In our April 2010 publication "Changing Course" we made the case for a change in the regulatory framework. We argued that the current approach:
- Does not incentivise sustainable solutions, leading to a lack of innovation.
- Does not provide incentives for accurate business planning, leading to mistrust and accusations of companies gaming. This has led to increasingly detailed regulation in attempt to get the answer right.
In its Future price limits - a statement of principles, Ofwat said that it was seeking to develop clearer, simpler and more effective incentives that drive allocative, dynamic and productive efficiency. Ofwat invited us to contribute to the development of their thinking in this area.
We welcome the opportunity to help develop a more productive approach. The report we have developed looks at ways in which the regulatory framework could encourage companies to adopt the best solutions for their customers:
- How to avoid any bias to capital solutions without encouraging companies to focus on short -term savings.
- How incentives can be shaped
The report concludes that:
- An approach to incentives which includes both rewards and penalties can help to ensure that companies deliver the outcomes that customers and other stakeholders want.
- A present value neutral approach to total expenditure (totex) avoids distortions between types of expenditure that skew company decision making