Ofwat chief executive Regina Finn has said the way the water industry is regulated may incentivise capital expenditure in circumstances where operational expenditure is more appropriate.
“We now question whether just incentivising capex for capex’s sake is the right thing to do,” she said. “Whether or not it exists, there is a perceived bias.”
She cited examples such as spending more on catchment management rather than treatment works downstream, or building interconnectors to move water between regions rather than building a desalination plant.
“Sometimes, building the treatment plant is not the right answer,” she said.
One solution could involve the regulator treating capex and opex together as “totex”, putting more of a focus on outcomes rather than levels of capital spending.
South West Water chief executive Chris Loughlin agreed that the regulatory system often fails to incentivise the best spending decisions.
He gave the example of an agricultural area, where a treatment works might be built downstream to treat water polluted by fertiliser from farm land runoff.
It may be better to spend money on measures upstream to prevent that pollution happening in the first place, he said.
“If we are only interested in shareholder return we should build a concrete box with chemicals in it,” he said. “But that is not the right way.”
Finn admitted that the regulatory system set up at the time of privatisation in 1989 may no longer be optimal. “In some ways regulation is starting to become part of the problem rather than a solution,” she said. “It is quite rigid.”
Water companies are too focused on what the regulator wants them to do, which is stymieing innovation, she said.
She identified the June return – an annual data return to Ofwat covering activities in the previous financial year – as a particularly overwrought process that should be reformed.
“It’s time for Ofwat to step back from this kind of micro-management of data,” she said. “It could go as far as [having] no data collected [and] saying companies are responsible for monitoring their own performance.”
Another option would be a risk-based system where data is only collected when Ofwat wants to look into a problem, she said.