Written evidence submitted by OFWAT
INTRODUCTION
1. Ofwat (the Water Services Regulation
Authority) is the economic regulator of the water and sewerage
sectors in England and Wales. The industry comprises 22 regional
and local monopoly companies and five new entrants (new appointments).
Ofwat has been in existence since 1989. It became a corporate
body with a Board structure on 1 April 2006.
2. Our main duties are to:
— protect the interests of consumers, wherever
appropriate by promoting effective competition; and
— enable efficient water and sewerage companies
to carry out and finance their functions.
We are also required to contribute to the achievement
of sustainable development.
3. Since privatisation, our regulation of
the sectors has helped to deliver a number of successes. Leakage
has been reduced by one-third, drinking and bathing water quality
has been improved and £90 billion has been invested in infrastructure.
We have challenged the companies we regulate to become more efficient,
delivering bills that are £110 lower than they would otherwise
have been.
4. However, the sectors now face a new set
of challenges, including:
— increasing environmental regulation;
and
— affordability concerns coupled with rising
consumer expectations.
5. We welcome the work already undertaken
by the Pitt, Cave and Walker reviews.
EXECUTIVE SUMMARY
6. Regulation of the water and sewerage
sectors has been very successful over the past 21 years. But the
sectors in England and Wales face new and significant challenges
including climate change, population growth and affordability.
So the time is right to review the regulatory framework and ask
how it can contribute to meeting those challenges.
7. This submission explores briefly some
of the issues that Ministers may wish to consider as they seek
to address these challenges in the Water White Paper and any future
legislation. We have structured our submission into the following
broad themes.
8. At the heart of our submission is the
need to value water. This will help drive better investment decisions,
sustainable management of water resources and efficient use of
water. For example where companies understand the value of water
they will be incentivised to share or trade water where that is
efficient, instead of unsustainably abstracting more water from
the environment. They will also be able to make better decisions
about managing demand and leakage compared to building new supplies
such as reservoirs.
9. Decisions on environmental improvements
need to be more transparent. Consumers should understand what
they are being asked to pay for through their water bills. Sustainable
outcomes will only be possible if accountability for environmental
damage lies with those responsible for that damage. Tools like
the "polluter pays" principle can help.
10. Customers are central to the success
of the sectors. The sectors, including the regulator, must have
legitimacy in their eyes. So we need to continue to improve customers'
understanding of and engagement in how we set price limits on
their behalf. Customers must also see that they are treated fairly
and supported when they cannot pay their bills. Changes that directly
affect customers—for example the roll out of metering—must
have clear policy goals set out.
11. We also need to develop innovative ways
of regulating that build on customer engagement. That includes
targeting our regulation on those areas customers consider most
important. We could also take a more risk based approach to data
gathering to reduce the regulatory burden. This would include
continuing to safeguard services to customers by effective action
on their behalf where there are failures. Because we are already
planning for the next price control period, any changes to regulation
need to be made as soon as possible to allow them to become established.
ENVIRONMENTAL OUTCOMES
12. We need a holistic approach to environmental
policy that emphasises water. It is a crucial part of the natural
environment, our economic prosperity and way of life and we must
value it properly.
13. This means considering the effect of
removing water from the environment, the carbon impacts of providing
clean supplies and disposing of used water and the impact on customers'
bills.
14. Such an approach will help to, but will
not on its own, reveal the true value of water to the environment
and society. Revealing that true value would drive more sustainable
investment choices by companies, more sustainable decisions on
the location of water intensive industries, and more sustainable
behaviour by consumers of water.
15. The recent drought in the north west
highlighted problems that arise when water becomes scarce—either
at a point in time as in this case, or over time as in the south
east. While a national water grid would be unfeasible and very
expensive, an understanding of the value of water would encourage
companies to share resources in more effective ways. This might
allow other investment to increase supply to be deferred—delivering
both cost benefits and benefits to the environment
16. Water customers have, to date, borne
most of the costs associated with the Water Framework Directive
and other environmental regulation. It is important that environmental
improvements are paid for fairly and all responsible parties bear
their share of the costs. This is particularly important where
customers are already struggling in the current economic climate
to pay their bills. Costs must include the carbon impact of implementation.
17. A particular concern is how to encourage
less pollution and damage to our water resource in the first place.
Under the current arrangements there is no incentive on those
responsible for causing pollution to consider alternative options.
This is unfair on water customers who have to pay for expensive,
carbon intensive treatment processes. The polluter pays principle,
as promoted in the Water Framework Directive, has an important
role in addressing this. It gives the right signals to stops polluters
from polluting. But this must be backed by strong regulation to
deter those willing to flout the rules.
18. Climate change means we will need to
adapt to the increased risk of weather volatility, such as more
frequent flooding. We are currently reviewing the regulation of
drainage infrastructure to ensure that it is fit to meet the challenges
of the future. We will be happy to share the findings of this
review with the Committee.
19. There is an opportunity for the Natural
Environment White Paper to set these issues in a wider context
and to emphasise the value of water to the environment. We will
share our response to the Government's current consultation with
the Committee.
SOCIAL OUTCOMES
20. Consumers are at the heart of our regulatory
regime. They are entitled to good quality services at a fair price.
Therefore, it is essential that consumer representation is strong
and effective within the price review process. We need to continue
to improve that representation, engagement and understanding,
which can only be beneficial for the consumer.
21. Effective engagement will ensure that
customers, who have no choice in the supplier of their water service,
are confident that they are getting a fair deal. This is essential
if the sector, including its regulatory regime, is to have legitimacy
in customers' eyes.
22. The Walker review made a number of important
recommendations. It identified affordability as a growing problem,
particularly in the south west whose customers face the highest
bills. Bad debt is rising, adding £12 to each customer's
bill. It is important that a clear framework is established to
assist those unable to pay their bills.
23. Ministers asked us to look at a number
of options to help customers in the south west to help inform
their choices on social policy issues. We would be happy to share
our initial findings with the Committee.
24. The Walker review also looked at metering.
It concluded that metering is the fairest method of charging.
But consideration needs to be given to the pace and impact of
switching to metered charges. Failure to consider the impacts
can lead to affordability concerns for vulnerable customers.
25. It is important that, while the review
of the welfare system is under way, affordability concerns within
the sectors are given due attention.
ECONOMIC OUTCOMES
26. The regulatory framework has worked
well so far. We now have an opportunity to examine what parts
of the system remain fit for purpose and which need to be changed.
We are currently carrying out a review of how we regulate, and
how the regulatory burden can be reduced by taking a more targeted,
risk-based approach. We will share our preliminary findings with
the Committee.
27. Greater customer engagement and closer
integration of the customer voice in the regulatory process will
greatly assist this move towards risk-based regulation.
28. Focusing more on risks within the sectors
will allow us to collect less information. Instead, we can concentrate
on the material issues of concern, and particularly how they impact
on customers.
29. If the recommendations of the Cave review
are followed and market forces are introduced into the sectors
the regulatory framework will, necessarily, change. Overall, the
impact of these changes will be deregulatory.
30. Although we have just begun a price
control period (2010-15) any changes to regulation would need
time to bed in. The companies would need time to adjust to any
new reporting requirements and we would need time to put any new
systems in place. As a result, any changes would need to be made
well in advance of the beginning of the 2015 price review process
in early 2012.
October 2010
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