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FOCUS 13


LOOKING AHEAD, THERE WILL BE MORE OPPORTUNITY TO RECEIVE AN INCENTIVE PAYMENT, AND MORE RISK OF BEING PENALISED.


What other changes will Ofwat’s PR14 regime bring in?


PR14 will mean a much greater focus on operational effi ciency and cost reduction, as well as customer service.


The way that water companies are incentivised – how they are rewarded or penalised – will differ. The new regime aims to drive different behaviour towards customers. The regulator has asked companies to set out in their business plans exactly how they are going to better engage with customers, as well as asking them to suggest ways in which they might be incentivised to give customers what they want.


Looking ahead, there will be more opportunity to receive an incentive payment, and more risk


of being penalised. Given this slight increase in volatility, we need to put investors at ease. Ofwat knows that water needs a huge capital injection – tens of millions of pounds over the next ten years. I believe there is plenty of capital out there that will continue to see water as an attractive low-risk sector. So, despite the small amount of added risk, investors can still make money.


Another big PR14 change revolves around totex. In the past, the way capital expenditure and operational expenditure were treated was different. Now, the regulator is looking at the total spend – whether capex or opex – and putting a different regime around that. In the past, if you made a saving you had to pass that back to the customer in the form of lower bills. Now companies will be allowed to keep a portion of


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that saving but they can’t simply decide to invest less, as they have to meet certain targets. Plus, if spending overruns under the new regime, that can’t be passed on to customers.


Another PR14 change will be separate price controls for the retail and wholesale sides of the industry, with the consequence that enterprise customers may be able to choose their supplier. We are seeing more differentiation between companies too. South West Water and Affi nity Water have gained ‘enhanced’ status from Ofwat. This means that their plan has been broadly accepted and they will not receive further challenge, particularly on costs. All the other companies now have to revise and re-submit their plans to try to meet Ofwat’s expectations.


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