Ofwat has today launched a major consultation setting out its preferred options for the future framework to regulate the role of markets in the water sector and the role regulation will play – and is calling for change in the industry.

Introducing the detailed 174 page consultation paper, Ofwat said if the water sector in England and Wales is to meet future challenges and to deepen trust and confidence it will need to change.

The regulator said in its initial proposals for how it will get a better deal for customers, the environment and wider society from 2020, it aims to build on its established approach to setting prices.

However, changes would be needed if the sector is to meet future challenges, such as stretched water resources, dealing with environmental water quality problems, and customers who are struggling to afford their bill.

The proposals include measures to get companies to source water and use sewage sludge more efficiently, while gaining a richer understanding of their customers’ priorities.

Ofwat is aiming to kick start a water trading market is overhauling how information on supplies is shared, and maintaining pressure on companies to use the most efficient source.  In the last two decades little progress has been made in effective water trading, which involves moving water, often using rivers and aquifers, across company boundaries, from where it is plentiful to where it is scarce, Ofwat said. The amount of water traded since the early 1990s has remained fairly stable at around four to five per cent of water put into the system.

Better allocation of water could help keep bills down and better protect the environment – with  unrealised benefits estimated at around £1billion.

Energy from sludge market to be opened up

Ofwat also wants to encourage better use of resources in how the sector harnesses energy from waste. Treating wastewater produces sludge, which is being used to create gas. This can be used for energy generation supplied to water companies themselves and fed into the grid, and to fertilise fields. The regulator said it now wants to remove regulatory red tape to open up the market for sludge and encourage innovation- the ensuing savings made would keep bills down and help meet UK energy needs sustainably.

 The regulator also wants to see more ongoing stakeholder engagement with  customers to achieve a deeper understanding of customers’ short and long term priorities, as well as working with them to help create more affordable services.

Ofwat's job is to keep companies on their toes so that customers are protected

Cathryn Ross, Ofwat Chief Executive said:

“In 2014 our approach to setting price limits helped drive service up and bills down. We need to build on that, but with big challenges ahead we need to make changes to avoid customers getting a raw deal.

“Our job is to keep companies on their toes so that customers are protected. Companies have told us that they have already made all the easier efficiencies. That’s why we want to open up new a frontier for efficiencies.

“Supplies are already stretched in areas where the population is rising. We want to kick start water trading where this will help keep bills down and stop us taking too much water from our rivers. We also want to deregulate to free up scope for companies to make better use of sewage sludge to help meet their own, and the country’s energy needs.

“If we can encourage companies to innovate, and to truly understand what customers want now and in the future, we will be in a strong position to maintain trust and confidence in this vital public service.”

Ofwat to move from RPI to CPI

 Ofwat is also proposing changing the measure of inflation it uses to set bills and financial returns. Currently Ofwat uses the RPI (retail price index) – which is increasingly discredited as a reliable measure of inflation, the regulator said. Ofwat plans a gradual move to what it describes as the more legitimate CPI (consumer price index which would help maintain customer trust and confidence and could also reduce bill volatility.

Since 2003 the Government has used the consumer price index (CPI) as the basis for inflation targeting, and since March 2013 the retail price index (RPI) has no longer been an official government statistic. Furthermore, in January 2015 an independent report by Paul Johnson recommended that: “Government and regulators should work towards ending the use of the RPI as soon as practicable,” reflecting serious concerns regarding the robustness of RPI.

 Alongside today’s consultation, in line with its new statutory duty Ofwat has also published its views on how the sector should approach the major challenge of delivering resilient systems and services and how its regulation will encourage companies to do this.

 This includes companies understanding how they can withstand current and future shocks, as well as anticipating and responding to long term trends.

Deadline for submission of responses to the consultation is 10 February 2016. Ofwat will then set out its finalised proposals in a decision document, which it intends to publish in May 2016.

The regulator is also proposing to consult, during 2016, on further outstanding policy issues with regards to the role of markets and the regulatory framework for the 2019 price review.

By the end of 2017 it will have confirmed its final approach to how it will set price limits between 2020 and 2025. It will then set final price limits by December 2019.

Click here to down the consultation paper Water 2020: Regulatory framework for wholesale markets and the 2019 price review

Click here to download Towards resilience: how we will embed resilience in our work