Regulatory price review framework comes under research scrutiny

A research project to help water companies provide the evidence base that influences the next regulatory price review process has got underway.

UKWIR commissioned Frontier Economics to start exploring its ‘big question’: How do we ensure that the regulatory framework incentivises efficient delivery of the right outcomes for customers and the environment? to determine the industry’s priorities and, based on these, define future areas of research.

Frontier Economics carried out wide-ranging interviews with regulatory specialists that identified six priority topics, which were then explored in more detail in a series of virtual workshops. The six priority topics and key findings were:

• The role of the customer

Customers should be engaged where meaningful research and insights can genuinely inform regulatory decisions and business plans with a desire to see engagement evolution not revolution – for example by incorporating national research findings with company-led insights.

• Balancing risk and reward

Measures that balance risk and reward remain valuable but future work should improve how those risks are articulated to guide water companies and regulators in carrying out any risk calculations more consistently.

• Optimal environmental investments

There are potential barriers to investing in nature-based solutions and so alternative options need to be explored – for example developing more explicit measures of `natural capital’ and amending guidance to better capture the environmental benefits of investment.

• Integration of cost assessment and service quality

One potential option to improve this area of the regulatory framework is a more pragmatic sequencing of price-setting decisions that increases the focus on key areas of cost and service – while recognising that any early decisions may need to change as more information comes to light.

• Long term issues

Long-term incentives are important but can become compromised by short-term pressures, which then has the potential to affect performance levels for future generations and some environmental outcomes. Future price review processes should consider setting service quality targets over a longer time period and applying high-level outcomes rather than output-focussed measures.

• Government role and light-touch regulation

The status quo should be maintained where the Government sets national strategy and policy and regulators determine the regulatory approaches and methodologies to achieve those – but recognising the merits of returning to more light-touch, simplified regulation could lead to more unfair outcomes for companies or customers.  

Oluseyi Onifade, UKWIR strategic programme manager, said: “Our big question is about making sure the outcomes being delivered for customers and the environment are accurately measured and valued, delivered efficiently and balance short and long-term needs.

“This is critical to developing a new king of social contract between water companies and customers that goes beyond the water bill and is vital to maintaining trust and confidence in the water industry more widely.  The first stage of this project provides an all-important stock take of the regulatory framework used to set prices, and how that could be improved, and so it’s given us a clear direction of travel in terms of our next steps.”

UKWIR will now commission future work on three key areas – models for customer engagement, regulatory risk and reward measures, and long-term incentives and investments – to help inform future processes.