Commenting on yesterday’s launch of Ofwat's consultation on the principles for setting price limits for water and sewerage companies in England and Wales from 2015 onwards, Richard Laikin, UK Water Sector Leader, PwC, said:

"Combined with Ofwat's recent moves to overhaul the regulatory compliance framework for the sector, with proposals for more targeted data reporting by the companies and enforcement action by the regulator, this represents a substantial shake-up of future regulation of the sector.

"Companies and investors will welcome the proposed protection of existing assets, and moves to a less prescriptive approach, but will need to understand the implications of separating the price controls and the changes in the incentives on each element of the business. As ever, the devil will be in the detail, which will only emerge over the coming months as the proposals are refined.

"We also look forward to further policy developments which will be revealed in the Water White Paper due to be published in the next couple of weeks. It is expected that this will presage some major changes in the sector, such as increased retail competition for supply to business customers and reform of the upstream water trading and abstraction regimes. The interplay between Ofwat and Government proposals will be very important to ensure that companies are given a consistent set of incentives to do right thing for consumers and the environment."

Ofwat are proposing some significant changes in their approach to setting prices, including:

• introducing separate price controls for the retail and wholesale (networks and water resources) elements of the value chain instead of a single integrated price control as practised in the past;
• moving to a less prescriptive "outcomes" based approach which will give companies more freedom in how to meet their obligations and potentially lead to less intrusive regulatory oversight; and
• introducing more direct customer engagement in the price setting process, in order to encourage the companies to give higher priority to the service outcomes that local customers want.

 PwC’s comments contrast with some of the views expressed at the Future Water conference in October, when Environment Minister Richard Beynon said that anything likely to “spook” the investment community would be excluded from the White Paper.