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Regulating the companies
Fact sheet – Regulating the companies The Water Services Regulation Authority (Ofwat) is the economic regulator of the water and sewerage industry in England and Wales. Our role is to seek value for consumers. Before 1 April 2006 our functions rested with the Director General of Water Services. The framework for the changeover was outlined in the Water Act 2003. It provides a similar structure to other economic regulators. The Board includes the Chairman, a Chief Executive (once appointed), two executive and four non-executive directors. The Board is responsible for deciding how we carry out our functions and effectively meet our statutory requirements. There is a majority of non-executive members. Our duties are laid down in law and, where appropriate, we make judgements about how best to perform them. As a non-ministerial government department we are not subject to direction from Ministers. We are accountable to Parliament and regularly provide evidence to select committees. Each year we provide an annual report to the Secretary of State and the First Minister of Wales, which is laid before Parliament and published. What are our duties? The duties for most of our work as an economic regulator are laid down in section 2 of the Water Industry Act 1991 (WIA91) as updated by section 39 of the Water Act 2003. Our main duties are to:
Subject to our main duties, we also:
We also have general duties in exercising our powers to consider the effect on the environment. Providing water and sewerage services Setting price limits We set annual price limits for each company which allow the companies to finance their functions. The current price limits were set in 2004 for the period covering 2005-2010. They will next be set in 2009. The price limits reflect what each company needs to charge to finance the provision of services to its customers. At present, a review of price limits must take place every five years. We will be consulting to find out if this continues to be the appropriate period. Adjustments can be made to price limits between reviews for a limited number of reasons. We do not control profits or dividends. If companies exceed our efficiency assumptions they will be more profitable. Customers will benefit from these efficiencies at future price reviews. It is for companies to decide whether to share these benefits with customers by charging less than their price limits allow between price reviews. Promoting economy and efficiency The price limits we set companies are based on demanding efficiency assumptions. These encourage the poorer performing companies to catch up with the more efficient ones. We make comparisons between companies, against each individual company's targets, and with other sectors. Where necessary we seek improvements. We provide companies with incentives to keep their operating costs and the costs of maintaining their assets to the minimum necessary and to adopt cost-efficient solutions to achieve their outputs. Where companies are successful, they retain the savings for five years and customers benefit at the next price review through price limits which take account of the efficiencies achieved. For the revenue raised through the price limits, each company must deliver the outputs set out in our determination. It is for the company to decide how to allocate resources to deliver these outputs. Monitoring activities We monitor the activities of the companies. Every year we ask the companies to provide information about the previous year in the June return. These statements provide us with details on a wide variety of activities including, for example, levels of customer service, new additions to the network and leakage information and allow us to compare performance levels between companies. We check that companies are meeting the outputs assumed in the price limits we set. Ongoing monitoring allows us to take early action if needed. We publish four reports annually on the performance of each of the companies:
How we enforce companies' licences? Companies operate under licences, granted by the Secretary of State for Environment, Food and Rural Affairs and by the Welsh Assembly Government, to provide water and sewerage services in England and Wales. The licences impose conditions on the companies which we enforce. Since April 2005 we can impose financial penalties of up to 10% of turnover where a company contravenes its licence or appointment conditions or fails to meet required standards in performing its duties. We can change a company's licence with its agreement. If the company does not agree we can refer the proposed change to the Competition Commission on public interest grounds. Where we feel a company is in breach of the terms of its licence, or is in breach of a duty, we have powers to secure compliance by means of an Enforcement Order. Protecting customers In protecting the interests of customers the Water Act 2003 also gave us a duty to take into account the interests of individuals:
No undue preference or undue discrimination A customer's bill should, in general terms, reflect the costs which that customer imposes on the water and sewerage systems for a supply of clean water, disposal of dirty water and drainage of surface water. We approve companies' charges schemes. The charges scheme includes information such as the level of charges and timing and method of payments. Accounting issues Companies must carry out transactions between the regulated business and any associates at a full commercial rate. We monitor this so that associated businesses are not cross-subsidised at the expense of water customers. We also review the benefits from the sale of land transferred to the companies at privatisation, or acquired since then, to protect the interests of customers. Environmental duties We are also required in developing or considering proposals relating to companies' functions to (among other things) further the conservation, and enhancement of natural beauty and the conservation of flora, fauna and geological or physiographical (landscape) features of special interest. Sustainable development Under section 39 of the Water Act 2003 we must exercise our powers and perform our duties in a way that contributes to sustainable development. We aim to carry out our duties in a way that meets the principles of sustainable development. We are developing our approach. Guaranteed standards scheme Customers of water and sewerage companies are entitled to guaranteed standards of service. If a company fails to meet any of the guaranteed standards, customers are entitled to a compensation payment. The standards include targets on making and keeping appointments, responding to account enquiries and dealing with planned or unplanned interruptions to water supply. How are customers represented? The Consumer Council for Water (CCWater) is a separate organisation that represents the interests of consumers in respect of price, service and value for money. It also investigates complaints from consumers about their water company. (www.ccwater.org.uk). We recognise and respond to CCWater's concerns. By working closely with CCWater, we ensure that consumers' views are at the heart of regulation. Our respective roles and working relationships will be set out in a memorandum of understanding. How are disputes handled? Complaints from consumers about bills and levels of service are normally dealt with by the company first and referred to CCWater only if agreement cannot be reached. CCWater help to resolve complaints where possible. If the company and consumer are still unable to agree a solution we will review the case and can make a binding decision. We also have enforcement powers in respect of certain claims and complaints, including connection charges, drainage and laying pipelines on private land. Promoting competition Our duty to protect the interests of consumers is to be achieved, wherever appropriate, by promoting effective competition between persons engaged in, or in commercial activities connected with, the provision of water and sewerage services. Since 1 December 2005 suppliers, known as licensees, have been able to supply any premises with a likely annual demand of at least 50 Megalitres in England and Wales (a Megalitre is 1,000,000 litres). The new arrangements have nearly doubled the number of customers who are able to change supplier to around 2,200 customers. We continue to monitor the activities of the licensees to ensure that they are complying with their licence conditions. Best regulatory practice In exercising our powers and performing our duties we must have regard to the principles of best regulatory practice. Our activities should be transparent, accountable, proportionate, consistent and targeted only at cases where action is needed. We concentrate our work where it will have most effect, for example, by setting leakage targets only where necessary to achieve cost effective levels of leakage. Who else regulates the water industry? Our decisions are made independently of Government, but we work closely with:
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