Capex bias in the water and sewage sector

Ofwat’s report on Capex bias is an important contribution to the debate. This is a vital issue for three main reasons.

•  The water industry will continue to need massive investment £22bn over AMP5; the financial structure must ensure that this investment can be funded.
•  Water bills are continuing to rise and with the squeeze on household incomes it is even more important that everything is done to minimise costs.
•  Everyone agrees the water sector needs a lot more innovation. It faces some huge challenges from climate change and rising population and if these are to be solved at a cost customers can afford then new innovative solutions will be needed.  Capex bias limits the options open and is a major constraint on innovation.

Ofwat’s paper makes clear there is a capex bias as this quote illustrates: “When we consulted on SuDS, a number of (water) companies considered that the existing regulatory framework incentivises capex rather than opex solutions. So, they thought that they have incentives to build sewers, rather than investigate alternative approaches”.

The bias is even more starkly illustrated by the Abington reservoir inquiry. The Inspector concluded that Thames Water had not adequately investigated the alternative solutions such as demand management. Instead it had favored the highest capital cost solution. The current debate over the Thames Tideway Tunnel is raising this issue up the political agenda.

The water companies can not be criticized for working to ensure the best return for their shareholders. It is the regulatory framework that must change. This is an issue that has been around since privatization 25 years ago. It is time to stop talking and take action. The responsibility clearly lies with the Government and Ofwat. Decisive action is needed from the Ofwat “future price limits project” supported by the water white paper when it is published at the end of this year.