Regulation of the water and sewerage sectors continues to be a pertinent issue with new challenges facing the industry such as climate change, population growth and potential market reform.
Economic analysis is a key component of the regulation of the water and sewerage sectors. Economic principles are crucial to the design of regulatory mechanisms to ensure that the right incentives are provided to the regulated companies and to ensure that customers and the businesses themselves are not exposed to excessive risk. Potential market reform in the water and sewerage sectors may change the structure of the industry and the degree of competition at different stages of the supply chain. Economic analysis provides key insights into the way in which the regulatory framework needs to change to reflect the possible transition in the water and sewerage sectors.
We are experienced advisors to Ofwat, the regulator for the water and sewerage sectors in England and Wales, having carried out a significant number of projects related to many different aspects of the regulatory framework.
We advised Ofwat on cost of capital and financeability issues for the last water price review (PR09). We also carried out a project which reviewed the adjustments applied to CAPEX proposals in company business plans in order to establish the appropriate ratio for the capital expenditure incentive scheme (CIS) implemented for the first time at PR09.
We have advised Ofwat on alternative approaches to regulation that could be employed in the future, taking into consideration potential market reform in the sector. We recently carried out a project looking at risks and incentives in the context of Ofwat’s Future Price Limits project. Our report reviewed principles and practice in the use of regulatory tools to provide appropriate incentives and manage risk. We have also carried out a study into possible reforms to access pricing and eligibility to promote competition in the water and sewerage sectors.
Comparative efficiency analysis is a key aspect of the current regulatory framework in the water and sewerage sectors. We recently advised Ofwat on the use of comparators in the regulatory framework and different approaches that could be adopted in the future under different scenarios. In a previous project, we reviewed the econometric models that Ofwat uses to benchmark water and sewerage companies’ capital maintenance expenditure.
We have also provided advice to water and sewerage companies on a range of regulatory topics. This includes recent work for Thames Water on the cost of capital and on risk-sharing mechanisms.
Our in-house team in this field includes: Stephen Topping, Jonathan Green and Maurizio Conti.
Primary contact: Stephen Topping.