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UTILITY WEEK | 7TH - 13TH AUGUST 2015 | 23 Customers Analysis T he discussion papers published by Ofwat last week have given the indus- try a glimpse into what could be a sig- nificantly different sector in the next decade, as well as inviting them to help shape it. With topics from customer engagement through to the length of the price control period laid on the table, the regulator has opened the door to an overhaul of the sector. Ofwat hopes that igniting the debate around how the sector runs and is regulated will address the pressing issues of water scarcity and environmental quality – things exacerbated by population growth and cli- mate change. Finding solutions that are affordable to companies and their customers is the ultimate aim. Encouraging a longer term approach Climate change and population growth are long-term issues that require long-term planning. So Ofwat is asking whether there should be long-term incentives to encourage water companies to plan and act to deal with the challenge. The regulator highlights that extending the price control period – as has happened in the energy distribution sector – is an option, as is creating longer-term outcome delivery incentives. Another solution to prevent short- termism and the boom-and-bust nature of the five- year investment cycle could be a staggered approach to price controls for different ele- ments of the water sector, such as water and wastewater areas. Separating price controls further PR14 saw Ofwat set separate binding controls for wholesale activities and retail activities for the first time. Now the regulator is consid- ering going further. In the paper, Ofwat says a greater degree of price control separation in wholesale activities could reveal the rela- tive efficiency of firms in different areas, and therefore where further efficiency savings could be made. These separate price controls could range from fully binding, separate controls through to non-binding or indicative separation. With this greater clarity, Ofwat suggests it could enable better price signals and potentially support new entry in various new markets. Making more use of markets A market-based approach to upstream services could encourage innovation and improve allocative efficiency by revealing important information on the cost of provid- ing services and the value that consumers place upon them. The two key areas highlighted as being ripe for competition are water resource and sludge treatment and disposal. Water trading and allowing new entrants to offer sludge services to incumbents could "drive innovations and deliver savings", according to Ofwat chief executive Cathryn Ross. This could also see inroads being made into the vertical integration of the market as new entrants take on roles traditionally car- ried out by the incumbents. Competitive tendering – similar to the regime used by Ofgem in offshore transmis- sion – is another avenue Ofwat is keen to explore. Not only could this produce a new way of delivering much-needed assets, but it would also test the market to ensure they were being delivered as cost effectively as possible. Customer engagement This was "at the heart" of the PR14 process, but the regulator wants to build on this suc- cess for PR19. Developing a longer-term approach is something Ofwat wants. Again, should out- comes longer than the five-year AMP cycle be considered? The regulator also questions whether it is appropriate to allocate five-year rewards for projects that last decades. The role of customer challenge groups (CCG) is another area up for debate. Should they continue to lead customer engagement, or should they take a step back and function in an assurance role, monitoring the pro- gress made on the PR14 promises? Ofwat looks keen to push for cross-CCG collaboration to ensure companies are held to account fairly, with their performance promises held up against others in the sector. Risk and rewards This is central to Ofwat's aim of aligning the interests of customers, investors and com- pany management. One suggestion is that the reward for out- performance is increased, while the baseline return is scaled back – adding to the incen- tive for companies to deliver as promised. Another is changing the indexation link for RCV away from RPI to CPI. The deadline for responding to the dis- cussion points is 10 September 2015. They will help shape the initial proposals for PR19, due at the end of this year. Cathryn Ross sets out Ofwat's plan in the Chief Executive's view, p6 Towards Water 2020 Ofwat has published a series of discussion documents setting out its ideas for the priorities and processes of the next price review, PR19. Mathew Beech looks at what they say. Provisional high-level programme plan for Water 2020 2015 18 months Retail non-household reivew Licence mod engagement 1. Lessons learnt 2. Towards 2020 discussion paper Initial proposals Methodology con doc Methodology PR19 BP submission RBR submission Draft determinations Final determinations July Dec Jul/Aug Dec Jun Dec Apr Retail go live May/Jun Dec 2016 2017 2018 2019