Ofwat has set out proposals to develop a new approach to regulating operational resilience to achieve the best outcomes for customers, society and the environment.
The regulator is seeking comment on a new discussion paper on operational resilience which sets out Ofwat’s proposal to use an iterative three stage process to achieve its longer-term ambition to develop an integrated monitoring framework for operational resilience.
The process will consist of:
- Stage 1 (2022-23): first to target reporting of a small number of additional water and wastewater measures
- Stage 2 (2022-25): gaining further insight through the collaborative development and refinement of enhanced monitoring
- Stage 3 (2026-onwards): finally, consolidating each element into an integrated monitoring framework.
According to Ofwat, this will enable it to form a holistic and more complete view of asset health and wider operational resilience in the sector.
The paper says that operational, financial and corporate resilience of companies affects all current and future customers’ water and wastewater services and that companies should be able to demonstrate a clear understanding of the health of their assets over the long term and how this impacts the resilience of their services.
Around 80% of companies' total expenditure relate to routine, year-on-year base costs, which companies incur in the normal running of their business to provide a base level of good service to customers and the environment and maintain the long-term capability of assets.
The paper says:
"Maintaining and improving operational resilience requires companies to identify and manage a complex range of risks to make sure their assets operate effectively to meet current and future service needs.....it is important for companies to demonstrate to their customers that their money is being used efficiently and effectively.
Current approach to operational resilience
Under the regulator’s current approach to operational resilience, the water companies are expected to fully understand their assets and “act appropriately to deliver short and longer-term operational resilience. “
A key part of this is the outcomes regime in the price control, which holds companies to account for delivering outcomes for customers and the environment. However, in Ofwat’s view although the regime captures a company's failure to mitigate risks when they have an impact on service, it focuses on performance at a point in time. This “may not always provide the breadth and depth of information needed to gain insight into the effectiveness of a company's approach to maintaining assets or managing current and future risks” the paper says.
Evolution of Ofwat’s approach to operational resilience
Ofwat now wants to evolve its monitoring approach to provide “a richer picture of operational resilience” for customers and stakeholders and develop an integrated monitoring framework informed by the outcomes regime and complemented by wider monitoring activities.
Via a voluntary data and information request for 2021-22, Ofwat has asked water and sewerage companies to report on five measures and water only companies to report on two measures.
During 2022-23 Ofwat will carry out targeted monitoring activities that focus on immediate or emerging priority areas. The regulator will further consult on performance commitments as part of its PR24 draft methodology in July 2022.
Stage 2 (2022-25) will include enhanced monitoring activities to develop wider measures (both leading and lagging) in collaboration with the sector to help gain further insight into sector operational resilience.
Stage 3 (2026-onwards) will see the implementation and integration of a monitoring framework to drive improvements in longer-term operational resilience.
As part of stages 2 and 3 Ofwat will then consider how data can be used to share the current picture of operational resilience with customers and stakeholders.
The paper states:
“The opportunity to harness data and information from new technological developments and artificial intelligence will be key in helping the sector to make data on their assets and asset performance open to improve transparency for wider stakeholders……
“Companies should foster transparency in this area and be open to publishing and sharing the data they provide as part of our proposal for an integrated monitoring framework.”
Deadline to submit comments on the discussion paper is 26 May 2022 – click here to download the paper.
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