Ofwat has published a discussion paper setting out its emerging thinking about a new shared vision for the water sector and Ofwat’s strategy for regulating the water and wastewater companies in England and Wales from 2020 onwards.

Introducing the paper, Ofwat’s emerging strategy - Join the conversation, the regulator has highlighted the main challenges facing the water sector as :

• Long-term water resources
• Operational resilience
• Pressures on the natural environment
• Customers’ changing expectations
• Legitimacy
• Affordability

Ofwat says in the paper:

“We are looking afresh at how we can deliver our part of the shared vision. There is much that has worked in the past which we should retain and evolve. But the challenges mean we need to make important shifts in what we do and how we work.”

Ofwat expects to to retain and build on much of existing policy framework

The paper says that based on an initial assessment of what has worked well so far, the regulator expects to retain and build on much of its existing policy framework including:

• An allowed return on the assets of the regulated company
• Outcome based incentives, reset every five years
• Financial resilience and board leadership
• Markets, trading and competition
• Customer engagement

Three significant shifts in Ofwat’s approach to regulation

However, Ofwat has proposed three significant shifts in its emerging strategy it thinks it needs to make in its approach to regulation- summarised as:

1. Creating a better future and bringing a longer-term perspective to its approach by setting long-term targets, planning for sustainable future water resources and ensuring long-term operational resilience.

2. Driving transformational change by enabling adoption of innovative approaches, encouraging affordable solutions and turning information into insight.

3. Encouraging private enterprises to deliver public value by looking to companies to own their public purpose, encouraging the delivery of social and environmental value and ensuring value in the round for customers, communities and the environment.

The paper outlines a number of key changes the regulator now expects to make in how it works.

Ofwat will itself listen more to customers so it can “drive change and enable water companies as they deliver value for customers, communities and society.”

It will also look to collaborate and partner more with other regulators, including through the UK Regulators Network, for a more joined up and effective approach. Ofwat will also seek to share expertise, insight and resources with the Consumer Council for Water and other consumer bodies and organisations specialising in customer service and business ethics.

On regulation, the paper suggests Ofwat could carry out more frequent reviews and evaluations of how effective regulation is in driving the medium and long-term changes and improvements needed in the sector.

Ofwat to consider how it can strengthen sector’s approach to long-term operational resilience

The paper concludes with a discussion of some possible implications of the strategy for price controls from 2025 onwards.

Actions the paper says Ofwat could take include exploring how it can work with others to set a limited number of strategic long-term expectations for the industry, together with following through on the joint work already begun to improve the resilience of long-term water supplies.

The paper also suggests the regulator will consider how it can strengthen the industry’s approach to achieving long-term operational resilience in its assets, especially in the face of climate change.

“By understanding their assets, companies can target and be more efficient in their maintenance and replacement activity, be proactive in mitigating the impact of climate change and reduce service failure risks to customers.

“Not all companies have a sufficient understanding of the condition and resilience of their assets, or how this is likely to evolve over the longer term. We will seek further information from companies in this area so we can devise an approach for driving improvements.”

Innovation – slow uptake and “much duplication of effort and expenditure”

Commenting on the current pace of innovation, the paper says new techniques, technologies and business models are essential to increase productivity and meet strategic challenges in the most cost-effective way. However, Ofwat says the sector has been slow to adopt new tools and techniques at scale and there is “much duplication of effort and expenditure in this area.”

The paper says that while the regulator is confident it can continue to make progress through the financial incentives it places on companies, it has other tools available to speed up change.

Other tools available to Ofwat to speed up change

Ofwat says it could also do more to facilitate the adoption of new tools and techniques – including ring-fenced funding in the upcoming PR19 regulatory settlement to reward companies who have rolled out innovative approaches.

The regulator has also suggested it could establish a centre of excellence to drive more co-ordination in trialling and rolling out new technologies and ways of working by water companies.

On the new business retail and other markets, Ofwat said it will continue its efforts to improve the way markets work. “They provide an important vehicle for bringing new ideas and disruptive approaches to the sector as a whole,” the paper says.

Looking at the role of data in promoting innovation, the paper also flags up the possibility of Ofwat taking further action to make water company data openly available to allow insight and new services and products to be developed.

Finally, looking beyond the 2019 Price Review, the paper says Ofwat “will build on and learn lessons from the 2014 and 2019 price reviews to shape our approach in 2024 and beyond.”

This will include considering “how the greater role of markets in the wholesale value chain enables the price review to be redesigned.”

The regulator said it may also seek to evolve the current fast track approach “to differentiate further between the process for companies with a strong track record in living up to the aspirations in the vision and those that are falling behind.“

“Going further, we will consider what new performance standards might be appropriate in the light of the joint vision, especially best practice in protecting and enhancing the environment and delivering for society.”

“We may need to improve our ability to assess the natural capital accounting methods which companies use in their business plans to calibrate incentives."

Click here to download Ofwat’s emerging strategy - Join the conversation