Regulating Asset Management Through Serviceability and a Common Framework for Investment Planning

Abstract

Regulation by output (albeit with an associated investment level assumption related to a price-cap) rather than input is one of the ways in which the Water Services Regulation Authority (Ofwat), the economic regulator of the water industry in England and Wales, incentivises companies to deliver effective asset management. The paper discusses how such arms-length regulation operates, and sets down output indicators for such a regime. The paper draws on experience of some fifteen years of operation and annual monitoring of trends in serviceability indicators, which are the foundation upon which the regulator judges the appropriate financing for capital maintenance at periodic reviews. It describes the UK water industry’s risk based approach to the capital maintenance planning common framework (CMPCF) jointly developed by companies and regulators in 2002, and Ofwat’s approach to its assessment of company business plans submitted for periodic reviews of prices in 2004 (PR04) and 2009 (PR09). The paper highlights issues arising from PR04, development of its asset management assessment (AMA), and setting formal numeric serviceability outputs at PR09. Together, the reviews in PR04 and PR09 allowed overall increases in capital maintenance expenditure of nearly 50 %. Ofwat recognises the need for such expenditure increases to maintain the flow of services to customers and to consolidate the benefits from previous improvement programmes. However, it is questionable whether we are now approaching a sustainable level of capital maintenance for the future.