The paper follows on from the publication of the Future Price Limits consultation by Ofwat, providing support for the proposed regulatory changes and consolidating a number of policies put forward earlier.
KPMG welcomes the publication of the WWP and the overall objective to articulate the long-term policy and vision for the sector, particularly in the areas of environmental sustainability and improved water resources management.
The proposals rule out a radical overhaul of the industry, such as mandatory vertical separation of the value chain. However, they outline potentially significant evolutionary changes over coming decades.
The government stated that it aims to maintain investor confidence necessary to privately finance large capital investments in the industry in the future, but this will require the future returns to reflect new risks and a more complex industry structure.
The proposals also aim at encouraging innovation and efficiency and at providing choice to customers by facilitating more competition across the value chain allowing more business customers in England to choose their water and sewerage supplier. However, they rule out competition at the household level for the foreseeable future.
The paper proposes to reform the charges paid by new entrants for using an existing undertaker’s network by replacing the so called ‘costs principle’ with a new access regime. This should increase attractiveness of entry by new services providers, but also requires further careful specification of the access prices.
The proposed measures would simplify the rules and regulations to implement a single common retail market across Great Britain and to make it easier for multi-site customers to deal with a single water supplier nationally. However, consequences of the proposals need to be carefully thought through ahead of practical implementation. For example, when competition is extended to the 5ML threshold for business users, a large multi-site retailer might still not be able to consolidate its water spend if it has sites above and below the threshold.
The WWP's proposals to change the special merger regime are welcomed. DEFRA has signalled that the turnover threshold for the merger regime could be raised to £70 million per annum, making mergers involving all but the few largest water-only companies simpler by reducing the likelihood of a referral to the Competition Commission. This could enable important further rationalisation in the sector.
A significant overhaul of the abstraction regime has also been promised, but the suggested implementation timetable is long, with consultation on the measures not expected until 2013 and legislation to be brought in the next parliament with a view to implementation by the mid to late 2020s.
The paper leaves out a significant amount of detail, some of which will need to be addressed before the proposed Draft Bill in 2012 and specified in regulation. It will be important for companies and investors alike to engage and understand the financial, regulatory and operational implications of these proposals. This is particularly significant in the context of the corresponding changes to the regulatory framework proposed by Ofwat.
KPMG is looking forward to working with all industry stakeholders in further developing and implementing these proposals to achieve real and tangible benefits to all water services consumers while ensuring appropriate risk-reflective returns to the capital committed to the industry.