Ofwat has launched a new consultation over its proposals for future regulatory reporting requirements for the regulated water companies.

The water industry regulator said the changes are needed to take account of separate price controls, company-specific delivery performance assessment and forthcoming changes to accounting standards from 2015-16.

The draft proposals set out an overall framework for regulatory reporting in the upcoming AMP6 2015-20 period and a summary, together with Ofwat’s justifications for the proposed reporting requirements. 

Introducing the consultation, Ofwat said:

“Our emerging vision for the sector is that there should be trust and confidence in the services that are provided by all companies. Services are largely provided by vertically integrated monopolies, and it is vital that there is appropriate transparency on their performance, which includes reporting on the services they deliver to customers and the costs they incur for those services. In the water sector it is particularly important that there is comparative information available so that all stakeholders are able to analyse relative as well as absolute performance. “

The regulator said it was “mindful of the need for regulatory reporting to add value for customers and other users and the costs incurred by companies to produce such information must be justified on this basis.”

Ofwat said the proposals were aligned to its vision for the water sector and for Ofwat as the sector’s economic regulator, which it will publish this year, following consideration of inputs from its June stakeholders workshop.

Form and scope of regulatory reporting

Ofwat said that the regulatory reporting framework should:

• focus on value-added reporting;
• be risk-based, practical and targeted; and
• provide flexibility for the future.

Ofwat is proposing a single, annual regulatory report with financial components based on the existing regulatory accounts framework. It would however also be “widened to reflect the importance for stakeholders of being able to assess financial performance in a consistent manner, with a combination of narrative and financial reporting. “

Commenting on its plans, Ofwat said an integrated published annual ‘regulatory report’ would allow further steps towards implementing its more risk-based regulatory framework, and be the primary vehicle that companies use to demonstrate compliance with the separate price controls.

The key purpose of the regulatory report would be to support comparability to ensure stakeholders benefit from consistent reporting across the sector

Ofwat is proposing that the water companies prepare and publish the report in the form of a separate document but append it to their statutory accounts to reduce the level of repeated information and to help cross-referencing.

In Ofwat’s view statutory accounts on their own are insufficient to assess the performance of vertically integrated, price-controlled monopolies which it sees as particularly relevant in a water sector with long-life assets and where there is an absence of competitive markets for different parts of the value chain.

As part of PR14, the regulator has set separate price controls for the different wholesale and retail elements of the appointee business - the water companies are therefore required to present financial information for each to allow stakeholders to review companies’ performance against final determinations. Ofwat said it is likely that price controls will be further disaggregated from the 2019 price review(PR19) and be based on revenues as well as costs. 

Under the proposals, the water companies would also be required to present a performance summary in a separate section of the regulatory report which would be a high-level report of the performance of the appointed business, including outcome delivery and the regulatory financial results of the regulated business.

Ofwat said that as a minimum, it would expect this section to include reporting on the following:

• outcomes and delivery service levels – performance against delivery commitments and associated delivery incentives (including the service incentive mechanism or SIM); and
• cost performance – the company’s efficiency in delivering wholesale and retail services compared with the expectations set in final determinations.

Stakeholders should be able to understand the extent to which companies are genuinely delivering lower cost solutions (the benefits of which are likely to be shared with customers), as opposed to phasing costs differently from expectations. Ofwat also expects to see some consistency between the metrics that all companies present on their outcome performance, and a minimum level of reporting to ensure comparability.

Ofwat is also proposing that all the water companies should present a real or shadow credit rating, obtained from at least one of Moody’s, Standard & Poor’s or Fitch, alongside a commentary of how the rating has been generated. Some companies (including those with listed debt) are already required to publish an investment-grade credit rating as at the date of publication of the regulatory accounts.

Ofwat said that information collected under the reporting framework should also help stakeholders, including customers and investors, to make effective decisions and hold companies to account, and allow appropriate performance and financial monitoring and regulation for the period 2015-20.

The closing date for submissions to the consultation is 11 November 2014. Click here to download the consultation document.