An information notice from water industry regulator Ofwat has outlined the principles it will apply in making changes to water company licences following a consultation with key stakeholders.
The licence modifications are needed to implement the framework for setting future price limits. The price limits need to respond to emerging sustainability and customer service challenges as well as ensuring the sector remains attractive to investors, Ofwat said.
The notice says Ofwat will protect financing of wholesale activities by linking wholesale price to inflation; however the regulator says that it needs a degree of flexibility to define wholesale activities to meet legislative and regulatory objectives. This could allow sludge disposal activities to move outside the wholesale control in the longer term, Ofwat said.
Ofwat also requires flexibility in setting price controls for non-wholesale activities, meaning that the conditions of appointment in Section 13 of the Water Industry Act 1991 need to allow for changes in the number, duration and form of price controls by introducing, for example, “less intrusive controls for services where customers have choice.”
However, Ofwat says that it will limit the areas of flexibility in wholesale activities to make sure they do not jeopardise the financing of the wholesale function.
Ofwat aims to provide certainty on the scope of the licence modifications by the time its detailed methodology for setting price limits is published in spring 2013.
If the water companies agree with the modifications, Ofwat expects the revised conditions of appointment could be in place by December 2012. However, if agreement isn’t reached after further consultation, the matter may be referred to the Competition Commission, delaying proceedings by up to six months.
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