Water industry regulator Ofwat has set out its final forward work programme for 2015-16 - which includes flagging up "possible changes" in water company ownership.

Introducing its final programme, Ofwat said the programme is designed to help meet Ofwat’s new strategy, ‘Trust in water’, which it set out in January 2015. The new strategy, which builds on the regulator’s statutory duties and functions, will determine what Ofwat does and how it works from now until 2019-20.

Ofwat has identified a number of areas where it can make the biggest impact for customers in 2015-16 and set out the following strategic priorities:

1. Implementing Water Act reforms and preparing for the 2019 price review

This involves delivering the reforms provided for in the Water Act 2014,  including putting in place the arrangements for the opening of the non-household retail market to competition in April 2017. It also includes supporting the development of water trading and abstraction reform. Ofwat said this will require further changes to the way it sets prices in the AMP7 2019 review and also require changes in the regulator’s approach to casework.

2. Maintain customer confidence through a period of change

This involves recognising the changes that are coming in the sector and to Ofwat’s regulation of it, and ensuring that service providers and others across the sector maintain the confidence of customers in provision of public services. This includes ensuring that the changes in the sector deliver demonstrable benefits for customers, now and in the long term.

3. Maintain investor confidence in the sector through a period of change

This involves recognising the changes that the Water Act will bring to the sector and its regulation of it in order to benefit customers, maintain the confidence of investors in the sector and the economic regulatory framework. This includes continuing to discharge Ofwat’s  statutory duty on financeability, to ensure that efficient companies can access capital.

4. Monitoring sector performance

This involves developing the means by which Ofwat monitors the sector’s performance against its vision of trust and confidence, and receives assurance from the sector. It will also include the development of a risk-based approach to assurance, which will reflect the risk associated with different aspects of the sector and different service providers.

5. Ensuring Ofwat has the skills, experience, systems, processes and culture that support its new strategy

This will involve developing the people, infrastructure and governance to deliver the new strategy and vision for the sector, and develop the tools, information and approaches to regulation that Ofwat needs to deliver its duties efficiently, effectively and using best regulatory practice.

Delivering value for money

Ofwat’s aim is to carry out all of its work efficiently and effectively. From 2015-16 onwards, the regulator will be part of the UK Government’s Comprehensive Spending Review (CSR) – it also has what is described as a “significantly reduced budget.”

Ofwat’s licence fee for 2015-16 is £21.159 million (equivalent to about 0.02% of the sector’s turnover) plus a further £2 million for the Thames Tideway - about £7 million lower than 2014-15. This does however reflect an increase on the original 2015-16 CSR settlement to enable Ofwat  to progress Water Act 2014 reforms and changes in the profile of its work on the Thames Tideway. The licence fees are recovered from the water companies.

The fee excludes Ofwat’s work on Open Water – the programme of work to co-ordinate the development of the market rules,framework and systems required for an effective non-household retail market as set out in the Water Act 2014 – which represents additional work over and above Ofwat’s usual work. This work is funded from a separate, ring-fenced licence fee of £7.13 million for 2015-16.

On other licence fees, Ofwat said it will recover the cost of regulating the Thames Tideway Tunnel project separately from Thames Water. The regulator is also recovering the cost of the Open Water programme from water companies separately.

Ofwat said it will continue to seek efficiencies in delivering its work to secure even better value for money, including reducing its office space during 2015-16. The regulator is also looking for opportunities to share resource with other regulators and seeking further value for money through its membership of the UK Regulators Network (UKRN).

Ofwat said it would notify stakeholders if it decides to change plans significantly during 2015-16.

Measuring progress

In terms of measuring progress, Ofwat said it is working with key stakeholders, including other water sector regulators,to develop an assessment framework and performance dashboards for monitoringthe progress that the sector makes towards its vision for it. The regulator is planning to publish more details on the assessment framework during 2015-16.

Commenting on possible changes to its work, Ofwat said:

“We have an ambitious strategy and a reduced budget. We have made changes to the way we are structured and work to accommodate this, but we still need to be able to work flexibly and re-prioritise throughout the year. While we plan based on previous experience and our understanding of how our landscape will evolve in future, we may need to do more or less than we currently anticipate. This may affect the resources we have available and the work we are able to carry out.”

The regulator said that over the coming year, a number of factors could change its plans, including the General Election in May - the newly-elected UK Government would have its own priorities for the water sector in England.

Tideway Tunnel: Ofwat will work to ensure it costs "no more than necessary"

Ofwat also highlighted the fact that the Development Consent Order granted for the Thames Tideway Tunnel is currently subject to four applications for judicial reviews. The regulator said its work on the programme is dependent on:

• the UK Government’s decisions;
• any legal proceedings; and
• the progress of the Thames Tideway Tunnel project itself.

Ofwat said it is working with the UK Government, the Environment Agency, Thames Water and other stakeholders to implement a regulatory framework for the IP so that the Thames Tideway Tunnel  is delivered effectively and efficiently, costs no more than necessary and delivers the best value for money possible for customers. While Thames Water is procuring the IP, Ofwat is monitoring the procurement and evaluation processes throughout.

Key dates include establishing an assessment framework for the sector

Key dates in 2015-16 include:

• Publish an assessment framework for the sector and for Ofwat for monitoring the state of progress against the visions for the sector and for Ofwat (April to June 2015).
• Consult on the approach to Ofwat’s  resilience duty (April to June 2015).
• Publish a  five-year strategic business plan for 2015-16 to 2019-20 (July to September 2015).
• Host the first cross-sector strategic discussion, using the new sector assessment framework (October to December 2015).
• Consult on arrangements to protect eligible customers for the new non-household retail market, including new guaranteed service standards and deemed contract arrangements (October to December 2015).
• Publish findings of Ofwat’s work looking at customer vulnerability, including issues for the sector to take forward, and potentially changes to how Ofwat regulates (January to March 2016).
• Publish the final approach to Ofwat’s  resilience duty (January to March 2015).

Casework will ensure opening of non-household retail market to competition is effective

Ofwat also flagged up that in particular, it will use its casework in the coming months to ensure that the opening of the non-household retail market to competition is effective and delivers benefits for customers as provided for in the Water Act 2014. The regulator also plans to carry out work in 2015-16 with a view to ensuring the casework will support the development of water trading and abstraction reform.

Ofwat said it expects more transactions to take place within the wholesale part of the value chain, between the monopoly water companies and other service providers. Through casework, the regulator said it “will be clear in setting out and enforcing ..expectations in relation to those transactions.”

Interestingly, Ofwat has also highlighted possible changes in water company ownership, commenting:

“It is likely that there will be some changes in ownership as water companies respond to the challenge of delivering price controls during 2015-20, opening of the non-household retail market to competition and information that we have revealed through the 2014 price review and will continue to reveal as we go forward.”

Ofwat said it would also develop “early warning mechanisms to spot water companies experiencing financial distress” and further develop its approach to “dealing with failures, should they ever arise.”

Finally, during 2015-16 the regulator will publish a five-year strategic business plan to provide stakeholders with more transparency about its long-term plans and budget.

Click here to download Ofwat’s Forward Programme 2015-16