Water industry regulator Ofwat is today launching an important debate around future water challenges with the publication of a keynote discussion paper, together with a number of separate papers on specific policy issues and a paper on lessons learnt from the 2014 price Review.

'Towards Water 2020 – meeting the challenges for water and wastewater services in England and Wales', together with supporting policy discussion papers on markets,monopolies, customer engagement and outcomes, sets out the challenges facing the water sector in England and Wales.

The regulator sees it as a first step to gain common understanding around issues facing the sector and how it can help to respond to the challenges.

In line with new legislation, the Water 2020 programme will facilitate the introduction of markets for wholesale water and wastewater services in England, increasing the scope for entry and, ultimately, more efficient outcomes and innovation.

 Major challenges Ofwat has identified (which could be further heightened by population growth, climate change and rising customer expectations) include:

• meeting demand for water in areas with stretched water resources;
• dealing with new challenges around environmental water quality;
• developing and maintaining resilient services and systems; and
• tackling affordability.

 The regulator is seeking comments on whether it has got its assessment of the challenges facing the sector right, and if it is focussing on the right questions to address these challenges in building its regulatory framework.

How to regulate to encourage service providers to focus on customers- not price reviews?

 Key questions Ofwat wants to address about its regulation of the water sector are:

• How do we regulate to encourage service providers to focus on their customers over the longer term, rather than focusing their effort around periodic price reviews?
• How do we build on the customer-focused approach to the 2014 price review (PR14) and promote and maintain genuine customer engagement that drives companies’ businesses?
• How do we regulate to encourage service providers to discover new ways of delivering outcomes to customers, which reduce cost and improve service?
• How do we encourage service providers to discover and reveal the efficient cost of providing services?
• How can we best align the interests of investors, management and customers?
• How can we maintain investor and customer confidence through the transition to any new arrangements?

Water companies look at key issues in “market place of ideas”

As part of its collaborative approach Ofwat has separately set up a ‘marketplace of ideas” in conjunction with Water UK where a number of the water companies have already submitted papers setting out their approach to the evolution of sector regulation.

Issues covered include:

Future challenges and uncertainties - Anglian Water, United Utilities and Yorkshire Water have considered the major long term challenges and uncertainties facing the water sector.

Customer engagement - Wessex Water commissioned a report from Frontier Economics to investigate the potential impact of more direct negotiations between customers and companies when setting prices and service levels. Yorkshire Water has examined how continuous customer engagement will enable a deeper understanding of customers' changing priorities over the short, medium and long term.

Outcomes  - Northumbrian Water has considered the role of Outcomes, Performance Commitments and Outcome Delivery Incentives, including the role of comparative upper quartile industry performance measures, customers' preferences, willingness to pay research and issues raised by comparing different levels of service across companies.

Totex - Anglian Water has reviewed the use of the totex expenditure assessment used in the PR14 price review and considered the future application of totex assessments to subsequent price control periods.

Menus - Anglian Water has considered the role of menus within future price controls, including how companies responded strongly to the incentive created by Ofwat's "enhanced" status for business plans in the PR14 review. 

Capital maintenance - Anglian Water has reviewed previous approaches to capital maintenance planning and considered how these may need to evolve.

Access pricing - Severn Trent, working with Oxera, has put forward proposals for reform to access pricing. Anglian Water has considered principles for a future access pricing regime in the UK Water sector, including accounting for different stakeholder views and setting out some alternatives for allocation of the RCV within an access pricing framework.

The future of the RCV - Severn Trent commissioned a report from Oxera to consider options for the future treatment of the RCV in terms of cost recovery and remunerating new investment. South West Water commissioned Frontier Economics to undertake a study to examine the potential options for Regulatory Capital Value (RCV) allocation within the wider context of upstream reform in the water sector. Yorkshire Water has considered the future of the RCV in the context of the challenges facing the industry, looking at the impact on key stakeholders and identifying areas for further research and analysis.

The duration of price controls - Northumbrian Water has considered factors that are relevant in thinking about whether to change the duration of price controls or stagger control periods.

Sludge treatment and disposal - Wessex Water has considered how changes in regulation that would foster greater commercialisation in the sludge sector could drive greater innovation and efficiency.

Ofwat will retain focus on engagement, outcomes and totex in 2019 Price Review

While Ofwat is not proposing solutions at this stage the regulator makes clear that it will be looking to build on the successful principles that underpinned its 2014 price review, including a more proportionate and targeted approach to regulation that puts the onus on companies to act responsibly. Key aspects of the PR14 framework that Ofwat proposes to retain include the focus on customer engagement and outcomes and a total expenditure (totex) approach to cost assessment.

Cathryn Ross, Ofwat Chief Executive, said:

 “We want to build on the successes of the 2014 price review so that we enable and encourage companies to deliver more for less. If we are to maintain trust and confidence in these vital public services, providers need to deliver better services that are better value for money, while also using scarce resources more smartly and working better for our natural environment.”

 “With big challenges ahead, we cannot afford to stand still. The sector needs to innovate to create value that can be shared between customers, the environment, society, and of course investors.”

“We also need to recognise that water is a scarce resource and start thinking differently about how we can make better use of it.”

 The water companies also need to stop seeing customers as passive consumers, she added.

Next steps

Ofwat wants to see more water trading, which the regulator said should help some companies avoid the costs associated with expensive new storage capacity .  It is also examining whether regulation is getting in the way of innovation, in markets like sludge treatment, so that deregulation could drive innovation, delivering savings and helping to meet energy needs.

Deadline for responses to Ofwat’s discussion paper  is 10th September 2015 and the regulator will pursue ongoing  engagement throughout the autumn.  Ofwat will then consult in December 2015 on its initial proposals for regulatory change,  followed by the publication of its decisions on the issues in May 2016. The regulator said early clarity on these issues would help to maintain regulatory predictability.

Click here to download 'Towards Water 2020 – meeting the challenges for water and wastewater services in England and Wales' 

Click here to download Towards Water 2020 – policy issues - customer engagement and outcomes

Click here to download Towards Water 2020 – policy issues: promoting markets

Click here to download Towards Water 2020 – policy issues: regulating monopolies

Click here to download Reflections on the price review - learning from PR14