure alignment between the contractual and regulatory frameworks, it has been agreed that the licence conditions of both companies will be amended to require them to comply with the Bulk Supply Agreement.

Ofwat said it has also been agreed that the regulator will issue guidance on the regulatory aspects of the Havant Thicket reservoir, in order to provide confidence to the parties and to prospective investors in the reservoir on the regulatory framework.

“In particular, the guidance seeks to provide investors with greater confidence about future regulatory periods, by providing guidance as to how we might treat the project in future price controls,” the consultation document says.

The effect of the licence amendments is that Ofwat will be able to intervene if there is a failure to comply with the Bulk Supply Agreement - something which the regulator considers is necessary in order to protect both sets of customers.

The regulator said it was also important that the costs of building the reservoir are kept as low as possible in order to protect Southern Water’s customers who are paying for the reservoir, commenting:

“This requires that investors have confidence that Ofwat supports the bulk supply arrangement and that Ofwat will allow Southern Water to collect revenue from its customers for payment on to Portsmouth Water.

“ These licence amendments and the guidance are intended to provide investors and customers with confidence that Ofwat supports the project and that the contractual and regulatory regimes are aligned.”

Both the amendments and the guidance make clear that any intervention by Ofwat will be a remedy of last resort and that the regulator would expect both companies to work together that in the first instance to address any problems that arise.

The guidance covers three main areas :

• recovery of efficient costs over the life of the project;
• treatment of the Bulk Supply Agreement should either party enter into special administration; and
• regulatory treatment of the outcome delivery incentives associated with the timely delivery of the reservoir

The consultation paper says Ofwat “strongly support” the proposed development of the Havant Thicket reservoir, commenting:

“The ambitious approach embraces our challenge to the sector for greater regional collaboration in delivering secure water resources.”

However, describing the approach as “one of a kind”, Ofwat said the guidance should not be seen as setting a precedent for other projects - whether or not the projects had some similar characteristics.

Following on from the consultation outcome and subject to final agreement from Portsmouth Water and Southern Water, Ofwat is aiming to amend the companies’ licences in mid-March 2021.

The reservoir , which will have approximately 8,700 mega-litre (Ml) capacity, will enable Portsmouth Water to provide Southern Water with up to 21 Ml/day from its Gaters Mill water treatment works.

The Havant Thicket PR19 price control has an initial duration of 10 years, aligning it with the expected construction period of the reservoir and reflecting the long term bulk supply arrangements between both companies.

The bulk supply agreement Southern Water will enter into with Portsmouth Water has an expected duration of 80 years with charges payable by Southern Water to Portsmouth Water for the lifetime of the agreement. The charges include:

• a capacity charge which represents the cost of constructing, operating, maintaining and financing the reservoir
• a volumetric charge which reflects the incremental operating costs of providing water to Southern Water.

The capacity charge will be payable for the duration of the bulk supply agreement.

The consultation paper points out that Ofwat does not limit the prices of bulk supplies through price controls. They are normally negotiated between water undertakers as part of the bulk supply agreement. The paper states:

“We expect both parties to report transparently on the costs incurred in the construction of the asset relative to the efficient cost allowance determined by Ofwat, the recovery of those costs and the recovery of economic profit, in future annual performance reports, or any successor regulatory financial statements.”

“Portsmouth Water and Southern Water may seek in principle agreement from Ofwat for material changes in order that any significant additional costs can be financed by Portsmouth Water and Southern Water .....

“We will consider any such occurrence on a case by case basis and whether a proposed material change of circumstances is likely to be deemed economic and efficient.”

The bulk supply agreement also covers certain events of default and provides that even in the event of a default, Southern Water would continue to pay bulk supply charges to Portsmouth Water, an arrangement which is considered necessary to ensure the project is financeable.

Ofwat is now seeking views from interested parties on the detail and transparency of the regulatory framework and how Ofwat intends it to operate, saying:

“We welcome any comments on perceived gaps in the guidance or areas where it is unclear.”

Deadline for stakeholders to comment on the proposed modifications is 2 March 2021.

Following on from the consultation and subject to final agreement from Portsmouth Water and Southern Water, Ofwat is aiming to amend the companies’ licences in mid-March 2021.

Click here to download the consultation paper.