Ofwat is calling for clarification from the National Infrastructure Commission (NIC) on its reference to “changes to regulatory or market structure’ as possible options for cost-effective infrastructure in its consultation on the National Infrastructure Assessment.

The comments come in the water sector regulator’s response to the consultation by the Commission (which closed on 5^th August) on its proposed process and methodology for the development of a National Infrastructure Assessment.

Introducing its response, Ofwat said its role as an independent economic regulator “remains vital to the provision of affordable, resilient and sustainable infrastructure in relation to water and wastewater services.”

Commenting on the reference in the consultation paper by the Commission to ‘changes to regulatory or market structure’ as options for cost-effective infrastructure, Ofwat said:

“Given the timescales for our Water 2020 programme, market development and the planning to inform the next Periodic Review for water and wastewater services we would ask that the commission clarifies its support for these processes early to avoid uncertainty."

“We have committed to providing the methodology statement for our next price review for consultation by July 2017, and so anything that would affect this would need to be clear well in advance of the date or risk injecting uncertainty into the price review process.”

NIC could adopt Ofwat's customer-centric focus in developing approach to the NIA

The regulator also drew attention to its own drive for a customer-centric approach to ensure that the water companies focus on their customers, suggesting this could have wider relevance for the NIC as it develops its approach. The response says:

“We think it is vital that the work of the commission builds on this customer focus, and the legitimacy it brings. There is a risk that infrastructure providers and their investors could interpret the NIC analysis as being a top-down approach, rather than one which builds on the vital role of customer engagement and involvement in decision making. It is therefore important that the NIC focuses on strategic direction to national infrastructure planning rather than local service provider plans.”

Ofwat goes on to suggest that the Commission’s approach should consider risks and who bears them as well as costs in a narrow sense, referring to its own experience, especially in relation to the recent Thames Tideway Tunnel project.  Using an innovative approach to allocation of risk between investors, companies and government, Tideway had secured one of the lowest ever financing costs for an infrastructure project, the regulator said.

Ofwat: role of green/soft infrastructure is becoming increasingly important 

Commenting on natural infrastructure assets, Ofwat’s response says:

“We are very pleased that the process and methodology recognises that infrastructure assets also include natural assets such as rivers and flood plains For water and wastewater services the role of green/soft infrastructure is becoming increasingly important and relevant to ensure infrastructure solutions are resilient and sustainable to a wider range of possible futures, as well as to ensure cost-effectiveness over the long term.”

According to Ofwat,  a multi-sector approach will be one of the biggest opportunities for the commission to provide additional benefits, referring to the strong interdependencies which exist across sectors related to water, wastewater and drainage services, particularly with energy and food.  However, the paper says Ofwat is “equally clear that sector-based planning approaches for infrastructure may mean that some significant opportunities may not have been realised.”

Ofwat is urging that the commission should give particular consideration to both customer value and resilience, saying that in assuming customers will pay (either through water bills or taxation), it is important that “future infrastructure requirements provide a valued benefit which is affordable.”

"Customer legitimacy ..is particularly important in uncertain times"

Referring to customer engagement during PR14, Ofwat said this was a significant step forward both in terms of getting the best result for customers and driving real innovation in the water sector.

“We took this approach deliberately to get away from a tendency in the sector to work to the regulator, not to the customer. This also helped the sector to focus on the long term needs of customers, including resilience, rather than being led by topdown plans.” Ofwat said. “Customer legitimacy of the sector, and our independent regulation, also help underpin investment in the sector, and we would note that this is particularly important in uncertain times.”

The regulator has also told the Commission that the role of markets is likely to be particularly important with regard to an integrated infrastructure approach and drawn attention to its Water 2020 work.  “For both water resources and bio-resources, markets are being introduced for elements of the value chain where there is scope for new players and different approaches to drive down costs, encourage innovation and make better use of scarce resources and existing assets.”

"Markets....will help to ensure that the regulated monopoly investment is targeted better"

Ofwat said the process of introducing these markets would shine a light on the current regulated cost base. While the wholesale network infrastructure controls would continue for the bulk of the pipe and treatment work assets, the markets at either end of the value chain will help to ensure that the regulated monopoly investment is targeted better.

Commenting on infrastructure provision for water, wastewater and drainage, Ofwat said it believes that the most appropriate and effective approach is for the NIA to set-out a series of scenarios with clear milestones for decisions and delivery – an adaptive management strategy. “We do not see that the NIA will have sufficient information to make site specific infrastructure recommendations outside of the formal planning processes and particularly the Statutory planning process for water resources.”

The NIC is assessing the infrastructure system as a whole and looking across sectors to identify and explore the most important interdependencies and resilience implications. The Commission is also examining cross-cutting issues which affect the delivery of infrastructure including governance, sustainability, funding and financing, costs, resilience, performance measurement and project appraisal methodology.

The consultation is part of the first stage of the NIA process to determine a vision of the UK up to 2050, to identify resulting long-term infrastructure needs and to highlight priority areas for action over the medium-term. This report will be published in summer 2017.

The Commission will then consult widely on the Vision and Priorities report to inform its final conclusions on the UK’s infrastructure needs and priorities to 2050 - the National Infrastructure Assessment will then be published in 2018.

Click here to download Ofwat’s response to the National Infrastructure Commission’s consultation.