Utility Week

4. WHAT: PRINCIPLES-BASED REGULATION What's the deal: Both Ofgem and Ofwat have embraced the concept of principles- based regula on, but the transi on is by no means complete, and recently has met with significant hurdles due to the rise of public and poli cal concerns around the trustworthiness of u lity organisa ons and the effec veness of market mechanisms for protec ng customers. 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. Both Ofgem and Ofwat claim to stand by their principles-based, hands- off approach to regulatory evolu on. But their ability to maintain this line against a poli cal storm that demands heavy- handed interven on may become increasingly difficult to reconcile, 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. 5. WHAT: DIRECT PROCUREMENT What's the deal: Direct Procurement for Customers (DPC) is a new set of arrangements Ofwat is introducing for PR19. It will enable third par es to design, build, operate, and finance large projects of more than £100 million that would otherwise have been delivered by water companies. This model is already being used in the £4.2 billion Thames Tideway Tunnel. Why it ma ers: In our survey, new commercial models were rated 6.7 out of a possible 10 for their poten al to be disrup ve. This was a figure matched only by regulatory change and uncertainty. 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, some have reserva ons about using DPC because the costs a ached to the tendering process are high compared with more tradi onal procurement methods, and because there is uncertainty around risk alloca on. Roddy Adams, managing director of Atkins Acuity, says DPC could clear a path to new entrants or outside investors exploi ng the deregula on of the sludge market or abstrac on market. "There are early signs of significant change ahead and market par cipants need to be planning for these changes now. As Ofwat stated, delivering this vision relies on everyone in the sector working together." A complete transition to principles-based regulation would be a radical shift KEY FINDINGS All respondents agreed business models will change increasingly over the next 15 years as a result of disrup on. In the main, the market agrees that technology and regula on are the most disrup ve factors (both were rated 6.75 out of 10). It is thought regulatory disrup on will affect energy genera on and energy retail the most (just ahead of energy networks). Confidence in the various regulatory approaches is not high – 4.8 out of 10 on average. There is (marginally) more confidence in the RIIO regime (5.2 out of 10) to accommodate the scale of change facing networks in the next five to ten years, than there is in the PR19 framework (4.8 out of 10) to accommodate the scale of change facing water companies in the me period to 2025. Government and local authority ac ons are believed to be crea ng both posi ve and nega ve disrup on – some respondents said there was a lack of focus due to Brexit, but others said the government would provide both the nudge factor and regulatory push to alter consumer behaviour and the usage and storage of electricity/launch of new business models. I N A S S O C I A T I O N W I T H UTILITY WEEK | 6TH - 12TH APRIL 2018 | 9 I N A S S O C I A T I O N W I T H

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