Utility Week

18 | DECEMBER 2022 | UTILITY WEEK Water Analysis Environmental regulation should focus on outcomes Wessex Water is leading calls for a fundamental change to the way environmental regulations are framed. We talked to two senior directors at the company to explain why. W essex Water has proposed a step change in environmental regula- tion away from prescriptive catch- all rules. The company is pushing a new approach, using novel regulatory tools and incentives to work with farmers and market mechanisms. With Ofwat due to publish its final meth- odology on PR24 in January, the debate over how regulation evolves to meet the fresh challenges facing the water sector is intensifying. Wessex Water is one of the companies which raised its head above the parapet to suggest the current approach to price con- trols is long overdue for reform. Utility Week spoke to Guy Thompson, director of environmental futures, and Matt Greenfield, director of regulation, about what the company believes would deliver better results for customers, communities and the environment when business as usual will no longer guarantee the right type of much-needed long-term investment. "This is not about deregulation, it's about better regulation," Greenfield explains, acknowledging that as large monopolies with the potential to have a huge environmental impact – positive and negative – water com- panies need to be heavily regulated. "The politics of the issues around envi- ronmental performance get conflated with what we're trying to promote," Thompson says. "Which effectively is a recipe for rais- ing environmental performance and raising the level of environmental leadership by the sector. But it's also perceived to be a loosen- ing of regulation and therefore, a step away from the traditional regime the Environment Agency [EA] thinks it needs to have in place." The EA's chief executive, James Bevan, has said the UK could take advantage of the opportunity afforded by leaving the EU to update its environmental rules to be more relevant to conditions and specific chal- lenges in the UK (see p25). Re-thinking WINEP So what is Wessex proposing? Essentially a re-examination of the Water Industry National Environment Plan (WINEP) to focus on the outcomes that really matter to cus- tomers without being prescriptive as to how companies achieve them, and for Ofwat to "level the playing field" for how funding is allocated in business plans. All water companies are being invited by the EA to submit proposals by the end of this month to the WINEP. These are required in two formats: a traditional approach based on inputs and outputs; and an option for Advanced WINEP with outcomes that are predefined by the EA. The WINEP methodology sets out that it is based on a comprehensive set of driv- ers and obligations, stipulating that water companies should plan their interventions with a mind to how they will contribute to the goals in the 25-year Environment Plan. These are environmental, net zero, catch- ment resilience to flooding or drought, and how it could contribute to people engaging with and enjoying the natural environment. Greenfield explains that the reality of the WINEP is countless inputs and outputs spec- ifying what to do, which might not actually translate to better water quality in rivers. "We have some issues with the Advanced WINEP mechanism," Thompson says. "The design the EA put in place essentially takes you back to inputs and outputs and cost- benefits assessment for individual assets. The EA will need to work with companies who want to use Advanced WINEP as a mechanism to deliver better outcomes if we're going to get value from using that mechanism for customers and investors." For instance, sector-wide targets to reduce nutrients at treatment works may not be the Guy Thompson, director of environmental futures, Wessex Water

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