Water industry regulator Ofwat has launched a new consultation on wholesale and retail charges.

Ofwat has previously set a single price control for water services, and a single price control for wastewater services. The regulator will now be setting separate controls for:

• water wholesale services;
• wastewater wholesale services;
• household retail services; and
• non-household retail services.

The Water Bill which is currently making its way through Parliament sets out changes to the governance arrangements of charges. If the legislation is passed, Ofwat will no longer be required to ‘approve’ companies’ charges schemes but will instead set charging rules which the water companies must comply with.

In October 2013 the UK Government published a set of charging principles which will underpin the development of the charging guidance that the UK Government will issue to Ofwat in the future.

The consultation describes some of the different options available for setting charging rules, and potential approaches to governance in the light of Ofwat’s new price control framework and the Government’s reforms in the Water Bill.

Issues under consideration include:

Different approaches to managing bill stability - Customers consistently report that bill stability is a priority for them. This is therefore also a priority for the regulator, as well as being a policy priority for the Government. The consultation discusses whether explicit charging rules for stability of wholesale and household retail charges would also be appropriate.

Improving the cost reflectivity of charges - Cost reflectivity refers to prices reflecting the underlying costs of a given product or service. The consultation discusses the various ways that improved cost reflectivity could be pursued. Ofwat says that reflecting the underlying costs through charges can incentivise efficient behaviour – and greater efficiency means lower bills to customers overall.

Standardising wholesale charges - While the level of charges will vary across companies – reflecting differences in their underlying costs and local circumstances – there may be merit in requiring them to use a common methodology in deriving their wholesale charges. Ofwat says this would make charging structures across England and Wales more consistent and also ensure that retailers providing services to business customers that are able to choose their retailer are not faced with such a significant range of very different wholesale charging schemes in different regions – for example, when serving customers with sites in different regions across England and Wales.

Information and governance – Ofwat is consulting on its preferred approach to assess compliance of wholesale and household retail charges with price limits and companies’ other obligations. The regulator wants to do this in a way that ensures companies take ownership of their own charges and engage with their customers. To this end, Ofwat is proposing to no longer publish charges on the behalf of companies.

Splitting of wholesale and retail charges - This will be the first time that companies will be required to split their wholesale and retail charges. Ofwat is seeking stakeholder views on how companies could do this.

Click here to download the consultation document. Deadline for responses is 7th March 2014. Following on from the consultation Ofwat will then set out its conclusions in spring 2014, alongside a draft set of charging rules for consultation.