Regulating a utility
A Water Services Association case study

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Page 4: The cost of quality

Water Services Association 2 Image 3Since privatisation the water industry has, more than at any other time in its past, been in full public view. Water Service Companies are undertakers providing an important public service and it is important that any regulatory system is seen to work efficiently. In most instances, regulatory bodies will share common expectations with each other. For example, all regulatory bodies support increased investment in the water industry and the development of higher performance standards. However, given the different roles of each of the regulatory bodies, each seeking to protect the interests of a different group of stakeholders, there are likely to be some areas of conflict, though a compromise can usually be reached. This balancing process tries to maximise the quality of water services provided, whilst keeping costs down to a reasonable level.

There are many issues that have to be balanced between the regulatory bodies.
For example, these might include:

  • OFWAT and Customer Service Committees may object to a hosepipe ban, while the Environment Agency may be looking to encourage water conservation or augment water resources.
  • The Ministry of Agriculture, Fisheries and Food has targets controlling the dumping of sewage sludge at sea. The danger is that the extra cost involved in developing new processes to avoid doing this, such as incineration, may lead to conflict with both OFWAT and the Environment Agency.
  • OFWAT will be seeking to safeguard the interests of customers by keeping water bills down, while the Environment Agency will be seeking to improve the environment, which may require higher spending on cleaning processes.
  • OFWAT seeks to develop a fair system of charges. A Water Service Company may dispute its price limits and refer this to the Monopolies and Mergers Commission.
  • Charges set by OFWAT may reduce a Water Service Company’s ability to raise standards over and above those required by law.

Other factors that might affect the balancing process of cost and quality include:

  • Political parties may have different views towards regulation and any legislation they may develop may affect the roles of each of the regulators in years to come.
  • Compliance with European Directives has involved considerable investment and this has had an effect on water charges.

Over recent years the balancing process between regulatory bodies has been highlighted by the media and has put the water industry in a spotlight that is likely to remain focused upon the water industry for a long time to come. The Cost of Quality debate has been successful in developing public and media attention on water bills and the financial impact of higher quality and environmental standards. At recent conferences leading figures from both major political parties contributed to the debate on regulation. For the Conservative Government Ian Lang, the President of the Board of Trade, confirmed that he would continue to interfere within the market while it was in a ‘transitional phase.’ Labour’s John Battle referred to ‘incentive-based price capping,’ ‘intra-industry and cross utility mergers’ and ‘vertical integration.’

It has been argued that Water Service Companies in England and Wales are among the most regulated businesses in the world. However, though the framework may be seen by some as being restrictive, it has been designed to allow companies to act independently on behalf of customers and shareholders. For the water industry, private sector regulation is certainly far tougher than in the days of the public sector, when many felt that standards had been compromised by under-investment. Good regulation means that the Water Service Companies have the resources necessary to deliver high quality services, whilst ensuring the customer has value for money.

Water Services Association | Regulating a utility