Memorandum by Ofwat |
1. Ofwat considers that the British system
of independent economic regulation and customer representation
has made an important contribution towards protecting the customer
and citizen from the adverse affects of monopoly, and others agree.
For example, the Comptroller and Auditor General commenting on
10 April 2002 on the publication of his report "Pipes and
Wires" (HC723) said:
"The way that the regulators have used their
price reviews to drive down the costs of the major utility networks
while the quality of the service delivered has improved, represents
a great success story".
2. At the same time, as unelected public
appointees, Ofwat takes very seriously its accountability to Parliament.
We are creatures of statute and work within that framework, subject
to judicial review of our actions. The current Water Bill makes
proposals which will change our constitution.
3. We are financed by water customers, but
subject to token votes which ensure that our expenditure is subject
to parliamentary scrutiny and audited by the National Audit Office
both for regulatory and propriety and for value for money. The
process has not so far identified any major shortcomings.
4. We report on our activities annually
to Parliament and the National Assembly for Wales through the
Secretary of State for Environment, Food and Rural Affairs and
the Welsh Assembly Government. WaterVoice (the statutory Ofwat
Customer Service Committees whose Chairman together form the WaterVoice
Council) is at present a part of Ofwat but speaks separately from
the regulator and presents its own annual reports. The Status
of WaterVoice is likely to change once the Water Bill is enacted.
It will present separate evidence to the Committee.
5. We consult widely and publicly on our
proposed forward programme. Our regulatory proposals are subject
to full public consultation and we are committed to following
the principles of good regulation established by the Better Regulation
Task Force: transparency, accountability, proportionality, consistency
6. Ofwat's key decisions are subject to
external review, notably by the Competition Commission on price
limits and licence changes and by the Competition Commission Appeals
Tribunal on competition cases. The Director General and Ofwat
staff have frequently appeared before Parliamentary Select Committees,
including the Environment and Public Accounts Committees, to give
evidence on our business. We meet and correspond frequently with
members of both Houses of Parliament and of the National Assembly
for Wales. We attend appropriate specialist all-party groups.
We supply factual material to Ministers for use in response to
parliamentary questions and debates.
7. We have adopted the Nolan principles
in conducting procedures for appointments by the Director General.
These currently include the four non-executive advisory directors
on the Ofwat Board, the 10 WaterVoice Committee Chairmen, all
of whom are paid an appropriate fee, and the voluntary members
of WaterVoice Committees. Ofwat is a non-ministerial Government
department. Its staff are civil servants and are subject to the
established rules governing their appointment, pay, conditions
and behaviour, scrutinised on behalf of Parliament by HM Treasury
and the Cabinet Office. There are, for example, rules of conduct
to guard against possible conflicts of interest.
8. The evidence below responds to the Committee's
guidance on the issues to be addressed, following their list of
9. The Water Industry Act 1991 vests the
relevant powers in the Director General of Water Services (DGWS)
who is supported by Ofwat. The current Water Bill before the House
of Lords proposes to substitute a Regulatory Authority and a new
independent Consumer Council for Water. The key statutory duties
of the Regulator are set out in section 2 of the 1991 Act, to
be amended by the Bill. Ofwat's budget is financed under the water
companies' licences by customers. The resources raised in 2003-04
will amount to £12.6 million. Further powers, for example
in the Competition Act 1998 and Enterprise Act 2002 apply to water
as to other sectors.
10. This is a matter for Government and
Parliament. In this they may be assisted for example by the Better
Regulation Task Force (report on economic regulators) and by the
National Audit Office (eg its report "Pipes and Wires").
11. Philip Fletcher is the current DGWS,
appointed in 2000 following public competition in accordance with
Nolan principles. His own appointments to his advisory Ofwat Board,
follow the same principles and have involved a representative
of the Civil Service Commission. The appointment of chairmen and
members to WaterVoice Committees follow the same principles. The
total WaterVoice membership at 31March 2002 was 131, of whom 55
(42 per cent) are women and 13 (9.9 per cent) members of ethnic
minorities. This compares with the national averages of public
appointments of 34 per cent women and 4.8 per cent from ethnic
12. The Act requires DGWS to exercise his
powers in a way that he judges will enable efficient water and
sewerage companies to carry out their functions properly and to
finance them. This requires Ofwat to make judgements about what
revenues and companies need to collect. The resulting price limits
must allow the companies to secure a reasonable rate of return
on their capital. This is to ensure that lenders and shareholders
are willing to invest in efficiently operating companies.
