Regulation of the water industry Contents

5Is regulation fit for purpose?

76.Much of our report has referred to the current price review, PR19, which will be finalised in December 2019, setting prices for the period 2020–2025. Ofwat considered that the last price review (PR14), covering 2015–2020, was delivering lower bills, more investment, fewer supply interruptions, reduced leakage and environmental benefits.209 In the next price review, Ofwat has “set four themes for companies to focus on and deliver against: resilience, affordable bills, customer service and innovation”.210

77.Some water companies were supportive of the approach taken in PR19. For example, Yorkshire Water stated that it “represents a major step change in the regulation of the sector and creates clear incentives to improve services to customers”.211 Others were dissatisfied with the five-year timescale. For example, Anglian Water stated that:

Current regulations require water companies to submit business plans every five years against ever increasingly vast and burdensome requirements. The frequency of these reviews is arguably too high, with much of the five year period used to plan for the next. There is a case for aligning utility regulatory cycles to allow local authorities and strategic planning bodies to take a more comprehensive and consistent long term view on growth.212

78.The Government’s 2011 Review of Ofwat and consumer representation in the water sector, known as the Gray review, found that “Ofwat has contributed to significant achievements in the water sector since it was established in 1989”.213 Although nobody had “recommended radical change to the sector’s regulatory arrangements”, Ofwat needed to “make some important changes to the way it works” to allow regulated companies to address the “substantial future challenges” facing the sector.214 Investors in Water stated that:

While aspects of Ofwat’s framework have become more flexible (such as its approach to outcomes), the overall complexity of the framework has increased. At a high level, the regulatory methodology and supporting appendices for the 2014 price control totalled 289 pages, whereas the 2019 price review methodology totals 828 pages (plus further supporting documents). Clearly, a regulatory settlement that covers over £50 billion worth of revenue over a five-year period should contain a degree of detail. However, it is an observable fact that the overall complexity and prescriptiveness of the framework has increased, rather than achieving the reduction in regulatory burden that the Gray Review envisaged.215

In contrast, Bristol Water noted that “the regulatory framework has evolved and adapted significantly over time” and that:

The pace of change has accelerated since the review by David Gray in 2011 of Ofwat’s regulation of the water sector, which noted at that point the considerable evidence that burden of the regulatory regime meant water companies were too Ofwat-focussed and conservative in their approach. A substantial change in culture of both companies and Ofwat was felt to be required. There is evidence of a positive culture change since then, supported by changes to the regulatory regime.216

79.The Chartered Institution of Water and Environmental Management (CIWEM) suggested that:

After three decades, it would be right for an independent review to consider the ability of the water industry, as currently configured and regulated, to meet the needs of the environment and society, which are considerably different and in certain contexts more acute to those which existed 30 years ago. Such a review should take the opportunity to examine how water companies are owned, operate and are regulated in the devolved administrations and make recommendations for how the current approach may be improved.217

Rob Lawson, Chair of Water Resources Panel, CIWEM, explained that:

It is not just about prices and charges to customers. There is a much bigger need to focus on environmental outcomes. There is a much bigger need to engage with customers […] that is why we recommend a review.218

80.The Future Water Association questioned Ofwat’s “significant emphasis” on reducing bills in PR19, despite the “average water and sewerage bill [being] around £1.11 per day (or just over £400pa)”.219 It stated that:

The recent customer engagement exercise by the companies as part of their PR19 Business Plan development has suggested customer priorities are more about long term resilience and continuity of water and wastewater services, reducing leakage and protecting the environment, rather than bill reductions.

It could be argued therefore that the current regulatory approach, or part of it, mitigates against the long-term outcomes for consumers and the environment.220

81.The water industry in England and Wales is diverse, and in the drive to mimic and create competition, economic regulation has become very complex. The introduction of the water retail market is an interesting experiment, the success of which remains to be seen.

82.While Ofwat has increasingly tried to take a less prescriptive approach and focus more on outcomes, the price review methodology has become more lengthy and detailed. It is unclear whether economic regulation has overall become more or less burdensome for water companies and what the impact is.

83.We recommend that the Government commissions an independent review of whether the water industry and regulation are fit to meet future needs such as drought resilience, as well as delivering value for money for customers. Consideration should also be given to whether the price review cycle is too short to allow long-term planning in the industry. Our recommended review should begin immediately so that it can influence the 2024 price review. A strong, independent regulator will be needed in England and Wales in the future, under all circumstances.

209 Ofwat (RWI0016), para 15

210 Ofwat (RWI0016), para 16

211 Yorkshire Water (RWI0037) para 1.1

212 Anglian Water (RWI0015) para 8

213 Department for Environment, Food and Rural Affairs, Review of Ofwat and consumer representation in the water sector, 2011, p 3

214 Department for Environment, Food and Rural Affairs, Review of Ofwat and consumer representation in the water sector, 2011, p 3

215 Investors in Water (RWI0027) para 38

216 Bristol Water (RWI0040) para 1.2

217 Chartered Institution of Water and Environmental Management (RWI0021) para 28

218 Q 21

219 Future Water Association (RWI0041) para 1

220 Future Water Association (RWI0041) para 1

Published: 9 October 2018