The economics of long‑term asset health: How regulators can incentivise maintenance

In summary

• Price controls that prioritise short-term efficiency and cost-cutting don’t incentivise effective asset maintenance  
• This fails to address the potentially catastrophic risks and costs of asset failure, leading to higher long-term costs, reduced resilience and generational unfairness 
• Regulators’ approaches vary, but the best integrate engineering evidence, incentivise long-term asset stewardship and use risk allocation mechanisms 
• How well regulators adopt such best practices will play a major role in determining the future of the UK’s infrastructure 

Long‑lived infrastructure is the foundation of every regulated utility. Water networks rely on pipes laid before the First World War; electricity networks depend on transformers and cables with 40-year to 60‑year lives; telecoms networks mix legacy copper with new fibre; rail and aviation infrastructure require continuous renewal.  

These assets deteriorate slowly but then fail suddenly. When they do, the economic, environmental and political consequences can be severe. 

For two decades, UK price controls have emphasised short‑run efficiency, bill stability and cost‑cutting. The unintended consequence has been a steady erosion of asset condition. Economically, this is predictable: Regulators have not consistently rewarded long‑term maintenance, and companies have not always responded rationally to the incentives they were given. 

A new regulatory paradigm is needed, one that treats asset health not as a cost to be minimised, but as a source of long‑term value. 

The standard UK regulatory toolkit includes benchmarking, efficiency targets, total expenditure (totex) incentives and periodic resets. These create several distortions that push companies toward deferral. 

• Short price control cycles encourage postponement: When companies know that any efficiency gains will be clawed back at the next review, they have strong incentives to defer maintenance to keep current-period costs low 
• Benchmarking penalises companies with older or more complex assets: Econometric models often treat asset condition as noise rather than a structural driver of costs. Firms with deteriorating assets appear inefficient, even when they face higher unavoidable maintenance needs 
• Capex is rewarded; opex is squeezed: Many regulators treat capital expenditure more favourably than operating expenditure. Maintenance is often classified as opex, creating a bias toward replacement rather than repair 
• Resilience is hard to measure: Traditional output measures focus on service quality and cost rather than the underlying probability of failure. This makes it difficult to reward preventative maintenance. 

The result is predictable: Maintenance becomes the easiest cost to cut, especially when political pressure pushes regulators to keep bills down. 

From an economic perspective, long‑term maintenance delivers value in three ways.  

First, it reduces whole‑life costs, because preventative maintenance is almost always cheaper than reactive repair or full asset replacement. Second, it improves resilience, as well‑maintained assets are less likely to fail during extreme weather, cyber incidents or demand spikes. 

Finally, it supports intergenerational fairness. The current practice of deferring maintenance shifts costs onto future consumers, who must pay for emergency interventions or accelerated replacement when failures resulting from inadequate maintenance eventually occur. Today’s consumers should pay for the value they receive, not for yesterday’s underinvestment. 

These long-term benefits are not captured by traditional efficiency models, however. Regulators need tools that recognise the long‑term economic value of asset stewardship. 

Asset health is not just an engineering or operational issue. It has direct implications for regulatory finance and the weighted average cost of capital (WACC). 

First, poor asset health increases operational and financial risk, since deteriorating assets increase the probability of failure, emergency expenditure and regulatory intervention. Investors price this risk, which can raise beta (if failures correlate with market conditions), the cost of debt (if credit metrics weaken), and the overall WACC (if the sector becomes politically exposed). 

Strong asset stewardship, by contrast, reduces risk and stabilises returns, lowering cashflows’ volatility and resulting in more consistent regulatory outcomes. This can support lower betas, reduce debt premia and justify lower allowed returns over time. 

In other words, good asset health is a risk mitigation strategy. 

Regulators should also aim to avoid a circularity, where poor asset health raises risk, and higher risk raises the WACC and the company’s cost base, which in turn raises bills, making it harder for providers to price-in investments in maintenance.   

Providers need to avoid embedding asset condition risk into the WACC, unless it is clearly systematic. 

