Water & Wastewater Treatment Magazine
Issue link: https://fhpublishing.uberflip.com/i/957171
THE DISRUPTION: DIRECT PROCUREMENT What's the deal: Direct Procurement for Customers (DPC) is a new set of arrangements that Ofwat is introducing to the water sector as part of its next price review, PR19. The new approach will enable third par es to design, build, operate, and finance new large-scale projects that would otherwise have been delivered by the incumbent water company. (Ofwat defines a large-scale project as one with a totex value of more than £100 million.) This model is already being used in the £4.2 billion Thames Tideway Tunnel, or "super-sewer" – London's second biggest infrastructure project a er Crossrail. Why it ma ers: DPC is an exci ng prospect for companies, as it creates the opportunity for new partnerships to deliver some of the country's largest projects. However, there are those in the sector who have reserva ons about using DPC because the upfront costs a ached to the tendering process are high, compared with more tradi onal procurement methods, and because there is uncertainty around how risk alloca on will work in prac ce. THE DISRUPTION: PRINCIPLES- BASED REGULATION What's the deal: In 2014 at U lity Week's Congress event in Birmingham, Ofgem chief execu ve Dermot Nolan announced that the regulator was embarking on a change process in its approach to regula on which would see prescrip ve rules binned in favour of "principles-based" frameworks. Se ng out his stall, Nolan envisaged a smaller licence for energy suppliers, gravita ng around the idea of "trea ng customers fairly" rather than compliance with specific processes or requirements. He said, in the new world of principles-based regula on, the onus would be on companies to interpret whether their products, pricing and customer service arrangements lived up to the ideal of fair treatment. Why it ma ers: A complete transi on to principles-based regula on would be a radical shi , with big implica ons for the risk exposure of u li es, enforcement measures and service diversifica on. While most u li es are in favour of a move away from prescrip ve rules and market interven ons that can have unintended consequences, leaving good prac ce open to interpreta on poten ally also increases the scope for disagreements between companies and regulators. In the water sector, recent sugges ons that Ofwat should be given enhanced powers to control water company financial arrangements undermine the idea that a core principle of transparency can be effec vely regulated without a prescrip ve rulebook. Both Ofgem and Ofwat claim to stand by their principles-based, hands-off approach. But their ability to maintain this line against a poli cal storm that demands heavy-handed interven on may become increasingly difficult to reconcile with this goal, once again cas ng a shadow of uncertainty over the direc on of travel for u li es regula on and impac ng the ability of companies to innovate and differen ate their offerings. NATIONALISATION AND ALTERNATIVE MODELS While many significant regulatory disrup ons are today emana ng from exis ng regulatory bodies and their evolving frameworks, it must be acknowledged that there is also increasing scope for these ins tu ons themselves to be irrevocably disrupted in the near to mid-term future. Labour's pledge to rena onalise u li es – including energy supply, energy networks and water networks – has created scope for a radically different future that would unwind almost 30 years of work to make private ownership and compe ve markets deliver. Details are scant on how Labour's rena onalisa on plans would work in prac ce, but a January report on alterna ve models of ownership suggested a blend of state, local and community ownership for Na onal Grid and other electricity and gas sector infrastructure. The boards running the companies would be split between state appointees, local and devolved administra on government nominees, consumer, and employee representa ves. Despite the protesta ons of shadow chancellor John McDonnell, it's likely rena onalisa on would be a costly business and, as Sco Corfe, chief economist at the Social Market Founda on (SMF), says it is "pre y unclear" how exis ng owners would be compensated. The SMF published a report in February quan fying how much Labour's plans to take back control of water companies would cost and put the rena onalising of water alone at £90 billion. On top of that, the SMF es mates the government would also have to pay out £100 billion in order to meet the industry's investment needs over the next 25 years. Much to the chagrin of u li es leaders, however, surveys show strong public support for rena onalisa on. With the popularity of the current government eroding, the likelihood that Labour will get a chance to make good on its promises is increasing – and credit ra ngs agencies such as Moody's and S&P Global have issued warnings accordingly. 32 | APRIL 2018 | WWT | www.wwtonline.co.uk P R E S E N T S I N A S S O C I A T I O N W I T H