Water industry regulator Ofwat has hailed its approach to the 2009 price review, which set the water companies’ investment programme for the next five years, as “ a considerable success.”

The comments come in a new Report by Ofwat which looks at how the regulator conducted and managed the price review and how it worked and communicated with stakeholders. The report does not however consider whether the outcomes of the price review were the best for all stakeholders. Ofwat said that while it remained “entirely satisfied” with the outcome, it would only be able to make a final assessment at the end of the price review period. However, from where the regulator is now, Ofwat believes its approach was a considerable success - it had set price limits for the period to 2015 that are, for the first time, lower (on average, in real terms) at the end of the period than they were at the beginning. At the same time, price limits included a record amount of capital investment.

Ofwat commented:

“It is clear now that our decision to put customers at the heart of the review and to take account of the wider economic environment was right; the water and sewerage sectors in England and Wales remain attractive to investors and customers are not paying higher water bills for unnecessary investment.”

Ofwat has identified high level strategic concerns about the following issues:-

• The price review process has become increasingly burdensome.− The data requirements are ever expanding – we now need special tools to manage the data we collect.
• The analysis we carry out is not related to risk in a systematic way and is too detailed. This may link to an increasingly risk-averse culture in the broader water and sewerage sectors.
• There are unintended consequences, for example cyclical spending.
• Resource requirements are disproportionate – the price review takes almost three years to do but only sets price limits for five years. The time requirement diverts stakeholders from the important delivery phases.
• We are concerned that our approach has become increasingly complex, which can reduce transparency. Some of the incentives we have introduced may not send clear and simple signals to the companies and customers.
• The focus on five-year price limits seems to us to discourage long-term planning.
• The 25-year strategic direction statements were widely welcomed as a good innovation, but there are still some concerns that the price review process does not properly reflect longer-term issues.