A modern regulatory framework for asset health requires three components: better measurement, better incentives and better risk allocation.

Regulators need to move beyond simple condition grades and develop metrics that capture asset age and deterioration curves, the failure probabilities under different scenarios, and the economic cost of failure, including environmental and social impacts. They should also try to capture the long‑term cost of deferral. 

This requires integrating engineering models with economic analysis. Asset health should be treated as a quantifiable economic variable, not merely a qualitative narrative. 

Regulators should ensure incentives encourage a long-term view, rather than just short‑term savings.  

To do so, they should consider multi‑period allowances that give companies certainty over long‑term maintenance funding; totex approaches to remove the capex/opex bias; and outcome‑based incentives linked to asset reliability, resilience and long‑term performance. They should also consider front‑loaded depreciation or regulated asset base (RAB) adjustments for assets with known deterioration risks. 

The goal should be to align company incentives with whole‑life cost optimisation. 

The risks of asset failure outweigh the added costs of effective maintenance. The downside is large, sudden and politically costly. Yet existing incentives fail to reflect this asymmetry as they largely incentivise companies to control maintenance costs within a price control period.  

To address this, regulators should incorporate uncertainty mechanisms for high‑risk assets within price controls, including considering targeted reopeners for emerging risks (such as climate impacts). They should also consider risk‑sharing arrangements under which companies have incentives to maintain assets but are protected from extreme, low‑probability shocks. 

These measures would ensure companies are neither over‑exposed nor under‑motivated. 

Existing regulatory frameworks already reflect some of these principles and practices, but they are far from being universally applied. Different UK regulators have taken different approaches to asset health that reflect sectoral characteristics, but also methodological choices. 

Ofgem has moved further than most regulators. It uses engineering‑based assessments for network resilience, applies totex to reduce capex/opex distortions, and increasingly relies on bottom‑up evidence for long‑term investment needs. Its approach to uncertainty mechanisms is also more developed. 

The Office of Rail and Road explicitly integrates asset condition into long‑term funding models. Rail is safety‑critical, so asset health is treated as a first‑order regulatory objective. ORR’s structured asset management frameworks are among the most advanced in the UK. 

Ofwat has introduced resilience metrics and asset health performance commitments, but econometric benchmarking still dominates cost allowances. The sector’s small number of providers and heterogeneous geography make benchmarking fragile. Asset health is recognised, but not yet central. 

These assets are more modular and shorter‑lived, so asset health is less of a central concept. However, Ofcom’s approach to long‑term investment incentives, particularly in fibre networks, offers lessons on how to support irreversible, high‑capex investment without over rewarding incumbents.

The Civil Aviation Authority uses hybrid models that combine benchmarking with detailed engineering assessments. Asset condition and resilience are central, reflecting the safety and capacity constraints of airports.

Across the regulators, the most sophisticated approaches share three features: 

• Engineering evidence is treated as equal to, or more important than, econometrics 
• Long‑term asset stewardship is explicitly incentivised 
• Risk allocation mechanisms are used to manage uncertainty 

All UK regulators could adopt these features more widely.

The future of UK infrastructure will be significantly defined by how well regulators adapt their frameworks to support long‑term asset stewardship. They face several strategic questions that are increasingly urgent: 

• How should asset health be defined and measured consistently across companies? 
• How can regulators distinguish between efficient maintenance and inefficient overspend? 
• What is the right balance between benchmarking and bottom‑up assessment? 
• How should regulators incorporate climate and resilience risk? 
• How can price controls support intergenerational fairness? 
• How can regulators maintain legitimacy while funding long‑term investment? 
• How should asset health be reflected in the cost of capital without creating circularity or over‑pricing risk? 

The UK’s regulatory model has always been adaptive. But the pressures facing modern networks, including environmental, technological, financial and political risks, mean that asset health must move from the periphery of price controls to the centre.  

Regulators that embrace this shift will be the best equipped to deliver outcomes that are efficient, resilient and aligned with the long‑term public interest.