Ofwat is already in the process of considering the options for market design of direct procurement for customers, according to the minutes of its latest Board meeting published this week.

Direct procurement covers the arrangements (include the financing of a project) whereby a water company procures services, particularly infrastructure projects in a similar way to Thames Water’s procurement of the Thames Tideway Tunnel.

The alignment of the risk between companies and customers associated with procurement was among a number of issues discussed by the Board, which also examined the reasons why companies were not doing this at the moment, which included the RCV addition companies receive from providing infrastructure themselves, and the impact this has on companies’ valuations.

The minutes of the meeting which took place on 28^th April state:

“The Board agreed to set clear expectations and strong incentives through the risk based review of business plans in PR19 for companies to use direct procurement for customers for suitable high value projects.”

The Board has agreed to set an appropriate threshold above which it would expect companies to consider direct procurement at PR19 at £100 million. However, it has also acknowledged the responsibility of companies to act in the best interests of their customers in any procurement, commenting that “excluding a project of £99 million from any direct procurement considerations would not be in this spirit.”

Ofwat will be assessing PR19 business plans in this area, particularly in the allocation of risk between company and supplier.

Other issues covered in the meeting include long term commitments for customers and in-period outcome delivery incentives (ODIs). The Board noted that there was a need to balance the future changes in technology and external environment, with the need for companies to commit to their customers in the longer term, beyond the five year price controls.

The Board’s preferred option for consultation, where five year performance commitments and ODIs are set at each price review, but companies are transparent about their longer term plans for performance, forms part of its consultation on its proposed regulatory approach to PR19, which closes on 20^th July. Under this option, water companies could still propose their own longer term performance commitments which Ofwat would review.

Some companies linking ODIs more closely in time with management performance rewards

The Board also considered a proposal to pursue a licence modification for in-period ODIs for all companies that will facilitate (but not require) payment of ODI rewards and penalties in-period. According to the minutes, in-period ODIs are resulting in a behavioural shift for some companies by linking ODIs more closely in time with management performance rewards.

Ofwat has agreed with in-period ODIs but said that the proposals should take account of the need to avoid undue peaks in customer bills within period.

The April minutes also point out that in recognition of the price sensitive nature of some of the decisions taken at the previous Board meeting which took place in March have only just been published.

According to the March minutes, Ofwat is looking to further strengthen the role of the water companies’ Customer Challenge Groups (CGCs) to challenge companies in the development of their business plans. The minutes refer to the importance of both regulatory experts and customer experts and measures that could enhance the strength of challenge put by CCGs, including comparative information on company performance.