Ofwat, the economic regulator of the water industry in England and Wales, is embarking on the biggest changes to the UK regulatory framework since privatization in the 1990s. The proposed changes center around increasing customer and community involvement and introducing competition to the water industry. Ofwat believes customers are demanding more say in water services and will have customer challenge groups scrutinize utility business plans. Competition will also be introduced starting in 2017, initially for business customers only. These changes aim to increase flexibility, enhance the consumer role, reduce regulatory burden, and create stability for investment, while promoting innovation.

1. September
16
Competition is the answer, now what was the question?
WSAA recently held a successful series of workshops for members and
stakeholders looking at significant developments in regulation in the UK
water industry. It was a pleasure to host Andrew Beaver from The Water
Services Regulation Authority, or Ofwat, the body responsible for
economic regulation of the privatised water and sewerage industry in
England and Wales. Despite a year of success on the sporting fields in the
UK including cricket, tennis, Tour de France and, dare I say it, the Lions
tour, Andrew kept his gloating in check and delivered a set of powerful and
topical workshops. Andrew presented to the WSAA Members meeting and
additional public workshop in Sydney. The workshops also benefited
greatly from the insightful comments of Ron Ben David (Chair of
the Essential Services Commission), Clair Petre (NSW energy and water
ombudsman), Kim Wood (MD Hunter Water) and Dominic Schuster (NSW
Treasury).
Ofwat is embarking on the biggest change to the UK regulatory framework
since the industry was privatised in the 90’s. The current framework has
supported £110 billion of investment in the industry, but the gains are
decreasing. Many of their challenges are similar to those we face in
Australia – more frequent floods and droughts from climate change,
affordability issues from tough economic times, while also meeting the
needs of the environment.
The proposed Ofwat regulatory changes centre on two main themes – that
of customer and community involvement and the introduction of
competition to the water industry.
Ofwat believes that customers, particularly business, are demanding a
greater say in the services delivered by the water industry, and has issued
a challenge to the utilities to demonstrate they have the customers and
community behind them. Ofwat will be advised on the merits of the
business plans of each utility by customer challenge groups.
I think this is a very interesting concept, but for me the real challenge will
be developing representative consumer groups. They will need to seek
expertise and voices from customers over and above welfare and social
justice groups. In Australia, research has shown that around 40% of
customers are happy to just pay the bill and not think about water services:
this is a large proportion that would be unrepresented on such groups. It
will be tricky to avoid the groups being hijacked by a vocal minority that
could force utilities to modify plans. However, this move is definitely in the
right direction and it will be an issue we will be exploring further at WSAA.
If the utilities’ plans pass the scrutiny of these groups, Ofwat will then take
a more outcomes focused approach to regulation. Utilities will have more

2. flexibility about what they submit, and how they recover costs. Ofwat is
reducing the distinction between opex and capex through the concept of
totex (total expenditure). At the same time they are keen to preserve the
predictable climate for investment which allows the water industry to
access capital at low cost.
The other major theme of competition will begin in 2017 with retail
competition initially just for business customers. It struck me that they are
doing this very carefully through a step by step approach thereby retaining
investor confidence. The broader productivity gains will be worth
monitoring closely. For example the major supermarket chains Tescos and
Sainsburys will have an option to work with just one utility across the entire
UK, rather than a plethora of different rates and invoices for each facility
across many geographically based water utilities.
As Andrew mentioned on more than and few occasions, the usual line of
economic rationalists is ‘Competition is the answer, now what is the
question?’ Competition through yardstick comparison has been the
bedrock in the UK and produces demonstrable improvements in
productivity. Some jurisdictions use yardstick comparison in Australia,
although maybe not enough?
Ofwat doesn’t have all the answers but I definitely believe that in seeking
greater flexibility, enhancing the role of the consumer, loosening the
regulatory burden and creating a stable climate for investment they are
asking the right questions and creating room for innovation.
(L-R) Adam Lovell, Clair Petre, Dominic Schuster, Andrew Beaver, Kim
Wood and Ron Ben David.