13. The DGWS must also balance his duties
to ensure that customers' interests are protected, that efficiency
and economy are promoted and that effective competition is facilitated.
14. In terms of outcomes, over £50
billion of private sector investment from 1989-2005, financed
by water customers, has brought about a very significant improvement
in the quality of drinking water and of the water environment
generally, both rivers and coastal water. (Thus over a decade,
the number of samples failing to meet rigorous drinking water
quality tests at the tap have fallen from one in 100 to one in
700 (99.86 per cent success).) The chemical quality of rivers
and canals has risen from 84 per cent classified as good or fair
to 94 per cent and coastal bathing water compliance with standards
from 66 per cent in 1988 to nearly 99 per cent in 2002.
15. Water customers' bills have risen in
real terms on average by 20.1 per cent since privatisation in
1989. This incorporates a 12.5 per cent reduction in 2000, reflecting
the greater efficiency of the industry in response to incentive-based
price cap regulation. The Water Industry Commissioner for Scotland
estimates that Scottish water and sewerage bills in 2001-02 were
60 per cent higher than would have been needed if the three former
Scottish Water Authorities had been operated as efficiently as
their English and Welsh counterparts. Since each company remains
an effective monopoly in its own area, large or small, the regulator
and shareholder between them have provided the incentives which
have enabled the industry to improve so markedly.
16. At the same time, Ofwat and WaterVoice
have sought to ensure that customers receive a better service.
On the evidence of the performance measures used by Ofwat and
reported annually there have been major improvements, for example
in reducing unscheduled interruptions to supply, improved billing
procedures and in handling complaints.
17. Price competition has developed slowly.
The Water Bill will increase, for customers using 50 Megalitres
or more a year, opportunities to seek competitive suppliers, but
the majority of customers will continue to be served by companies
with effective monopolies.
18. Companies may refer Ofwat's decisions
on price limits or licence changes to the Competition Commission
to be re-examined from scratch. At each price review, two companies
(now out of 23) have appealed in this way. Some decisions may
also be appealed to the Competition Commission Appeals Tribunal.
Our decisions may also be subject to judicial review. So far,
one such challenge (on the use of pre-payment meters following
the ban on disconnection of domestic customers) has led to us
having to change our policy and another was rejected. Administratively,
as with other Government departments, Ofwat's handling may be
referred to the Parliamentary Commissioner for Administration.
19. The summary of evidence sets out the
main avenues of accountability to Parliament. External audit is
conducted by the National Audit Office. By definition, in the
light of the statutory functions given to the regulator, his decisions
are taken independently of Government departments and other public
bodies. However, as a non ministerial Government department, the
normal Civil Service disciplines apply, for example in achieving
value for money and following the principles laid down for public
AND (B) IMPACT
20. (a) Ofwat's primary statutory duties
are to enable efficient companies to carry out and fiance their
functions, while also protecting customers' interests, promoting
economy and efficiency and facilitating effective competition.
It is essential that we approach our tasks in a transparent way,
designed to minimise unnecessary regulatory uncertainty. Within
the confines of commercial confidentiality, we consult widely
on our approach to issues. We hold workshops to describe and discuss
our policy approaches and meet the companies and others to discuss
issues. We publish five annual reports on different aspects of
the performance of the industry in response to regulation. We
thereby enhance their accountability for the provision of a public
service by private sector monopoly companies. We try to ensure
that the basis of regulation is fully understood by the companies
themselves and their own investors, bondholders and other lenders.
This helps to hold down the cost to them of raising finance and
thereby, through the system of incentive-based price cap regulation,
the cost of customer's bills. As examples, we now publish our
forecasts of companies' regulatory capital values and the financial
model we use to set price limits.
