So what does Ofwat's recently published Emerging Strategy document say exactly? Addleshaw Goddard partner and utilities expert Andrew Walker looks behind at a new shared vision for the water sector.


Background

Ofwat expects water companies to provide resilient, affordable services for everyone and to plan and invest effectively for the long term. This new strategy document sets out Ofwat's thinking about a new shared vision for the water sector and its strategy for regulating the water and wastewater companies in England and Wales from 2020 onwards. Ofwat wants to drive positive lasting change.

Ofwat Aspirations

Ofwat has three aspirations which are:

  • Delivering everyday excellence – the standard of service needs to be continually rising and customer's changing expectations must be met
  • Stewardship for the future – companies need to share responsibility for thinking and planning for the long term. They need to look after the systems, relationships, investment and reputation to ensure a sustainable future and also protect and enhance the environment.
  • Value for individuals and for society – water needs to be affordable and through delivering water and wastewater services companies need to deliver value for customers, communities and the environment. 

Challenges

Ofwat has identified some challenges to achieving its shared vision of excellence. These are:

  • Long term water resources - a growing population and changing climate are making it harder to meet water demand and water consumption in the UK remains one of the highest in Europe
  • Operational resilience – companies' assets are not always resilient to extreme weather events
  • Pressures on the natural environment -  increased abstraction is putting the natural world under strain. Flooding and drought arising from climate change are becoming more common
  • Customers' changing expectations –  customers increasingly expect more personalised, digitally enabled and sophisticated methods of anticipating and meeting their needs
  • Legitimacy – the water and waste industry's reputation has been damaged by some water companies historically being more focussed on making money for their owners and managers than delivering for customers. Increasingly people expect companies to act ethically and in the interests of the planet and society
  • Affordability – water needs to be affordable to all

Existing Ofwat Policies to be Retained and Built Upon

Based on an initial assessment of what has worked well so far, Ofwat expect to retain and build on much of their existing policy framework, including:

  • An allowed return on the assets of the regulated company – this approach to setting the price companies can charge gives investors certainty of revenue and a predictable return
  • Outcome based incentives, reset every 5 years -  the 5 yearly reset of revenue allowances, performance commitments and incentives allows Ofwat to drive continual improvement. Ofwat will reward companies that meet stretching performance commitments focussed on things that customers care about and that deliver for society and the environment
  • Financial resilience and board leadership  - financial resilience, a strong regulatory ring fence and responsible governance arrangements which consider the interests of customers and other stakeholders alongside those of investors are essential
  • Markets, trading and competition – can all help to drive further innovation and provide faster, low cost and efficient water connections to new homes
  • Customer engagement – companies should have customers at their heart, understand the different customers that they serve, engage directly and regularly with them and ensure that their decision making is well-informed by customer priorities, interests and changing expectations

Required Shifts in Ofwar Approach

Ofwat has identified 3 significant shifts which it thinks it needs to make in its approach to regulation. These are :

  • Creating a better future – setting long term targets, planning for sustainable future water resources and ensuring long term operational resilience
  • Driving transformational change – enabling adoption of innovative approaches, encouraging affordable solutions for the environment, maturing companies' relationships with their customers and turning information into insight
  • Encouraging private enterprises to deliver public value – looking to companies to own their public purpose, encouraging delivery of social and environmental value and ensuring value in the round for customers. communities and the environment

Required Changes in how Ofwat Works

To make these shifts and to achieve the aspirations in the vision Ofwat expects to make the following changes to how it works:

  • Listening more to customers – so that Ofwat can drive change and enable water companies to deliver value for customers, communities and society
  • Collaborating and partnering more – with other regulators for a more joined up and effective approach and to allow the greater sharing of expertise, insight and resources
  • Creating space for open discussion with water companies – about performance and other challenges across the industry and within individual companies
  • Carrying out more frequent reviews and evaluations of how effective Ofwat;'s regulation is being in driving the medium and longer term changes and improvements needed in the sector
  • Developing  new skills and making better use of data so that Ofwat are more effective and efficient in everything they do

Commentary

The Emerging Strategy document is to be welcomed – Ofwat's aspirations articulated therein are highly desirable and commendable as are the shifts identified in the document as needing to be made in Ofwat's approach and in how Ofwat works. Achieving these aspirations in the face of the challenges identified in the document will undoubtedly prove stretching and ambitious but it is right to set these targets as the water sector moves and evolves forward. 

You can read the full document here.

Key contact

Andrew Walker

Andrew Walker

Partner, Corporate
Edinburgh

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