Industry ponders consumer price-linked controls and in-period ODI adjustments

Ofwat has opened a consultation on anticipated major changes to water and sewerage companies’ licences which include replacing retail price index-based price controls with a consumer price link and introducing, for all companies, mid price control adjustments to revenue as rewards and penalties under the outcome delivery incentive (ODI) scheme.

The proposed changes will apply to the 17 largest water firms to accommodate the regulator’s plans for the 2019 price review and the development of wholesale competition. The controversial shift to consumer price-linked regulation will, said Ofwat, bring lower volatility and thereby bring “less uncertainty for customer bills and stakeholders.”

The regulator added: “We want the licence to support the changes we are making to how we regulate, which will help companies respond to and meet the challenges within the sector and contribute to improving resilience and drive efficiency, so helping to maintain affordable bills for customers,” said Ofwat.

As well as in period ODI rewards and penalties and seeking to link price controls to the Consumer Price Index (CPI) or Consumer Price Index including owner-occupiers' housing costs (CPIH) instead of the Retail Price Index (RPI), Ofwat has proposed two other measures to “enable the market to open up in bioresources (sludge) and water resources.”

The two measures are: separate controls for: water resources and sludge, and for water and wastewater network plus control; and to establish market databases in relation to water resources and sludge activities.

Ofwat senior director, David Black, said: “We want to ensure that customers and wider society have trust and confidence that their water and wastewater services are of a high quality and are provided in an environmentally sustainable way which is resilient and affordable.

He said the proposed changes to water company licences will “drive forward improvement and encourage opportunities to open up the markets in water and bioresources.”

The deadline for the consultation is 7 December 2016.

Consultation on Wholesale Retail Code

Ofwat has issued its statutory formal consultation on the two-years-in-the-making Wholesale Retail Code. It is asking whether respondents see the need for further amendments ahead of the code's go-live date in April next year. The regulator will introduce a derogation mechanism whereby licence holders can receiive a dispensation from compliance to obligations under the code where they can show the obligations to be an unfair burden.