Ofwat has announced proposals to change the way it regulates the water and sewerage sectors in a bid to drive more efficient, customer-focused companies, and ensure more sustainable water use.

The proposals are part of its consultation on how it plans to set limits on how much water and sewerage companies in England and Wales can charge their customers from 2015 to 2020.

For the first time, Ofwat will set separate price controls for retail water and sewerage services to household customers and price controls for retail water and sewerage services to business customers. It is also separating price controls for wholesale water services and wholesale sewerage services.

"By setting these distinct controls, we can target our regulation on the different activities that companies carry out," Ofwat said. "This is essential if we are to keep prices down, while encouraging innovation and sustainable solutions to manage this valuable and precious resource."

The regulator’s proposals focus on three main areas: regulating for efficiency and growth, a focus on customers, and ensuring sustainable use of water.

Ofwat said the proposals will ensure access to low-cost financing in order for water companies to continue investment into improving services. The regulator is also putting a focus on long term outcomes to encourage innovative ways of working and reduce environmental impacts.

The regulator also said its proposals will give customers an increased say in how their money is spent and make companies more accountable.

To ensure sustainable water use, the proposals hope to encourage water companies to value water better, improve water management and distribute it where it is needed most. A pillar of this is encouraging water trading across regional boundaries, which is widely seen as a method to combat drought.

Furthermore, Ofwat suggests that water companies source water from where it does not damage the environment, and penalising them if they take it from where it does.

Regina Finn, Ofwat Chief Executive Officer said:

“We face new challenges and difficult choices about water. We are living in tough economic times, and household budgets are under increasing pressure. At the same time, it is getting ever harder to manage our precious water supplies as the population grows in areas where resources are already stretched, and our weather becomes more unpredictable.

“We cannot afford to stand still. We are changing our approach to help ensure we have modern, innovative, customer-focused sectors ready to meet 21st century challenges.

“The new way we intend to regulate will give customers a greater voice, and help to address the problem that some of our water use is simply unsustainable. Currently half of our rivers are having damaging amounts of water taken from them, and little progress has been made in getting companies to share water.

“We are acutely aware that households won’t want to see any increase in bills that is not absolutely necessary. These changes will empower companies to rise to that challenge.”

The publication of Ofwat’s ‘Setting Price Limits for 2015 - 20' consultation follows a two year period of engagement by the regulator on how it might change its broad approach to setting price limits.

Ofwat will publish a final methodology for the next price review process in summer 2013. Decisions on new price limits are due at the end of 2014 and will come into effect in April 2015.

Read the consultation here