PR19, Ofwat’s latest price review has made headlines recently for the controversy it has caused, resulting in Northumbrian Water, Anglian Water, Yorkshire Water and Bristol Water challenging Ofwat over their financial settlement.
Ofwat, in the interest of protecting consumers, is limiting how much water companies could charge consumers. The water companies mentioned appealed to the competition authority (CMA) that the measures described would restrict investment in improving infrastructure, with the CMA ultimately ruling in the water networks favour.
The balance between protecting consumers and allowing adequate investment will always be delicate, especially in a regulated monopolist industry such as water. Having said this, the recent events highlight a greater subject matter: whether enough is being invested in water infrastructure?
Efficient water systems are key to any developed nation, but with parts of networks predating the industrial revolution, UK water networks are having to constantly rebuild, reinvest and innovate to ensure a constant supply of clean water, whilst also ensuring adequate sewage and sanitation. Coupled with a rise in flooding due to global warming and an increasing demand to efficiently deliver water (reducing leakage), it is clear why such levels of investment are necessary.
In order to ensure continued improvement and development of the waterways, targets are set for each network, whilst an overall target of reducing 16% of water leakage by 2025 is set by Ofwat. Alongside this, are targets around reducing pollution incidents and mains bursts, cutting consumer water usage, whilst also reducing bills by 12% before inflation.
In order to achieve these aims, there is no doubt that significant investment will be required. Spending in the form of R&D, innovation project funding, labour, etc. will not come cheap, but will be unavoidable if such aims are to be within reach.
The fact that investment will be required is something that Ofwat are very much aware of. They have gone as far to earmark £51bn investment over the next 5 years, going onto highlight objectives around: improved services, the environment, innovation projects, customer service, networks resilience against floods, droughts and other failures.
Though Ofwat have already expressed commitment to certain projects across the UK, alongside an estimate for how much will be dedicated to each project, specific details for each commitment have not yet been released.
It is clear that Ofwat are committed to investment into water infrastructure, proposing £1bn more than what was originally requested by the water networks. Perhaps then it is more the case that the distribution of investment is a more pressing matter. Since information in regards to this, in particular, the £200m funding for innovation projects is not yet available, judgment cannot be passed until these details are ironed out.
Ofwat's response to the CMA in regards to the appeal eloquently communicates the situation they’re in. PR19 is supposed to be challenging for the networks. Challenging goals are set for networks, while balancing investors requirements for a return, without allowing for supernormal returns that would otherwise be available in a monopolistic situation.
On balance, Ofwat have done well to allocate an appropriate amount of funding, set challenging, yet achievable goals and offer a fair return to investors. The next hurdle will be deciding specifically how to distribute said funding that has been promised. If this is achieved, then we can expect to see some great developments in the water industry over the coming PR19 period.