Glass half full vs glass half empty: Ofwat draft determinations are a matter of perspective
Published: 12 July 2024
On 11 July 2024, Ofwat published its draft determinations in response to the business plans submitted by the 16 UK water and wastewater companies in their AMP8 business plans. It promises £88 bn of total expenditure to reduce pollution, improve resilience, adapt to climate change, and work towards net zero emissions.
Differing perspectives
Colum Goodchild, Director of Asset Management, states that organisations are looking at this through multiple lenses which is influencing the rhetoric in the immediate aftermath of the announcement. But these different lenses can often be a useful tool in considering alternative perspectives when dealing with draft determination responses and potential CMA (Competition and Markets Authority) referral.
On the one hand Water UK, the trade association for the water industry, has branded Ofwat’s decisions as the “biggest ever cut in investment,” a 25% reduction from the requested £96bn. It argues this will slow environmental recovery and exacerbate water shortages, stating: “Ofwat has failed to be realistic about the levels of investment needed and what it will take to deliver and maintain necessary infrastructure".
On the flip side, Ofwat claims this is the biggest investment programme ever for the water sector with investment increasing from £59 bn in AMP7 to £88 bn in AMP8.
The new Environment Secretary, Steve Reed, has pledged a "reset moment" for water companies, prioritising customer and environmental interests. He has met with water company bosses to discuss these priorities and address performance issues. This comes immediately after his announcement just days ago where he set out his top priority for DEFRA is “cleaning up Britain’s rivers, lakes and seas”.
Customer impact
In terms of bill increases, Ofwat claims they are protecting the consumer pocket, and bills will average around £19 per year per household — an increase of one third of that requested by water companies — according to the BBC. Indeed, the rhetoric from Ofwat has shifted from announcing the publication of draft determinations to reassuring households that help is available if they think they are going to struggle with bills.
There is a careful balance required between customer bills and delivering the environmental improvements that are required nationally.
Payment for delivery
There is also a strong focus on payment for delivery. Ofwat is promising large investment but that is caveated with strong rules to ensure investment outputs are delivered through price control deliverables (PCDs).
For the 2025-2030 period, Ofwat will require companies to provide independent third-party assurance for delivery of enhancement schemes. They expect the company to appoint external assurance providers to meet the assurance requirements set out in the draft determination. We have supported companies in existing PCD assurance and are well-placed to support in the expanded regime going forward.
Outcome delivery incentives
Five of the eight new performance targets Ofwat has introduced are pollution related. These include reducing spills from storm overflows for companies in England to an average of 16 spills per year by 2029, cutting the number of serious pollution incidents to zero, reducing operational greenhouse gas emissions by 11%, reducing phosphorus pollution, and cutting internal sewage flooding.
Other targets include leakage, supply interruption, and building more resilient supplies.
According to Ofwat, a failure to meet these performance commitments results in an automatic penalty for companies. Ofwat expects the water companies to deliver the following:
- 2,500 projects to reduce spills from storm overflows
- Invest £10 billion to reduce harm from storm overflows
- Deliver £2 billion of nature-based solutions and increase biodiversity on water company land
- Reduce sewer flooding in homes by 13%
- Triple the replacement rate of water mains pipes
- Cut leakage by 13% – to the lowest level since privatisation
- Deliver £6 billion of upgrades to combat nutrient pollution
- Reduce operational greenhouse gas emissions by 11%
Consultation is open until 28 August 2024, and Ofwat will set out its final decisions on 19 December 2024.
We have a proven track record, acting as expert witness in PR14 and PR19. Our advisors provide strategic and procedural guidance, empowering you to lead your case with robust evidence, supporting you with your draft determination response or preparing for CMA.
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