Cunliffe Review

Cunliffe review: shaping the way forward

The Cunliffe review was published earlier this summer and included 88 recommendations on how to “reset the water sector and restore the trust that has been lost”.

In the review, Sir Jon Cunliffe covers proposed changes to: planning systems; legislation; and regulation. This represents an exciting time for the water industry, and a real opportunity for the UK water sector to change the way that it is perceived.

The challenge however will be with how a lot of these recommendations are implemented.

In this new series of papers, we dive in to the economics behind the review and share our initial thoughts on how we think the future economic regulation can evolve, and how changes could be implemented. We pose questions for the industry to debate and identify next steps for implementing changes.

If you would like to have a chat, please do reach out to us at hello@frontier-economics.com

 

Our Cunliffe paper collection

How could a supervisory approach to regulation work in practice?

One of the most fundamental shifts in the proposed way forward is the recommendation to introduce a supervisory approach to regulation. We ask what the benefits and risks are of this change, and share our initial thoughts on the design choices that need to be made.

Authors: Annabelle Ong and Ecem Can

Read the full paper here.

How do we set costs and outcomes with a supervisory approach?

The recommendation to combine a supervisory approach with traditional benchmarking to set cost allowances and performance targets presents an exciting opportunity to shape the future regulatory framework. However, there are many questions about how this would work in practice.

We look at the possible ways of doing this, share our initial thoughts on implementation challenges, and identify next steps for the industry to take.

Authors: Anna Northall and Aurora Phillips

Read the full paper here.

Making investment more accountable and increasing flexibility

The Review calls for stronger assurance that water companies deliver. But more controls risk complexity and lost innovation. We suggest a refreshed PCD framework that balances accountability with space for cost-effective, flexible solutions.

Author: Phil Wickens

Read the full paper here

Rethinking business plan incentives after Ofwat's Quality and Ambition Assessment

We ask whether the QAA was really the problem, and what risks we face if it is simply removed. We argue for a recalibrated incentive regime within the supervisory model that encourages companies to bring forward credible plans and equips the regulator to judge plans effectively.

Author: Phil Wickens

Read the full paper here

Cost modelling under the supervisory approach to regulation: the end of totex?

The Review questions whether Ofwat’s totex models still work for the UK water sector. We explore how cost benchmarking should evolve under a supervisory model to regulation, to aid in water infrastructure investment planning - with separate opex and capex allowances, more granular insights, and better data to balance efficiency, flexibility and realism in future price reviews.

Authors: Annabelle Ong & Aurora Phillips

Read the full paper here

Setting a minimum capital requirement for the water sector

The ability to set minimum capital requirements would be a new financial resilience tool for the regulator and the UK water sector.

We look at how the requirement could be expressed, what research could inform the minimum level, and how this recommendation overlaps with the wider supervisory approach.

Authors: Rob Francis & Thomas Fisher

Read the full paper here

Developing an outcomes framework for the future

The Review recommends the current outcomes framework is kept, with a rationalised set of performance commitments and reduced financial incentives. We explore how this can be implemented in a way which is consistent with the other recommendations in the Cunliffe review.

Authors: Annabelle Ong & Anna Northall

Read the full paper here

Setting returns on regulated infrastructure: the case for centralisation

The review proposes that the CMA should play a major role in setting allowed returns for regulated infrastructure.  We review the case for centralising WACC estimation, exploring the motivation for the recommendation as well as the opportunities and risks.

Authors: Michael Yang & Tom Fisher

Read the full paper here

RCV run-off and the “pay as you go” ratio: who needs asset lives?

The review encourages the regulator to review the approach to RCV run-off.  We explore how approaches in the sector have evolved over time and how the regulator could do things differently in future.

Authors: Dan Elliott & Tom Fisher

Read the full paper here

1017 Frontier Economics30771
The supervisory approach presents an exciting opportunity to improve regulation of the sector to the benefit of all stakeholders.
Annabelle Ong
Director
0426 Frontier Economics 313119.png
There is an opportunity now to create a new, more coherent framework that remembers the lessons of the past, rather than repeat its mistakes
Phil Wickens
Associate Director
Anna Berry 2019 Background Cutout
The introduction of the supervisory approach presents an opportunity for us to set cost allowances and performance targets in a more consistent way.
Anna Northall
Manager

36

years since privatisation

88

recommendations

£104bn

investment in the water sector over the next 5 years

Team Thoughts

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