Water industry regulator Ofwat has made substantial concessions to the water companies with its latest revised consultation on proposals for the “Section 13” licence change.
It is the third time the regulator has suggested changes to licence conditions, after the previous two occasions met with stiff opposition from the water companies.
Ofwat has now made significant changes to the proposals it set out in its December 2011 and October 2012 consultations. The proposals have been developed following “constructive dialogue” with water companies.
The revised proposals allow for separate price controls for wholesale and retail services, and do not provide any flexibility in relation to wholesale controls. Ofwat said that this addresses stakeholders’ principal concern about its October proposals by removing uncertainty about how the proposed greater flexibility in the licence would be used.
Wholesale controls will remain RPI index-linked and will be for five years. The proposals will also allow Ofwat to specify the number and duration of retail price controls (up to a maximum of five years) and refine the definition of customer-facing activities that are within the retail price control.
The regulator is no longer proposing to have the flexibility to have different forms of control for some activities outside of the wholesale price control.
Many water companies were worried that the licence change proposals released in October gave Ofwat gave too much discretion. They were also concerned that the proposals would affect investor confidence in the sector.
Last month Ofwat put out a “clarification” note on proposals in the October consultation but many water companies still could not agree with the regulator.
The revised Section 13 notice will be out for consultation until 23 January, a timetable discussed with and agreed by companies, Ofwat said.
It added that “stakeholders have been very clear that they would like to avoid a costly and time-consuming Competition Commission referral at a time when the focus should be on the 2014 price review and companies’ business planning processes.”
Ofwat has delayed the publication of its methodology for the 2014 price review until late January, after which the outcome of the proposals will be known.
If the regulator and companies fail to agree again, the case will almost certainly be referred to the Competition Commission, where any referral could take up to six months.
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