Ofwat has launched a new consultation setting out proposals for two significant shifts in the way it approaches regulatory compliance by the water companies which would drop the requirement for detailed annual information.

 

Introducing the consultation, the water industry regulator said the changes are fundamental to the delivery of its strategy – sustainable water – and underpin its revised approach to regulation generally.

Ofwat is proposing a significant departure from the considerable weight it has placed on data collection and monitoring in the past as a way of ensuring the companies complied with their regulatory obligations. The regulator now believes this approach does not necessarily get the best results for customers - it is also costly in terms of regulatory resources and can mean the companies respond to the regulator rather than to their customers.

The first change is to the current system of regulatory reporting which would aim to move Ofwat away from detailed regulatory monitoring of compliance. Instead, the change would put the companies firmly in charge of managing their risks and redefine the regulator’s role as holding them to account for the results.

The second proposal is that Ofwat itself should also adopt a risk-based framework. The regulator said this would not only include a systematic assessment of risk and opportunity but will also allow it to focus the allocation of its own resources.

Detailed annual June reports to Ofwat to be dropped

 The proposed changes to the system of regulatory reporting mean that Ofwat would no longer require the companies to submit June returns. Instead, the companies would develop their own systems and assurance processes to enable their Boards to sign off a risk and compliance statement, verifying that the company is in compliance with its regulatory obligations.

The statement would be published annually, but Ofwat would expect the underlying systems to be continuous, and the companies to be responsible for alerting it to any significant increase in risk, or failure to meet a regulatory obligation, on an on-going basis.

New performance indicators

Ofwat is also consulting on a proposal that the companies should publish performance indicators that cover the following four areas.

• Customer experience.
• Reliability and availability.
• Environmental impact.
• Finance.

The regulator believes there would be advantages to companies publishing consistent, comparable information and that the proposed suite of indicators should be useful to a broad set of stakeholders, including customers, investors and regulators.

Ofwat is proposing an initial regulatory requirement on the companies which could be useful as a ‘kick-start’ to the production of comparable information across the water and sewerage sectors.

Ofwat’s response to risk

Ofwat believes that a risk-based approach to regulatory compliance is incomplete without a risk-base approach to the allocation of regulatory resource. The regulator intends to introduce a systematic assessment of risk and opportunities, using a range of information sources. Ofwat said:

“We will adopt a rigorous approach to assessing benefits and costs before we incur or impose those costs on the sectors – costs that ultimately are paid by current and future water consumers.”

“Key to our proposals is a four-stage approach to assessing risks and making our decisions on whether to act and what course of action to take. This means that action that may impose a significant regulatory burden can only progress after it has been approved at a senior level within Ofwat.”

Ofwat will now work towards finalising the proposals by February 2012. Deadline for submissions in response to the consultation by 18 January 2012.

Click here to access the consultation document.