Ofwat has published a position paper setting out its decisions on the design of water and wastewater services regulatory framework in England and Wales.

Introducing the paper, the regulator said the water sector is facing critical challenges which suggest that if the industry does not change, then there is an increasing risk that:

• the future could be characterised by disengaged customers and low levels of legitimacy;
• where precious water resources are not used as efficiently as they might be – putting greater pressure on the environment;
• and where opportunities to tackle affordability and deliver more for less are not seized, resulting in higher bills for customers.

Ofwat said that the desire to strengthen the approach to customer engagement and outcomes to ensure a continued focus on current and future customers lies at the heart of its regulatory framework for water and wastewater services, commenting:

“Our new regulatory approach places even greater expectations on companies to understand the needs of all their customers, including those in circumstances which make them vulnerable. This requires more diverse approaches to understanding customers’ priorities, needs and behaviours.”

Specifically, the regulator wants companies to look to build a robust, balanced and proportionate evidence base, fully exploring how they can make use of operational data and information gained from innovative approaches (including experiments) in addition to survey data, focus groups and other research. Understanding customers’ priorities, needs and behaviours that companies gain should inform the development of business plans, including performance commitments, that drive the delivery of resilient services now and in the longer term, Ofwat said.

The regulatory framework is also intended to strengthen the role of local independent Customer Challenge Groups (CCGs) to challenge companies even further to improve the quality of their customer engagement.

Among the changes planned by the regulator include changing the indexation of the retail price index (RPI) for customer bills and companies’ assets to “a more legitimate measure of inflation”, the consumer price index (CPI, or CPIH). Ofwat will decide between CPI or CPIH in its methodology statement for PR19, which we will consult on in July 2017.

Price controls were previously been linked to RPI - meaning  customer bills have been linked to RPI. However, RPI is no longer an official statistic – its robustness has been called into question and its use by government and regulators is diminishing.

Ofwat said its new regulatory approach would promote markets to inform, enable and encourage greater efficiency in England and, where it aligns with Welsh Government policy, in Wales.

The paper flags up steps being taken by the regulator to inform, enable and encourage the development of two new markets – sludge (which is becoming recognised as a bioresources) and water resources –where Ofwat sees potential to unlock substantial benefits for customers, companies, investors and the environment.

In relation to bioresources, the paper says evidence shows there is scope for increased optimisation of activities across the companies – and, looking further ahead, greater participation from firms operating in wider waste markets.

 In relation to water resources, trading is below its optimal level, and taking steps to reduce identified barriers to this could result in significant benefits for customers. Again, looking further ahead, there is also scope for participation from third parties, both in terms of selling water into the public water supply, and in negotiating directly with water retailers as the retail business market.

The paper says Ofwat is also planning to “inform, enable and encourage greater use of markets in the financing and provision of new assets by third parties” and that its new regulatory approach would incentivise companies to use direct procurement for customers for high-value capital projects.

Ofwat said it will evaluate companies’ proposals for direct procurement for customers as part of its risk-based review of company business plans at PR19 and will expect companies to use direct procurement for customers for suitable projects valued at more than £100 million.

Targeted price control regulation will continue to apply to the wholesale parts of the value chain and for both bioresources and water resources where Ofwat said it cannot be certain about how far or how quickly markets could develop, price regulation will remain an essential part of its approach, at least over the near term.

Click here to download Water 2020: our regulatory approach for water and wastewater services in England and Wales