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Regulation and innovation: an unlikely couple?

This weeks guest blog has been written by Helen Smith, Tideway Regulation Manager.

You might be wondering what regulation and innovation could possibly have in common. For most people, regulation brings to mind rules, requirements, controls, procedures and red tape. Innovation is more likely to make us think of change, transformation, and new ways of doing things. So at first glance, regulation and innovation seem to have little in common. Sitting down to write this blog, I did wonder whether writing an entertaining and informative blog about the two concepts might be beyond the realms of possibility, but giving it some thought, the concepts have more in common than you might think – read on!

First of all, let’s get straight what we mean by regulation. There are many forms of regulation out there that affect Tideway, including environmental, safety and employment regulations, to name a few, all of which are really important. But what concerns us here in the Regulation team is economic regulation. Economic regulation exists to protect consumers in industries where there is little or no competition, and companies may have a dominant position (and let’s face it, competition for super sewers under London is likely to be pretty limited!)  Tideway’s regulatory framework is set out by Ofwat (the economic regulator of the UK water sector) in the form of a licence, and other guidance documents. It covers our main duties, our financial structure, how our costs are treated and how we earn our revenue. And believe it or not, we’re already in pretty innovative territory here. Tideway is the first ever company to be licensed as an “infrastructure provider”  to carry out a large or complex water or wastewater infrastructure project. You may be aware of some of the innovative features of this framework already, for example the fact that our investors won a competition to deliver the project by bidding a fixed cost of capital (the financial return for investors) to 2030 (three times longer than other companies in the industry!) This is usually determined by the regulator on a five-yearly basis.

Innovation in construction and operations is also becoming a hot topic in the water sector at the moment. Ofwat is currently preparing to carry out a price review (PR19) which will set price controls (the revenue a company can secure from its customers) for other water and sewerage companies from 2020 to 2025. Innovation is one of its four themes for the review, which means Ofwat will be looking at companies’ capacity and readiness to innovate across all elements of the business plans they put forward. Ofwat expects to see innovation in culture, processes and people as well as in the use of new technology.  And why does Ofwat care about innovation? It sees innovation as generating benefits for companies (through lower costs), customers (through lower bills) and the environment. Innovation goes hand in hand with another characteristic Ofwat is looking for companies to demonstrate – ambition – as it can be a way of achieving more for customers for lower cost.

Tideway isn’t subject to the current price review (PR19), as our arrangements are set out until 2030 in line with our fixed cost of capital. This means that Ofwat won’t be assessing how we innovate at this stage. But there’s no reason why we can’t look to get inspiration from Ofwat’s thoughts on what an innovation programme looks like at a top regulated company.  And we have an opportunity to show how our work aligns with Ofwat’s vision for the industry and to share the lessons from our innovation programme with the sector for the benefit of customers. We are in the unique position of being both a large infrastructure project and a regulated wastewater utility, which gives us a great opportunity to promote sharing and cross-pollination of ideas.

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