How long is long enough?

AMP5 is already making its presence felt but by the time it starts, 20 years will have passed since the industry in England and Wales was privatised. Major efficiency savings have been made since then but Paul Mullord says these could lessen.

AMP4 is barely a year old and not yet in full swing and already (but quite rightly) attention is being turned to AMP5 and the review process for PR09.

At the end of January, the Office of Water Service (Ofwat) issued a consultation paper: Setting and Sewerage Price Limits: Is 5 years right?. By the time the deadline for consultation (May 4, 2006) is reached, Ofwat will be no more and the results of the consultation will be reviewed by the Water Service Regulation Authority (WSRA) - this organisation replaces Ofwat in April.

One of the main differences between Ofwat and the new WSRA is that the present duties of the director general will become the responsibility of a committee rather than an individual.

Concern has been expressed by many in the industry over the impact this change may have on the decision-making process with fears that both consistency and the time taken to reach a decision may be adversely affected.

Many will be reassured however, by the recent announcement that Philip Fletcher, Ofwat's director general, will become WSRA chairman when the new authority is born and there is hope that not all the hard work to develop trust and respect during AMP3 will have been wasted.

Efficiency savings
By the time AMP5 starts, it will be more than 20 years since the industry in England and Wales was privatised. And although there have been some changes to the regulators (Environment Agency replacing NRA as environmental regulator and WSRA replacing Ofwat as the economic regulator) the process by which the industry is regulated has remained largely unchanged.

In that time, the industry has made considerable progress and has made substantial efficiency savings; however, logic would suggest that as efficiency improves, the scope for further gains in efficiency diminishes. That is not to say that further gains cannot be made, rather that the size of those gains will reduce going forward.

The RPIĀ±k model has been successful since privatisation in driving these improvements; but in doing so, the process has also been a driver for inefficiency, with the supply chain being subjected every five years to a disruptive and damaging downturn in workload.
In the two years leading up to the last Periodic Review of Prices, Ofwat commissioned Europe Economics, London Economics and Stone & Webster to evaluate the future potential for efficiency savings. Water UK commissioned NERA to do the same and water companies employed other consultants, including OXERA and Frontier Economics.

Opinions sought
At the same time the Energy Regulator, OFGEM commissioned Cambridge Economic Policy Associates (CEPA) to look at prospects for the energy sector and the water sector was looked at as part of that review.

No study has yet been undertaken to try and evaluate and quantify the negative effects of the review process but it may be that there is a point to be reached in the not too distant future, where the benefits delivered by the regulatory model become equal to or less than the cost of the disruption caused.

Without data, it is unlikely that we will know when that point is reached. The overall structure of the regulatory process may be a question for the future but within the system there are some well-established parameters that Ofwat's consultation aims to challenge.

The consultation document asks four specific questions, as well as asking for other ideas, opinions and observations. The four questions are:
l For how long do you consider the price limits should be set for the companies at PR09 and why?
l Do you favour establishing at PR09 mechanisms which will increase certainty beyond the end of AMP5? If so, how should these be achieved, for what period and why?
l Whether or not we change the period of price limits, can we do more to encourage companies to plan for the longer term? Can this be done without increasing risk for customers?
l How can we achieve an appropriate balance of risk between consumers and investors in the measures to deal with uncertainties arising between price reviews?
In addition, the document also asks whether it might be appropriate for different companies to be set different AMP periods - in effect staggering the review process so that not all reviews for all the companies coincide.

It also acknowledges the part played by an effective Early Start Programme (ESP) recognising that the ESP introduced for PR04 was less extensive and not as successful as anticipated, and expressing the wish for a better developed ESP for PR09.
The process for regulation is fundamental to the water industry in England and Wales having a profound effect on water company performance and the wellbeing of the supply chain and all that work in it. British Water recognises this and intends to respond fully to the consultation on behalf of its members.

In order to provide a detailed and fully informed response we are planning two workshops, to be run jointly with the Society of British Water & Wastewater Industries (SBWWI) for the members of both organisations.

These will be delivered in collaboration with British Water members EC Harris and Pinsent Masons and will be held on March 29 in Solihull, sponsored by EU Skills, and on April 3 in London, sponsored by Pinsent Masons.

For more information contact paul.mullord@britishwater.co.uk, call 01234 756014 or visit www.waterinnovate.co.uk
Paul Mullord is UK director at British Water.
T: 0207 957 4554.

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