Ofwat Chief Executive Regina Finn has denied that the industry regulator is acting beyond its existing powers with regard to modifying licences of water companies.

Speaking at the second oral evidence session for the Draft Water Bill, held by the Environment, Food and Rural Affairs (EFRA) Committee yesterday, Ms Finn came under attack from the MPs after a statement from credit rating agency Moody’s described the degree of flexibility which Ofwat is seeking as ‘surprising.’

Ofwat has recently released a revised consultation on changing water company licences after initial measures proposed by it were met by serious concerns from investors and water companies.

In the new consultation, Ofwat stated: “We are seeking some flexibility to change the way we set prices in the future without the need for further time-consuming and burdensome changes to licences, while still retaining the importance of the licence as a key foundation document and protection for companies, investors and others on the basis of our regulation.”

MPs suggested that Ofwat was seeking to act beyond its powers with regards to water company licence modifications before the proposals set out in the Draft Water Bill to modify the licences become law.

Ms Finn said: “We are not going outside our powers and we are not seeking to do anything beyond what we need to do to regulate this sector effectively.”

She added that the changes Ofwat is proposing were merely to help it regulate effectively and focus on incentives for water companies to produce better outcomes for customers.

In written evidence on the Bill and in the last oral evidence session with water company representatives, there were concerns that Ofwat is being given too much discretion in the Bill.

When this issue was brought up in the session, Ms Finn expressed surprise at the fact that the water companies are uneasy about it because Ofwat already has the power to undertake consequential amendments to licences from the Water Act of 2003. Ms Finn believed overall that the Draft Water Bill does not give Ofwat too much discretion on matters of licence modification, setting up of market codes and managing the development of the market. She also argued that Ofwat’s powers were bound by its primary duties of protecting consumers and ensuring water companies can raise capital easily. However, she was also open to further debate on the matter.

Water companies are generally afraid that changes in their licence conditions and leaving Ofwat to set access pricing regimes could have a negative effect on capital costs, which could rise. Ms Finn did not scotch this fear but said that the Bill provides the tools for Ofwat to ensure a sustainable water sector and that finance raised “must go into the right investments for the long-term future of the sector.”

On the risk of assets becoming stranded, which water executives have mooted previously, Ms Finn assured the Committee that market reforms would send signals to companies to invest in the right kind of asset at the best possible cost. She was keen to provide incentives for companies to invest in sustainable solutions for the industry in order to improve resilience and interconnectivity between the companies.

One MP on the Committee suggested that all stakeholders in the water industry, apart from only the Secretary of State, realised the need for companies to have an exit route for retail services. Ms Finn said that competition was possible with the “constraint” but it could have a negative impact on customer bills. In the absence of a clause for retail exit, she said Ofwat would want to regulate in a way which “maximises a level playing field and allows maximum benefit for customers.” She added however, that if it became a barrier to the evolution of the competitive market, primary legislation may be needed to change it.

Another concern brought up in the previous oral evidence session was the potential consequence, unintended or not, of the deaveraging of customer bills as a result of upstream reform. Ms Finn was adamant that household bills would not be deaveraged because their prices will continue to be regulated due to there being no competition in the household sector. She dismissed water company concern that bills could be deaveraged because of upstream reform as a “myth” and with no logic behind it.

Upstream reform could also impact on water infrastructure resilience. Ms Finn said upstream reform would help protect the resilience of the industry as it was not only designed to get water companies developing water resources in their own geographic area, but it will also allow other parties with a water supply to sell water to the companies. She expected to see more interconnection between networks and said the reforms “will lead to a resilient, long-term system.”