Effective economic regulation delivers benefits
Effective economic regulation provides a framework that aligns the interests of companies and their investors with those of customers, so that company management and investors benefit when the companies do more of what customers want. This creates value for everyone:
· customers get the services they want for a price they are willing to pay;
· managers get more freedom to lead and innovate; and
· investors make better returns.
The traditional model of regulation we used from 1989 delivered great benefits but declined in value
In the past, the way water and wastewater services were delivered was seen as a textbook example of a monopoly.
· A stable industry heavily focussed on assets and numbers.
· A regulator protected customers by making comparisons and setting very prescriptive rules backed up by enforcement action, such as fining companies.
At first this approach delivered great benefits. Companies made big improvements to the standard of those services – and how efficiently they delivered them. But the value of this 'comparative regulation' has declined.
And if the sector was to successfully meet the challenges it faces, it must become more efficient – it must be able to do more with less. Our traditional regulatory approach was not best placed to help the sector meet those challenges.
· Focused on the regulator rather than customers, the sector was slow to respond to customer’s changing needs in a 21st century economy.
· Companies needed to be encouraged to think of new ways of delivering services.
We needed to do more to inform, enable and incentivise the sector to establish new frontiers, especially by making better use of scarce resources and by innovating.
A modern approach to regulation for a modern sector
We now have a principles-based regulatory approach for regulating an evolving mix of monopolies and markets
We help and encourage the water sector to step up and assure us that it is delivering good outcomes and building strong relationships. Where companies don't step up and fall short, we will step in to protect customers.
Our principles are:
· focusing on the things that really matter to customers and wider society now and in the future ('Outcomes-focused’)
· using our tools to align the interests of companies and investors with those of customers using markets or market-style signals (‘Pro-market’)
· encourage companies to take responsibility for their relationships, listen and respond to their customers and be open, honest, fair and transparent; (Relationships-focused);
· focus where we are most needed most to protect customers (‘Targeted and proportionate’); and
· using both our traditional and broader tools to shine a light on issues and provoke debate (‘Using our tools’).
We're already using our approach successfully to make companies more focused on their customers
We want monopoly companies to think creatively about how they can secure the things customers and society care about ('outcomes').
To support this approach and make sure companies are on the right track, they all have pledges about how they will reach the desired outcomes (‘performance commitments’).
The companies agreed their performance commitments in collaboration with consumers and some of the commitments have financial rewards and penalties (‘outcome delivery incentives’) attached to them.
So companies and their investors get rewards for delivering what customers care about.
In 2015-16 companies delivered 70% of their performance commitments. They earned overall rewards of £31 million, but some companies also got penalties.
We're also using our approach successfully to challenge monopolies to do better
It's important that everyone has access to up to date information on how their service provider is performing. This allows them to challenge that provider to do better.
We require each monopoly company to publish annual reports on its performance, but we also worked encouraged the sector as a whole to set up the 'Discover Water’.
This new website publishes information so you could compare the performance of your company to the others. It works similar to a price comparison website but for monopolies.
We took a similar approach to get monopoly companies to do better for developers, where there were longstanding concerns that delays to house-building were being caused by poor service from infrastructure providers.
We encouraged Water UK the sector representative body to work with monopoly companies to publish statistics every three months so developers could compare company performance. This is already delivering improved services overall.
Where the companies didn’t step up and performance is unacceptable, we step in take action.
We are also taking our model even further to benefit customers
This year we will be monitoring the business retail water market being introduced in April 2017. This will allow eligible business, charity and public sector organisation to choose their water and wastewater retailer.
This will start a new chapter in our approach to regulation. In the past we have set specific limits on prices and targets for service quality for retail services in advance of each five year control period, based on forecasts.
In future, business customers will decide the price and service they are willing to pay. This will see us focusing more on the market rules that allow customers a choice of price and retail service levels, and intervening if market participants are not acting in line with those rules.
We are also aiming to support the development of new markets in water resources, bioresources and for large infrastructure projects ('direct procurement') model by the way we set monopoly companies’ prices in 2019.
How you can get the latest information
You can get the latest information on our performance in our annual report and accounts.
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