The Blueprint for Water environmental coalition has suggested that some of Ofwat’s Final Determination decisions on the water companies’ AMP7 Business Plans in the 2019 Price Review risk undermining significant gains made by the water industry.

The comments come in Blueprint for Water’s submission to the Competition and Markets Authority which is currently examining appeals by four of the UK water companies against the Ofwat’s PR19 Final Determinations on their AMP7 Business Plans.water sector regulator’s PR19 determinations.

"...line taken by Ofwat in curtailing long-term investment is so significant as to be damaging to the long term resilience of the industry"

Introducing its submission, Blueprint for Water, part of the wider environmental NGO coalition, Wildlife and Countryside Link, says:

“The unprecedented level of challenge to the industry regulator that this redetermination represents can also be taken as a sign.”

“That four companies have taken the major step of challenging their final settlements is testament to the serious concerns held not just by those companies involved, but across the industry, that the line taken by Ofwat in curtailing long-term investment is so significant as to be damaging to the long term resilience of the industry.”

The NGO goes on to raise a number of concerns, questioning whether “in this instance, Ofwat has got the balance quite right.”

".. to deliver a reduction in bills sends a message to customers that is fundamentally flawed; water is cheap, and getting cheaper"

In Blueprint for Water’s view, a number of the decisions taken by Ofwat appear to place greater value on the bill reductions to customers than on the investment that is needed now to prevent longer-term bill increases. The submission states:

“This is troubling on two key fronts. Firstly and most critically, we believe that to deliver a reduction in bills sends a message to customers that is fundamentally flawed; water is cheap, and getting cheaper.

“Whilst it is important to remain mindful of the financial pressures that customers face and to offer social tariffs that ensure water remains accessible to all, particularly in the light of the Covid-19 pandemic, Ofwat must consider whether the savings that can be made now are truly in the best interest of the customer.”

According to the NGO, prioritising a short term bill reduction now reduces the long-term saving potential associated with metering and water efficiency. This thereby removes the potential for customers to better manage their own water use, eliminating the associated savings on energy bills (linked to water heating) and carbon emissions. It also limits the reach of engagement and education work that will help to instill the value of water, and sacrifices the ability to reduce abstraction pressures on the environment.

Blueprint for Water goes on to argue that this goes against the recommendations of numerous reports and publications which all align around the need for increased investment and activity to secure sustainable water supplies.

The NGO has also flagged up the new primary duty for Ofwat to “secure the long-term resilience of water undertakers’ supply systems and sewerage undertakers’ sewerage systems” - including by promoting long-term planning and investment. Blueprint for Water has questioned whether the regulator has fully taken into account the principle it included in its Price Review methodology clarifying its expectations for resilience planning which emphasised the role of the environment in sustaining the resilience of systems and services, saying

“…their decisions to reduce the budgets available for certain schemes for AMP7 appear to contravene this principle.” Blueprint for Water has cited a number of examples from Ofwat’s Final Determinations to support this, including:

Anglian Water - Restrictions to Anglian Water’s strategic pipeline will mean that the system has in-built bottlenecks, reducing the resilience of the system by limiting the volumes of water that can be accommodated and meaning that it will likely need to be upgraded in the near future to rectify this.

Ofwat’s cost reductions for this scheme are comprised of efficiency reductions as well as questions on scope, which appear to hinge on differing assessments of capacity needs, how best value was arrived at, and whether the company will indeed deliver the proposed works.

“In cases like these, it would seem possible to take a ‘no regrets’ approach to awarding funding, and to deal with concerns over likelihood of delivery via an increased ‘uncertainty mechanism’ award, instead of by restricting scope,” the submission says.

Ofwat needs to ensure "that there is at least sufficient money to deliver proposed schemes"

While Blueprint for Water accepts Ofwat’s premise that ‘Just more money won’t deliver more outcomes’, it believes that this needs to be balanced with ensuring that there is at least sufficient money to deliver proposed schemes. It suggests:

“If, as some companies have suggested, they will genuinely be pushed towards delivering mediocre performance due to the need to deliver the lowest loss from the balance of expenditure, penalties and rewards, there needs to be a mechanism of looking again at the funding awards or incentives structures.”

In developing proposals, Blueprint for Water also agrees that the onus “rightly falls to the water industry to set out a reasoned case for proposed resilience schemes, describing a specific programme of delivery to deliver specific environmental (and therefore business) resilience outcomes. It accepts that it “may be a just criticism to say that not all have necessarily justified their proposed schemes fully enough.” However, it does not therefore follow that Ofwat should reject these costs outright.

Commenting on the value of environmental investment, cost benefit analysis and natural capital, the submission says:

“An area that has seemingly proved difficult for Ofwat to square is the desire to support innovative, nature-based solutions, against the need to enforce a time-constrained rewards and penalties approach in order to encourage plans that provide a sufficient level of certainty around environmental compliance.”

On nature-based solutions, the submission states:

“… whilst we do not feel we have sufficient knowledge of particular schemes to agree or disagree with Ofwat’s conclusions on them (whether part of this re-determination or for companies who have chosen to reluctantly accept their settlement), what concerns members of Blueprint for Water is the apparent mismatch between rhetoric and reality; Ofwat’s broadly positive position on nature-based solutions and other environmentally-beneficial approaches does not appear to have followed through to the schemes ultimately being taken forward.”

“… It should be remembered that in reaching investment decisions, least financial cost or greatest value for money in purely financial terms are certainly not the only reasonable outcomes to aim for - and certainly not when only considering these over relatively short time horizons.”

Blueprint for Water said that this is an area it would like to see given much greater attention for PR24; irrespective of the outcome of the CMA’s re-determination process.

“We will want to see assurances that the internal practices and processes in place do not prevent Ofwat supporting the kinds of schemes that it states it wants to see the industry delivering” the submission says.

In the meantime however, “companies report that the price settlements received mean that they must curtail their ambition, focussing on achieving the statutory minimum and delivering those against those targets which have associated financial penalties.”

 "..concern that many... schemes downscaled or underfunded by Ofwat are schemes the companies had demonstrated that there was particular customer support for"

Blueprint for Water concludes by commenting on the extent to which the regulator has taken customer preferences into account in its decisions, saying:

“Finally, it is a concern that many of the schemes downscaled or underfunded by Ofwat are schemes the companies had demonstrated that there was particular customer support for.

“Northumbrian Water’s two resilience schemes (one on sewer flooding in the north east, the other on water resources in Essex) had strong customer support, despite this meaning sacrificing a bill reduction, and indeed many customers wanted these schemes to go further still.

“Customers have told Anglian Water that they want to see investment now, not ‘kicking the can down the road and requiring us to pay more later’, and customer support for the plan as a whole was within the context of supporting a long-term strategic direction that requires early investment for later benefit.

“Yorkshire Water have highlighted a significant increase in support for environmental schemes within their PR19 plan compared to PR14, reflecting the shift in environmental awareness and concern across society as a whole. Yorkshire Water gained a 97% customer approval for environmental services within their PR19 business plan; having a seperate strand focussed on the environment was seen as a positive, giving this element a prominence and a greater level of importance.”

“Ofwat’s methodology for the Price Review discusses that there may be a need to ‘intervene in … plans to ensure that companies deliver the step change required by customers’, yet these examples suggest almost the opposite, with schemes that could deliver protection or enhancement of the environment, and have strong customer support, being curtailed.”

Click here to read Blueprint for Water’s submission in full