Utility Week

18 | SEPTEMBER 2021 | UTILITY WEEK Policy & Regulation Analysis SPS for Ofwat disappoints The first draft of Defra's latest Strategic Policy Statement (SPS) was released last month – and the early responses are glum, with critics citing a lack of detail about ambitions and time scales T he Strategic Policy Statement (SPS) served to Ofwat ahead of PR24 is intended to lay out the government's expectations and priorities for the regulator in the price review. However, industry com- mentators tell Utility Week that as it stands, the dra• SPS fails to do so. While some parts are widely welcomed, such as the focus on resilience and environ- mental protection, there is no precise plan or schedule for realising these aims, and crucially, no clarity on what the government expects to happen. Another omission is any mechanism to hold Ofwat to account for delivering the SPS. One sector commentator notes that Ofwat's accountability "tends to be a little ambiguous", with something of a "demo- cratic gap" that needs to be addressed. The statement requires Ofwat to report progress annually and to its board. The source tells Utility Week this is insufficient to ensure the regulator follows through. In the run-up to the publication of the SPS, there were encouraging noises from government in support of investment in cleaner rivers. This included Philip Dunne's private members' bill on pollution, which was incorporated into the workings of the upcoming Environment Bill. There was also a series of Environmental Audit Committee sessions that heard expert witnesses and stakeholders, as well as the representatives from the regulatory bodies. These sessions heard that the monitoring of water pollutants was not fit for purpose. The sector was heartened by this focus, hoping precise goals in the SPS would trigger the necessary investment. However, the con- cern now is that a lack of precision and pri- oritisation in the SPS will mean it does not translate into action. Investment will be essential to deal with combined sewer overflows, for instance, which Water UK estimates will cost £100 bil- lion to separate into sewage-only networks. Richard Emmott, director of corporate affairs at Yorkshire Water, says: "We'd like to see government be more precise in terms of what it wants, then Ofwat to be more precise about how it's going to work with the sector to deliver that." He adds that while there is "some excel- lent content" in SPS, the company would like to see more. "There is clearly a public demand for cleaner rivers, and we would like more emphasis on what the secretary of state expects water companies to invest in order to achieve this," he says. "We would also like to see a clearer sense of the order of the government's priorities. That would give Ofwat a much better frame- work in which to conduct the next price review. We'd also like to see more mecha- nisms for Ofwat to be accountable for how it delivers on the SPS." Emmott suggests this could be an annual letter on how it's delivering on objectives or, ideally, through an annual hearing at the Department for Environment, Food and Rural Affairs select committee to scrutinise work plans and how objectives are delivered. The need for accountability and clarity is also picked up by other commentators. Darren Rice, Anglian's head of policy and regulatory strategy, describes the SPS, in its current dra•, as a missed opportunity to pro- mote investment in the environment and car- bon reduction in the current decade. He says the dra• needs significant improvement. "Positively, the SPS recognises the need for future investment to deliver long-term environmental and social value. This needs to be facilitated by a stable, predictable regu- latory regime which incentivises investment at the scale required to address the future challenges facing society and the environ- ment," says Rice. "However, the dra• presents a long list of issues which, effectively, are le• to Ofwat to balance off alongside its statutory duties. This does not seem helpful to the achieve- ment of government's policy priorities, nor particularly useful as guidance for Ofwat." He suggests an "unequivocal steer on the importance of delivering a small number of key priorities for PR24" as a preferable approach. Those should focus on enabling the sector to deliver the additional invest- ment needed to meet its 2030 carbon target. Second, water companies should play their part in a collective effort to safeguard chalk streams and reduce pollution – adopt- ing nature-based solutions where possible. Third, they should bring forward a blend of water demand management initiatives and investments in supply-side enhancements so that all regions are resilient to a one-in 500- year drought event well before 2040 – which is the date proposed in the current dra•. "The kind of changes needed to the regulatory system to unlock the scale of investment necessary have not yet been proposed by Ofwat, although we hope that this may emerge as Ofwat develops its PR24 approach," Rice adds. Water-only company concerns Speaking from a water-only perspective, Portsmouth's CEO Bob Taylor says he was expecting to see more from both the SPS and Ofwat's initial discussion paper on PR24. While river health is essential to the whole sector, the recent emphasis on pol- lution, Taylor points out, relates more to companies treating wastewater than the water-only companies. "We hope we won't see this price review overshadowed by drainage and river water quality arguments, because in that one topic there are very large investment needs that don't particularly affect us. We don't want the whole process focused on that area." One concern Portsmouth has is its need to invest in the infrastructure and water resources required to enhance resilience and deal with the impacts of climate change. "Already we are feeling a lot of pres- sures for investment further down the track at PR24 and beyond," Taylor said. "The SPS is not particularly clear on investment. It sets out ambition on the environment with- out being clear on the direction of travel for bills and what the bottom-line result is of the need to do more in certain areas – particu- larly the environment." Ruth Williams, water correspondent To read this analysis in full: utilityweek.co.uk

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