Ofwat looks set to reduce the level of its reporting requirements from water and wastewater companies in England and Wales.

In a briefing to City analysts last week, Ofwat Chief Executive Regina Finn said:

“I am painfully aware that of the incidents that led to fines over the past five years, they were not highlighted through our annual, detailed, data intensive monitoring processes.”

The whole value of the Ofwat reporting requirements are now under serious question. Currently the focus of a Government review of its activities, the regulator’s comments come in the wake of calls for major change among a growing body of organizations. Ms. Finn said:

“I am acutely conscious that in 1990, that annual return had 16 tables in it, and 64 pages of reporting guidance. In 2010 there were 77 tables and 854 pages of guidance. And the man hours that go into checking, querying, analysing and quality checking this – by companies and us – are considerable. We are questioning the value of this. And also, I know from talking to many of you that you don‟t use this amount of data. Indeed, like us, you cannot see the wood for the trees. So it is time to change.”

Ofwat’s goal for the future is to develop an effective risk based framework which minimises the regulatory burden, with companies “spending their man hours on the day job not spending their time complying with onerous reporting requirements that do not deliver value.”

The new approach is likely to see Ofwat make significantly less use of monitoring, relying instead on tools like targeted investigations based on market intelligence, including information such as customer complaints, investor concerns, or competitor views.

Ofwat has already removed its requirement on companies and reporters to provide commentaries to the upcoming June 2011 annual return which provides detailed commentary on company performance.

Water should be valued as a commodity

The regulator also said that more emphasis was needed on valuing water as a commodity, referring to “the perverse way that we price abstraction rights”.

Ms. Finn cited as an example the fact that it is currently cheaper to take water from the River Thames, where water is “pretty scarce and you could be doing environmental damage, than it is to take water from the environment in Northumbria, where there is lots of water and taking the water from the environment will not damage the environment”.

As a result, the current price signal to a water company would be the cheaper option. However, if abstracting the water in Northumbria were relatively quite a lot cheaper then the company might choose instead to take water from somewhere where it is environmentally sustainable to do so (Northumbria) – for example, by building an interconnector or transferring water to the rivers and to be moved to where customers were located.

 Abstraction licence trading on the cards?

The regulator also flagged up the possibility of formal market-based trading in abstraction licences, which could have major implications for the water companies. Currently, the companies only have about half the abstraction licences, with the other half taken by energy companies, industry users and the agricultural sector.

Ms. Finn said that if organisations who abstracted water were actually actively trading water and trading abstraction licences, it would provide companies charged with the duty to deliver security of supply to its customers with the ability to deliver not only from within its own company boundaries, but also with the additional option of purchasing water from other companies for a period of time or in perpetuity.

Underlying infrastructure would then need to change e.g. via increased interconnection or additional storage facility – and in the process, open up new opportunities for existing companies or new entrants to the marketplace.

Ofwat needs to “drag our licensing regime into the 21^st century”

 Ms. Finn also flagged up the possibility of differential regulation what she described as the “asset-light” elements of the water sector value chain – the upstream and retail ends, compared with the centre “asset-heavy bit” pipes, treatment and distribution network assets.

Commenting on Ofwat’s wish to see major change in the sector, Ms. Finn said:

One of the things that is becoming clear to us is that we are probably going to need to drag our licensing regime into the 21st century. We are going to need to update and modernise it if we are going to be able to do some of these things.”

Moving to a more modular approach to licensing would allow Ofwat to tailor the terms and conditions to the particular element of the business being regulated - and hopefully allow Ofwat “to step back and use a lighter hand where that is appropriate”.

Analysts Citi said Ofwat’s briefing of lightening the regulatory burden could open the door to more water company mergers.