Ofwat has today published its final methodology and expectations for the water companies’ business plans which will set out their five year investment programme sfor 2015-2020. The water industry regulator said that a “closer look at companies’ retail services and encouraging water trading alone” will deliver a £2 billion benefit.

Setting price controls for 2015-20 follow widespread consultation and set out Ofwat’s approach to setting limits on how much water and sewerage companies in England and Wales can charge their customers from 2015 to 2020.

Outgoing Ofwat Chief Executive Officer Regina Finn said:

“There has been broad support for our plans which align with a culture that is changing in the water sector. We want companies to move away from ticking regulatory boxes and to concentrate instead on the importance of delivering for customers now and in the future including the environment. Our changes will drive a more efficient, dynamic, and customer-focused sector, developing long term solutions to meet long term challenges. This is good news for customers, the environment and the economy.

“It’s now time to deliver. Companies need to listen to their customers and come up with plans that show how they will meet the challenges facing the sector, such as affordability and long-term sustainability.”

Ofwat said it had committed to preserving core elements of its approach that make the sector attractive and able to access low cost financing that keeps customers’ bills down.  Changes flagged up by Ofwat include:

• getting companies to focus on delivering long term outcomes, giving them more scope in how they deliver; this will encourage innovative ways of working that can deliver services for less money, and with less impact on the environment; and
• giving customers an increased say in how their services are delivered and how their money is spent, and making companies more accountable for delivering what customers want over the long term.

Ofwat said it expects to see substantial efficiencies being delivered in the next five year review, commenting:

“…on top of that, independent analysis shows there are around £2 billion of combined benefits on the table for customers coming from the changes in our approach.

This includes focusing more closely on the customer-facing activities of companies through separate price controls and plans to encourage companies to use water more efficiently through trading.”

Little progress has been made in the last two decades on water trading, which involves moving water, across company and regional boundaries, from where it is plentiful to where it is scarce, with only 4 – 5% of water traded in the UK.

The regulator said the changes it was making to encourage water trading, as well as measures such as the focus on long term outcomes, were aimed at ensuring that companies become smarter in how they manage their water.

Ofwat said that this would help keep costs down, better protect the environment, and help the sector meet the significant challenges of managing water when there is increasingly volatile weather and population growth in areas where supplies are already stretched.

The publication follows a period of more than three year’s engagement by the regulator on how it might change its approach to setting price limits. Companies will submit their business plans to Ofwat on 2 December 2013. Ofwat will make final decisions on prices by January 2015, with new bills coming into effect in April 2015.

Ofwat has also today announced it is seeking increased licence fees from the appointed water companies to help fund the 2014 price review, before reducing fees in 2015.