PN 04/15 Ofwat responds to National Audit Office report into economic regulation of the water sector in England and Wales

Ofwat today welcomed a major new report supporting its approach to regulation which is delivering improved services, substantial new investment and “increasing value for money for consumers”.

Cathryn Ross, Ofwat Chief Executive said:

“I welcome the NAO’s clear recognition of the benefits already achieved, and the value of the new approach adopted for Ofwat’s 2014 Price Review. It highlights that Ofwat has been constantly refining its approach to respond to a fast moving world of uncertainty, and its new regulatory framework will make the sector more resilient and accountable in future.

“The NAO report highlights what Ofwat has already achieved: significant environmental improvements including service improvements, company efficiencies, and strengthening of company Boards and corporate governance. It also praises the outcome of our 2014 Price Review which means by 2020 bills will be £3 billion lower than companies had planned, a 5% decrease in real terms, £44 billion extra investment by companies and assistance to an extra one million vulnerable customers.

“I am pleased that the NAO recognises the significant changes we have made to the regulatory model, putting greater emphasis on companies taking more responsibility for results, taking a longer term view of challenges and listening more to their customers’ priorities. The NAO welcomes this approach, supported by a strong monitoring and assurance regime and our continuing commitment to step in quickly in a proportionate way when serious things go wrong.

“Developing and maintaining trust and confidence in this vital service is a journey which involves the whole sector, and we are keen to learn from, and work with all of our stakeholders. The report’s recommendations are helpful in providing a clear independent steer on some important issues facing the sector. They build upon the progress we have already made in these areas: transparency of costs; the appropriate balance of risk between customers and companies; customer engagement; and transparency of companies at a corporate and financial level.

“I was surprised by a suggestion that our price control regime does not yet achieve value for money, particularly given the evidence of strong delivery throughout the report. The report itself states that the Consumer Council for Water found that the majority of customers are satisfied with the value for money of water services with an increase from 69% in 2009 to 75% in 2014. Just last week the Competition and Markets Authority also endorsed our approach and supported significant price cuts for customers in the Bristol area – far greater cuts than the local company wanted.

“The report is right to say that companies made significant unexpected gains during the 2010 – 2015 period. This is not new information:  Ofwat Chairman Jonson Cox challenged companies on this when he took the Chair in 2013. The gains were largely as a result of unexpectedly low borrowing costs following the severe global financial crash, high inflation and changes in tax rates during the 2010 to 2012 period.

“In looking at this the NAO also however acknowledge that the way Ofwat balanced risk between companies and customers shielded customers from increased financial risk which could have led to significant bill increases had rates increased. I stand by this approach, because it protected customers from a risk that we did not think they should bear and provided certainty about the cost of their water bills.

“We do expect companies to own their relationship with their customers, be transparent and do the right thing by them. During this period we ensured that around £435 million was passed back to customers. A reassessment of the balance of risk and reward was also undertaken as part of the 2014 price review which resulted in the lowest ever cost of capital in a regulated sector set for the next five years and links company rewards and penalties to the outcomes their customers want to see delivered.

“Overall, that is good news for customers, and going forward, the NAO recommendations will help us to further improve our regulatory approach to continue to better align the interests of customers and companies.”

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Notes to editors

  1. The Water Services Regulation Authority (Ofwat) is the economic regulator of water and sewerage companies in England and Wales. Its role is to help the sector build trust and confidence with customers, the environment and wider society. It exercises its powers in a way that it judges will protect the interests of consumers, promote value and safeguard future resilient water and sewerage services by allowing efficient companies to carry out their functions properly, and finance them.
  2. Media enquiries to Ofwat Press Office on:
    Benedict Fisher 0121 644 7642 / [email protected]
    James Sheward 0121 644 7644 / [email protected]