The Department for Environment, Food and Rural Affairs (DEFRA) has laid out plans to strengthen Ofwat’s powers to amend licence conditions – based on the model currently used by Ofgem.
Water companies warned that the potential instability caused by the changes – set out in an update on progress towards the introduction of the Environment Bill – could deter investors.
The long-mooted proposal seeks to modernise the process for modifying water and sewerage company licence conditions to bring it more in line with processes followed by other utilities.
DEFRA has released a summary of industry and government responses to its proposed plans, which are likely to impact the way Ofwat handles the appeals process, gathers information and serves documents, as well as amending how it can modify licence conditions.
Investors in the sector urged caution against making changes that could see the water sector become unstable, stressing that “considerable investment had been made in the sector because of the regulatory certainty that it provided”.
In its response, the government noted Ofwat is “potentially constrained” by the current status quo and unable to make modifications it considers necessary, without making a reference to the Competition and Markets Authority (CMA). It added: “this is not a regulatory model that we believe should continue”.
Respondents from the water industry largely stated they did not support proposed changes mirroring licence arrangements followed by Ofgem, suggesting there are not necessarily greater efficiencies to be found elsewhere and questioned the relevance of such a comparison.
Investors also questioned the timing of making such changes to policy in light of the letter sent from the CMA earlier this year to the department for Business Energy and Industrial Strategy (BEIS). The letter suggested moving power from CMA to a judicial route for regulatory appeals in the sector.
The suggested judicial process was called “extremely onerous” by one respondent, both in relation to the burden of proof and costs for water companies, especially smaller ones.
The report said that respondents from water companies and investors in the sector felt the consultation assumed licence arrangements in other utility sectors and regulatory frameworks were more effective than in the water sector. They questioned whether this was the case and suggested “the Ofgem model did not work that effectively.”
Investor and water company fears echo fierce disagreements between the industry and the regulator in 2012 when plans to modify licences dented Ofwat’s reputation and that of the then chief executive Regina Finn, who resigned the following year.
Support of proposed changes came largely from individual respondents as well as from environment and rivers groups. Meanwhile the government acknowledged the majority support came from outside of the water sector.
The majority of proposals outlined in the paper were met with support, however the disagreement from the water sector was based on a feeling that the current system works effectively.
However, South West Water said it supports the idea of changing the licence process to create something more responsive to customers’ needs. It believes any changes should be tailored to the water sector and any individual faults in it rather than simply reflecting processes in the energy sector.
Severn Trent Water said it agreed with the need to modernise the licence process and would support changes that make it easier to make modifications “without necessarily needing 100% support of the industry”.
The consultation generally was criticised by water sector respondents for ignoring the fact that “consumer trust in the water sector generally tended to be higher than for electricity, gas or telecoms”.
The government commented in its response that while this might result in further future changes, the outcome of the review could not be be predetermined, and any changes could be some years away.
It is also seeking to modernise and strengthen the regulatory system by reforming elements of abstraction licencing to link it more tightly to the departments objectives for the water environment. It has proposed changes to the conditions under which the Environment Agency (EA) can amend licences to secure good ecological status for water bodies without paying compensation to the licence holder.
In response to suggestions for modifications to the model for licence condition modification, government said it recognised the concerns and challenges in the industry as well as the importance for stability.
It stated: “The challenges that we are facing from a changing climate and population growth requires us to have processes which allow the regulator to regulate effectively, and we believe that we should take this opportunity to ensure Ofwat has the right tools in respect of licence condition modification.”