Investors “should take heart in” the recent decision by the UK’s Competition and Markets Authority’s decision against imposing water regulator Ofwat’s price controls on four companies, Rachel Fletcher, chief executive of the regulator told the Infrastructure Investor Asia Summit last week.
The CMA provisionally backed appeals by Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water in September, which had argued against the 2.9 percent cost of capital for the 2020-25 price controls for UK water for being too low. A final decision is expected in February, although Fletcher was circumspect about what the decision means for the sector and Ofwat.
“To have the right of a full appeal is what makes the UK ‘gold standard’. That’s something people should take heart in, rather than as a suggestion things are failing,” Fletcher told the virtual conference. “The more important question is how do you assure yourself the settlement is an appropriate step towards the longer term future for an industry? That will sit at the heart of our next price review.”
Fletcher was joined on the panel by William Godfrey, economics director at communications regulator Ofcom, which is currently looking at returns around the broadband sector and said the regulator has taken a “relatively lighter approach on price regulation” in parts of the broadband sector.
“A lot of the returns in the broadband sector will be based on how the newer entrants can compete against the incumbent networks,” he added.
Both Fletcher and Godfrey said they were keen to introduce more private sector capital into their respective industries and Fletcher said Ofwat’s PR19 review will help enable newer entrants into the sector, perhaps with the use of the Regulated Asset Base model, as was used to procure the Thames Tideway.
“We are introducing competition in infrastructure build and taking the debate of allowed revenues out of the strict confines of a price control conversation,” she explained. “As part of PR19, we have agreed direct procurement of customer projects and will not be conducted by the licensed water company and it will go to market and find the best provider of that. Some of these big decisions are not strictly narrowly regulated decisions. They provide for investors another way of making a water sector investment, rather than a water company investment.”
In its national infrastructure strategy released last month, the UK government committed to delivering gigabit broadband to at least 85 percent of the country by 2025, a slightly watered-down version of a previous pledge of 100 percent, but Godfrey said this could create room for more private capital to enter the fray.
“We’ve seen a bit of phasing of government funding in the broadband space, that might create opportunities for private investment in some of the networks,” Godfrey argued. “One of the things that’s really difficult in our sector is to know where that boundary is between the competitive investments and where there really won’t be investment at all and where there’s a role for government. You don’t want to be too strong on those areas at risk of over-building or treading on the toes of commercial builders. In some respects, this potentially opens up an opportunity for private money to serve customers in perhaps these fringe areas.”