Regulating a utility
A Water Services Association case study

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Page 5: A period of change

The regulatory framework for Water Service Companies has contributed to the unprecedented change experienced by the water industry over recent years. Some of the changes are as follows:

Water Services Association 2 Diagram 5Fair charging methods for water services OFWAT believes that any charging method must be fair. The Director General has a duty to protect the interests of customers and, at the same time, provide the Water Service Companies with adequate revenue for necessary investment. The formula which limits the charges the water companies make for their services is known as ‘the K factor.’ This is simply RPI (Retail Price Index) + K. K is a charging limit which represents the amount by which average charges can rise in any one year. (However, ‘the K factor’ can become negative, like that imposed on British Telecom by OFTEL, the telecommunications regulator). K is set individually for each company. So, for example, if K is +4 and the RPI is 3% in the November prior to the new charging year, then the average charges can increase by no more than 7%.

Increases in capital expenditure to meet new investment requirements - current legislation places a huge burden upon Water Service Companies to commit resources to meet new standards and requirements. Over recent years there have been increased expenditures to meet ever-higher standards of performance, both in terms of water quality and environmental improvement, including some massive projects such as the London Ring Main and huge coastal clean up programmes around the country.

Improved customer representation - customers do not have the freedom to take their business elsewhere. Customer Service Committees have helped to deal with the interests of customers, ensuring that companies are aware of, and responsive to, concerns about the range and quality of services provided. Companies are seeking customers’ views on how services can be improved and developing more customer-friendly policies.

Comparisons of company performance - OFWAT has worked with the industry to develop a broad spectrum of indicators which are used to assess the relative efficiency of the various water and sewerage companies.

Improvements in quality - in 1996 the Drinking Water Inspectorate produced its sixth annual report. Of more than three million tests carried out on drinking water samples, 99.5 per cent met all the British and EC standards.

Environmental improvements - the principles of sustainable development require the balancing of present and future needs, so by satisfying our needs today, we should not be compromising the needs of the future. EC Directives have set minimum standards for the treatment of waste-water, the disposal of sewage sludge and the quality of bathing water. The quality of rivers and canals has improved significantly from 1990 to 1994 with a 26% net upgrading.
Water Services Association 2 Diagram 4

Water Services Association | Regulating a utility