Transcript Protect consumers of monopoly industries

The role of regulators in policy –
a water sector perspective
Network Industry Policy: Who Decides?
Aston Business School
12 March 2009
Ofwat – Protecting consumers, promoting value and safeguarding the future
Overview
What has regulation delivered?
What are the challenges now?
Regulation – the idea and evolution
Some water sector examples:
Setting prices, leakage targets, policy on charging, water
framework directive, climate change
The future – ‘policy-relevant’ regulation
Ofwat – Protecting consumers, promoting value and safeguarding the future
What has been achieved so far…
Leakage has
fallen by 35%
since peak in
1994-95
£80 billion has been invested.
Companies are more efficient
– bills are 30% lower than
they would have been
Network is
functioning better –
more companies
have stable
serviceability than
ever before
Water and environmental
quality has improved – 82 Blue
Flag beaches and fish in the
Thames again
Customer service is significantly better than 17 years
ago – only 4,825 properties (0.02%) are now at risk of
low water pressure, compared with 344,259 (1.6%)
properties in 1990-91
Ofwat – Protecting consumers, promoting value and safeguarding the future
…and future challenges
Changing climate
could bring more
droughts and
floods
Need resilient
infrastructure – network
is 335,000 km long, much
of which is ageing
Building on flood
plains increases
burden on drainage
systems
Growing UK population –
predicted to reach
71 million by 2031
Rise in single
households, which use
more water. Need to be
more water efficient
Water is the new oil
– Goldman Sachs
Ofwat – Protecting consumers, promoting value and safeguarding the future
Regulating networks – the original idea
Protect consumers of monopoly industries:
Consumer focus, especially price
Promoting economy & efficiency:
Post-privatisation need to drive efficiency
Promoting competition:
Roll back monopolies
Financing:
Independence & confidence for investors
Ofwat – Protecting consumers, promoting value and safeguarding the future
Policy wonks and regulation geeks
Wonks
Geeks
Strategic, holistic
Focused
Social welfare
Efficiency
Political
Neutral
Goals
Outputs
Citizens
Customers
Ofwat – Protecting consumers, promoting value and safeguarding the future
‘Classic’ RPI-X
Ofwat – Protecting consumers, promoting value and safeguarding the future
Implementing the theory – water price setting
Impossible to neatly ring fence water industry functions
Intrinsic links with natural water cycle and therefore with wider
policy questions
Need for investment to achieve public policy goals (public
health, environmental)
Four price reviews since early 1990s, development of
quadripartite process
Close working with standard setters and quality regulators
Increased transparency and quality of policy making
Regulator has challenged on behalf of consumers:
Water bills as ‘easy option’ for environmental improvements
Explicit guidance from Ministers
Growing maturity of process (and parties)
Extensive joint work on consumers’ priorities and cost benefit
analysis (including wider social and environmental issues)
Ofwat – Protecting consumers, promoting value and safeguarding the future
Setting water price limits for 2010-15
Ofwat – Protecting consumers, promoting value and safeguarding the future
Leakage since 1994 (Ml/d)
6,000
5,000
4,000
3,000
2,000
1,000
0
Ofwat – Protecting consumers, promoting value and safeguarding the future
Regulating leakage
Original theory: RPI-X incentives should drive optimal
approach to leakage
Experience was different
Political response, regulatory response
Outcome – targeted regulatory intervention, needs careful
maintenance, key reputational issue for the sector (companies
and regulators)
Economic, fact-based framework
Lessons – regulatory incentives need to be carefully reviewed
– they may not always promote the best outcome for society,
equally neither necessarily will short-term political priorities
Ofwat – Protecting consumers, promoting value and safeguarding the future
Regulation and charging
Water metering – politically charged
Regulatory policy focused on fairness and cost reflectivity:
Concern with balance of charges between metered and
unmetered customers
Regulation has not ‘pushed’ universal metering, or new
social transfers for vulnerable groups
Focus on cost reflectivity
Vulnerable groups protection through legislation – clearly a
political issue
Bad debt and ban on disconnection – regulatory focus on
putting in place incentives to manage the issue within
politically defined framework
Ofwat – Protecting consumers, promoting value and safeguarding the future
Implementing the Water Framework Directive
To achieve ‘good ecological status’ in water bodies, through
river basin management plans
Under current proposals water industry will bear 87% of costs
of implementing WFD measures
Concern that burden on water industry is too high – other
sectors and polluters should play a role
WFD measures should be the best value means of delivering
the environmental outcome
‘Disproportionate costs’ opt out
Locus for Ofwat: to ensure best value for consumers, right
incentives and polluter pays
Ofwat – Protecting consumers, promoting value and safeguarding the future
Climate change and the water cycle
Water distribution
Pipe network affected
by changes in soil
Water treatment
Reduced volume/
lower quality of
water for treatment
and risk of flooding
to operational sites
Water abstraction
Reduction in water
available for
abstraction
Water usage
Changes in the pattern of
customer demand
Wastewater to
sewer
Increased
flooding/surcharge
Wastewater
treatment
Increased risk of
inundation of
operational sites
Effluent discharge
Reduced river flows in summer to
dilute effluent discharges
Ofwat – Protecting consumers, promoting value and safeguarding the future
Climate change policy
Infrastructure Water
resilience resources
Drainage Maintaining Water
Innovative Leakage
serviceability efficiency
tariffs
targets
Renewable Catchment
Carbon
Carbon in Water quality
energy
management management cost benefit
Sustainability Setting price
limits
Innovation
Consumer
focus
Competition
Ofwat – Protecting consumers, promoting value and safeguarding the future
Ofwat’s strategy
Keeping consumers at the
heart of what we do
Keeping companies
accountable
Taking a longterm view of
sustainability
Shaping the
regulatory agenda
at national and
EU level
Enforcing compliance
Introducing
competition
where it benefits
consumers
Regulating
effectively
Ofwat – Protecting consumers, promoting value and safeguarding the future
Summary
Independent regulation has delivered
A subtle and evolving framework has emerged from the
collision of theory and reality
Huge new policy challenges – we need robust
independent regulation to continue delivering
Regulation is adapting, evolving new tools
Should be ‘policy relevant’ and active in policy discourse
Retain independence and balance, and be seen to do so
Ofwat – Protecting consumers, promoting value and safeguarding the future
Any questions?
Thank you
George Day
Director of Network Regulation, Ofwat
Ofwat – Protecting consumers, promoting value and safeguarding the future