The Regulators’ Alliance for Progressing Infrastructure Development (RAPID) has launched a new consultation on its proposals to establish common regulatory and commercial frameworks needed for the development of strategically important water resource supply solutions.

RAPID – a partnership of Ofwat, the Environment Agency and the Drinking Water Inspectorate (DWI) - was set up in 2019 to support strategically important new water resource infrastructure supply solutions to meet future water needs.

The RAPID Board is chaired by the CEO of Ofwat and comprises members from the senior leadership teams of the partner regulators. RAPID provides advice and recommendations to the partner regulators and to Natural Resources Wales.

Launching the consultation, RAPID said:

“Many of the best value options to develop strategic water resources require collaboration across more than one water company, and often with third parties. Such strategic resource solutions may require more complex commercial arrangements than projects which are developed by the incumbent company for its own sole use.”

According to RAPID, the regulatory and commercial arrangements this requires may present new or heightened challenges to environmental regulation, drinking water quality or economic regulation through funding and outcomes.

The regulators see a number of benefits in establishing common frameworks for addressing these challenges, including:

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

The consultation paper outlines the progress the water sector has already made in terms of the gated process and regional planning measures put in place for collaborating to develop best value water resource options.

The consultation is structured in the following four main areas with the aim of setting out the different policy options that might be available in developing and implementing the regulatory and commercial framework. In a few areas the regulators have provided stakeholders with a preferred option : for example, allocation of water in a drought and the model for procurement of infrastructure.

Planning for long-term outcomes

How to ensure that companies are incentivised to deliver the right resources, at the right time, in the right place and achieve best value for customers, society and the environment, and how the range of incentives may result in unintended outcomes/perverse incentives.

Development activities

Consideration of the extent to which a RAPID type framework is necessary over the longer term for development of strategic water resources and whether changes to the framework might be required.

In procuring major new infrastructure such as the strategic resource solutions, competitive procurement models are likely to offer benefits for customers. RAPID is requiring that companies and other stakeholders use Ofwat’s framework for Direct Procurement for Customer (DPC) or Special Infrastructure Provider (SIPR) model where appropriate.

Securing investment is key to the successful development of the regulatory and commercial framework and we explore to what extent companies are incentivised to optimise efficient use of solution and what investment signals are necessary to ensure assets are funded.

RAPID is proposing that as part of PR24 Ofwat should consider whether there are appropriate incentives in place for solutions where there may be low utilisation. The paper also discusses the allocation of risk between investors, companies and customers and the extent to which public water supply customers should bear stranding risks/subsidising other sectors.

Construction

RAPID has a role in approval of projects up to the start of construction. Beyond this, the paper considers the roles and responsibilities of the different partner regulators and how best to organise their involvement during the construction stage of the strategic water resource development. It also sets out options for regulatory oversight and whether it might be appropriate to extend RAPID's role.

Service Delivery

The regulators set out the options for development of the contractual structure for water trades and design and delivery of the infrastructure supporting the strategic water resource solutions.

This includes consideration of how trades should be treated in a price review, and whether the sunk costs which represent the capital expenditure elements can be passed through, and how any economic profit elements and variable costs could be treated.

Finally, the regulators also explore how they could move to a more co-ordinated network and the role a system operator could take in the future. The paper discusses how the regulatory and commercial framework might need to change in the longer term and how to enable transition to such a future model.

Responses to the consultation will subsequently feed into RAPID’s advice to partner regulators and to Natural Resources Wales during 2022. It will also be used to inform the work of the Environmental Regulations task and finish group and the Ofwat price review 2024 methodology, which will be consulted on this summer.

Deadline to submit responses is 5pm Wednesday 26 January 2022.

Click here to download RAPID’s consultation paper The regulatory and commercial frameworkfor strategic water resource solutions – a consultation