This briefing paper provides an overview of the economic regulation of the water industry in England and Wales. It provides an overview of the price review process that sets customer bills and water company service targets every 5-years. It includes a summary of the 2019 price review that followed increasing public scrutiny of the sector.
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The water industry in England and Wales was privatised in 1989. Most water and sewerage companies are regional monopolies, with dedicated pipe networks and water supplies in each company area. This means that household customers cannot choose or switch their supplier and competition is limited. Consequently, there is a need for economic regulation of the industry to ensure that the industry delivers value for consumers and the environment.
Ofwat (the Water Services Regulation Authority) is the economic regulator from the water industry in England and Wales. The Department for Environment, Food and Rural Affairs (Defra) and the Welsh Government set the policy and legislative framework in England and Wales, respectively.
Average water bills
Average water bills have risen since privatisation (after inflation) and have remained relatively stable since 2010. In 2020-21 bills are expected to drop below £400 for the first time in 15 years. Water bills vary between different companies because the costs of delivering infrastructure and services are different in different regions. Rising bills since privatisation have come alongside large investment by water companies, improvements to services and drinking water quality.
The prices that water companies charge customers in bills is controlled by Ofwat through a 5-yearly process called the price review. During the price review Ofwat sets wholesale price limits for each water company alongside performance targets, such as for leakage reduction, reducing pollution incidents and lowering personal water consumption. When setting company prices, Ofwat must balance the interests of the customer for lower prices with the need to make sure the water company can finance its operations and meet environmental responsibilities.
Price Review 2019 (PR19)
The last price review occurred in 2019 (PR19) and set prices for 1 April 2020–31 March 2025. Ofwat stated that overall, PR19 would result in a 12%, or about £50, fall in customer water bills (before inflation) and £51 billion investment by industry over the 5-year period. Ofwat states that the price review set “stretching but achievable” performance commitments on environmental improvement, for example, reducing leakage by 16% by 2025. PR19 has been described by Ofwat, the water industry and press as the “toughest yet” on the sector. Some companies are concerned that Ofwat focused too much on short term bill reductions at the expense of long-term investment in infrastructure. Four companies have asked Ofwat to refer their determinations to the Competition and Markets Authority for review. The Consumer Council for Water welcomed the price review as a good outcome for consumers.
Water company performance
Water company performance has come under increasing public scrutiny in the last few years from across the political spectrum. The profits and financial management of some companies alongside some high-profile service failures have raised criticisms that the sector is not delivering value for money for consumers.
Ofwat made some changes in PR19 in response to some of the concerns about the regulatory framework. These included reducing the allowed cost of capital, adding mechanisms for sharing benefits with customers from certain financial structures, setting expectations for maximum dividend payments and introducing financial reporting expectations. The water industry stated it fully supported Ofwat’s changes.