21. (b) The impact of regulation on
the economy is hard to access precisely, but the contrast between
the efficiency of the privatised industry in England and Wales
subject to economic regulation since 1989, and the public sector
equivalent in Scotland, where economic regulation has only just
been introduced, is enlightening (paragraph 15 above). We make
international comparisons beyond the UK and publish an annual
report on this. It is hard to make exact comparisons but the evidence
suggests that the water industry in England and Wales is towards
the leading edge of performance worldwide. Information included
in a recent UN study indicates that water quality in the United
Kingdom is ranked fourth in the world, only in Finland, Canada
and New Zealand is water quality better.
22. We have a duty to ensure that customers'
interests are protected. The Water Bill proposals will enhance
this duty. At present, water customers are represented by WaterVoicenine
regional Committees in England and one in Wales, whose Chairmen
together form the WaterVoice Council. Although part of Wales,
whose Chairman together form the WaterVoice Council. Although
part of Ofwat for budgetary and staffing purposes, WaterVoice,
which has no counterpart in the other member states of the European
Union, speaks independently (and sometimes critically) of the
regulator. The Committees hold their meetings in public, at which
members of the public have an opportunity to express their views.
Overall, the regulator and the customer representatives work closely
together and consult frequently with each other.
23. Ofwat has a recently improved website
explaining its purpose and approach and publishes reports and
leaflets designed to explained its role and offer advice both
to companies and customers, on issues ranging from the increase
in bad debt following on the statutory ban on disconnections to
the rights of tenants on caravan parks in respect of their water
bills. Ofwat and WaterVoice together receive complaints where
a water company is felt to have failed to deliver an acceptable
service. The WaterVoice Committees deal with most complaints.
We also investigate complaints that the Committees cannot resolve
and make representations to water companies to try to achieve
a fair and reasonable outcome. In most cases we have no legal
powers to force water companies to act on our recommendations,
but in practice they nearly always do.
24. Through press notices, articles, interviews
on radio and TV as well as consultation documents, we encourage
interested groups to contribute their views on matters affected
the public as customers or citizens. In addition, we have undertaken,
along with WaterVoice, Government, the water industry, environment
regulators and interest groups, joint customer research in preparation
for the coming periodic review of price limits. The first phase
of this research suggests that most customers are broadly satisfied
with the service they receive and consider it represents reasonable
value for money (details on the Ofwat websitewww.ofwat.gov.ukthe
work was carried out by MORI). But there are a number of issues
to pursue further in a second phase of the report. We also consult
directly organisations that have a specific interest in out work,
for example through workshops and seminars.
25. Complaints, other correspondence and
surveys, and the views of WaterVoice as representatives are important
factors in guiding regulatory action. For example, although the
number of cases of sewer flooding arising from inadequate sewerage
have fallen, public expectations have hardened and this extremely
unpleasant event is regarded as unacceptable. Accordingly, we
have agreed that companies which produce well argued plans for
additional work to curb sewer flooding in the current price review
period (2000-05) should proceed with them, and will be remunerated
within the limited provisions for adjustments between periodic
reviews, where there is customer support. However, regulators
are neither instruments of a particular administration nor representatives
of the public. They are the holders of statutory offices with
certain specific duties to carry out.
26. Regulators take their decisions independently.
They take account of good practice elsewhere and of the views
of the Competition Commission and of their peers. In Ofwat's case,
an important driver of better regulation has been the development
of our monitoring activities which allow us to compare companies'
performance on an objective basis. These comparisons help amongst
other things to decide what efficiency gains are practicable within
the sector as a whole.
27. At the same time, Government and others,
notably the environmental regulators, WaterVoice and the companies
themselves make an essential contribution to effective price reviews.
Thus, the decisions on the overall programme needed to enhance
environmental quality, partly in response to European directives,
are for Environment Ministers in DEFRA and the Welsh Assembly
Government for England and Wales respectively. The Government
from time to time publishes guidance and its views on issues associated
with the water industry. We take account of this in our decision
making process. In the water sector there is no subsidy from the
national or local taxpayer to the main functions of the industry,
which removes one possible complication.
28. Independence could be compromised if
it were believed that Government and the regulator were not safeguarding
regulatory independence. Statute and guidance should clearly establish
which office is responsible for each aspect of the regulatory
system to minimise the scope for duplication and confusion. Government
Ministers have continued to make clear the importance they attach
to the independent role of the regulator.
Office of Water Services