Future regulation

Last month Water UK published an open consultation on proposals for regulation. Barrie Clarke looks at the benefit to customers


Unlike ebony and ivory, regulator and regulated seldom go together in perfect harmony. Pride in tough requirements, set or met, is often matched by frustration. Different perspectives are as inevitable as boundaries are essential. That said, in recent years everyone in water has got on a lot better: success born of cooperation is in the air.

But nothing is forever. This is just the moment for problems to loom up and threaten the complacent or unwary. Water UK is determined to avoid this and last month published an open consultation on proposals for regulation in England and Wales fit for the challenges ahead1.

The success - measured according to taste in outputs or market confidence - means that evolution, not revolution, is the aim. Yet the project motives - to deliver better customer service and environmental protection, more efficiency and innovation, lower regulatory costs, and sustained capital funding - have produced a demanding agenda for change. This article looks at the benefit to customers.

Among the outputs of cooperation was customer research carried out by the industry, regulators, government and others before the 2004 periodic review. The findings2 show that customers' priorities are high quality tap water and security of supply, and investment in the infrastructure on which these depend. Cost was important naturally. Two thirds would probably be willing to pay more for improvements; a fifth were not. These views should be kept in mind when considering WUK's five objectives as detailed and discussed below:

1 Longer-term framework
The potential for conflict between long-term industry plans - to secure water resources for example - and a five-year regulatory cycle is well understood, and up to now it has been managed. However, this could change in the future. For example, planning for climate change and the advent of the water framework directive could make huge additional demands on the industry and its customers.
Water UK shows how a longer-term
strategic framework would protect customers from making costly mistakes. Case studies conducted in Yorkshire and Northumbria concerning the freshwater fish directive are graphic illustrations of what could go wrong... and right.
The obvious conclusion is that a longer-term approach would enable required
standards to be delivered at lower cost to customers than imposing the ratchet at arbitrary five-year intervals.

2 More consistency and coordination
Public differences of view between water regulators are not uncommon. The Environment Agency distanced itself from an aspect of Ofwat's final determinations in 1999. More recently, companies were informed that discharge licences would require changed terms whether funding was agreed or not. Uncertainty of this kind is distracting (as environment select committees have recognised) and could stymie efforts to meet future requirements.

Take just one example: the Water Framework Directive. Implementing the 'polluter pays' principle will need the closest cooperation between all parties. A lack of agreed actions to cut diffuse pollution will leave wastewater companies to pick up the bill and inflict high costs on undeserving water customers. When river basin management plans are drawn up, proper coordination must ensure that customer preferences and willingness to pay for improvements are taken into account.

3 More appropriate risk/return balance
Rewarding investment while protecting customers and enhancing service will be paramount in the years ahead. The approach taken to efficiency and incentives will be crucial.

Water UK shows how the current regime can stifle innovation and the capacity to deliver the services customers want. A full debate about incentives is needed. Will cost reduction, by means that are only too familiar, continue to be the main objective?
Could a more flexible approach do more for customers, still at least-cost? For example, present policy discourages additional spending between price control periods to meet genuine customer needs. Instead, the industry would like to see positive incentives to encourage investment where there are
obvious potential benefits.

4 Simpler, smarter regulation
Few political winds are blowing as strongly now as that behind the 'cut red tape' movement. Water UK believes that a lighter touch approach to regulation can help to free business to deliver regulatory outcomes more efficiently. The potential benefit to customers need not be spelt out.

5 More accountability
Water UK proposes ways of finding a greater sense of shared purpose and mutual trust, including more accountability on all sides.

Ofwat - the Water Services Regulation Authority from April 2006 - will be asked to take more account of evidence in its conclusions and provide a more robust route for appeals. Government should look at more systematic regulatory impact assessments. The industry should understand customer priorities better and work better with WaterVoice (soon to be renamed Consumer Council for Water). This is nowhere more important than in managing affordability, debt, metering and water efficiency.

In future, water companies will need to understand that what customers want may go beyond strict regulatory requirements. The big question for respondents to Water UK's consultation is how to effectively help
regulators become more flexible.

References:
1 Water UK, Future regulation for the water industry: a consultation, (July 2005)

2 Defra, Ofwat, Water UK et al., The 2004 periodic review: research into customers' views, (December 2003)

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