Ofwat has published details of the price control modification for Portsmouth Water’s proposed Havant Thicket Reservoir to limit the revenue that the utility can recover from its own customers in relation to its construction and operation.

The new reservoir,is being built to enable Portsmouth to provide a bulk supply to Southern Water. Southern Water faces significant water resources deficits in the west of its region after tight limits were imposed by the Environment Agency on the amount of water it can take from environmentally sensitive rivers within its appointed area in Hampshire.

In contrast, Portsmouth Water benefits from having a modest water resource surplus and has been working collaboratively with Southern Water to increase water transfers.

In October Portsmouth Water awarded a £3 million design services contract for the £106 million flagship Havant Thicket winter storage reservoir project. Construction work on the first new strategic water resource in the South East for decades is expected to get underway in 2024, with completion scheduled for 2029.

The modification does not place limits on the charges that Portsmouth Water can make to Southern Water in relation to the bulk supply arrangements associated with the Havant Thicket reservoir. It makes clear that the revenue from Southern Water and the related bulk supply of water would not be included within any wholesale price control.

In a paper setting out details of the proposed modifications, the water industry regulator said:

“Portsmouth Water has ambitious proposals to adopt supply-side and demand-side solutions to increase the amount of surplus water that it can provide to Southern Water, including proposals to build the Havant Thicket reservoir to maximise the amount of water that could be traded with Southern Water.

“We strongly support the proposed development of the Havant Thicket reservoir by Portsmouth Water to support water transfers to Southern Water. The ambitious approach embraces our challenge to the sector for greater regional collaboration in delivering secure water resources.”

Ofwat has set out how the efficient costs of the activities would be funded, including how revenues from bulk supply charges are treated. However, Ofwat said it was important that current and future customers of Portsmouth Water and Southern Water are appropriately protected and that “risks are allocated to those best able to manage them.” 

Condition B of Portsmouth Water’s licence has been amended to allow Ofwat to designate as “Havant Thicket Activities” any activities which consist of or relate to the planning, development, construction, operation and maintenance of the Havant Thicket reservoir and associated infrastructure or the bulk supply to Southern Water that it facilitates.

The modification will also enable Ofwat to determine the appropriate nature, form and level of the price control for Havant Thicket Activities and set it for a period of either 5 or 10 charging years.

The regulator intends to determine the separate control for Havant Thicket Activities for a ten year duration, although subsequent price controls may follow a five year regulatory cycle.

Ofwat also plans to determine a revised price control mid-period to apply from year 6 onwards if, as proposed, it determines a price control for 10 years.

The regulator also expects that any bulk supply agreement between Portsmouth Water and Southern Water will have provisions for adjusting the bulk supply charges that will be paid by Southern Water for material changes in circumstances.

Ofwat was considering three potential options – the regulator has concluded that a separate price control in relation to the reservoir is the most appropriate option to ensure that the regulatory framework protects the customers of Portsmouth Water and Southern Water, "encourages efficient behaviour and appropriately reflects the complex allocation of costs and risks" for the development.

The regulator says it is the most appropriate option because it:

• aids transparency;
• enables greater regulatory oversight;
• maintains continuity of incentives for efficiency throughout the construction period, aligned to our approach to cost and risk sharing; and
• enhances customer protection, recognising that it would be inappropriate for Portsmouth Water’s customers to underwrite the development of the project.

Ofwat received three responses to its proposal to make the licence modifications from Portsmouth Water, Southern Water and the Consumer Council for Water - all three stakeholders supported the proposed modifications.

Ofwat takes the view that a separate control will also allow for a more appropriate design option for the activities concerned. The scope of the Havant Thicket Activities will be set out in detail when Ofwat publishes it price review final determination on 16th December.

Click here to read Ofwat’s Notice of reasons for Havant Thicket licence modification in full