Ofwat has launched a new consultation on a discussion paper outlining its initial thinking on work to date by the Regulators’ Alliance for Progressing Infrastructure (RAPID).

Established in 2019, the RAPID partnership consists of three water regulators: Ofwat, the Environment Agency and the Drinking Water Inspectorate - Natural Resources Wales is involved in an advisory capacity.

The discussion paper sets out the water sector regulator’s initial thinking on the regulatory and commercial framework – Ofwat is now inviting comment on the scope of what it is developing, the priorities and timing.

The paper says that many of the best value options to develop strategic water resources require collaboration across more than one water company, and often with third parties. In addition, such strategic resource options (SROs) also require more complex commercial arrangements compared to projects designed to serve individual company areas.

Ofwat says the SROs also present new or heightened challenges to water sector regulation –  for example, environmental regulation, drinking water quality or funding and outcomes.

The regulator sees benefits in establishing common frameworks for addressing these challenges, including:

• reduced costs for individual projects
• mitigating risk of project delay
• helping to make water resource arrangements better able to adapt to challenges of the future.

“We think we can most add value by focusing on arrangements for large schemes that involve at least two companies or partners"

The sector has already made progress in collaborating to develop best value water resource options. The water companies now have ring-fenced funding to develop SROs to be ‘construction ready’ for the 2025-2030 period. The water sector is also establishing arrangements for strategic regional planning to deliver future water needs for England, in particular through regional planning groups.

Ofwat says in the paper:

 “We think we can most add value by focusing on arrangements for large schemes that involve at least two companies or partners. Our outputs will take the form of recommendations to regulators and to the wider sector, for example in the form of standardised terms for bulk supply agreements or other contractual arrangements.”

The discussion document sets out what the regulator sees as key issues, including:

• arrangements for transfers under drought conditions and times of operational stress
• charging and incentives
• major project delivery
• environmental regulation
• drinking water quality
• multi-sector solutions
• co-ordinated operations

The paper is highlighting how water is allocated in drought conditions and times of operational stress as a key concern. The regulator is proposing that companies within England and within Wales adopt a ‘fair shares’ approach, where different sets of customers receive a fair – which may be a similar or equivalent – level of service. The fair shares approach would also be supported by charges to incentivise companies appropriately.

According to Ofwat, companies are concerned about being able to recover efficient costs of investment from beneficiaries of the water resource, for example if the water resource is used less than anticipated. “We think in principle companies should have a similar level of confidence about the recovery of these costs as if they were developing the resource entirely for their own customers,” the paper states.

"Water trading incentives have not yet resulted in a significant uplift in trading activity"

Commenting on the current status of financial incentives for water trading which were first introduced in Ofwat’s 2014 price review, the paper says that based on available data, the trading incentives have not yet resulted in a significant uplift in trading activity between water companies.

At the time of the PR19 final determinations in December 2019 only a small volume of water had been traded under the arrangements.

On Direct Procurement for Customers (DPC) where the major project is built, financed and operated by a competitively appointed provider, the paper sees having a competitively appointed provider, such as through a DPC model, as being “just as applicable to SROs as to a single water company project.”

 According to Ofwat, the situation may be complicated where it is important that more than one company is the procuring party – the regulator is currently reflecting on this further as part of a working group.

On strategic water resource infrastructure, the paper says that planning water resources beyond the public water supply (e.g. shared resources between sectors, or more generally integration of drought and flood planning) “seems likely to lead to best value solutions in some cases.”

 "Multi-sector solutions may bring additional complexity"

However, Ofwat goes on to comment:

“Set against this, such multi-sector solutions may bring additional complexity. We are reflecting on regulatory and commercial aspects of this as part of a working group.”

According to the regulator, over time, to the extent that strategic transfers become more prominent, the benefits from effective coordination of operations are expected to increase. This includes decisions around asset utilisation, access to capacity and volumes of water supplied - however, the technical complexity of co-ordinated decision making may be significant. Ofwat is taking this work forward through a consultancy study and a working group.

Ofwat is now inviting views regarding the scope of what it is developing, its proposed next steps (including any additional activities it should be undertaking), priorities and timing. The regulator is planning to consult on policy options towards the end of 2021, prior to the initial consultation on regional plans.

Key questions Ofwat would like to receive comment are:

• Which aspects of our initial thinking do you agree with or disagree with?
• What other approaches would you advocate and why?
• What have we missed that also needs to be progressed?

Deadline to submit comments to Ofwat is Wednesday 21st July 2021 – click here to download the discussion paper