Regulating a utility
A Water Services Association case study

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Page 2: The external environment

Water Services Association 2 Diagram 2The external environment within which water companies operate is complex. Water companies, like all organisations, have a prime responsibility to serve their stakeholders. These are not only individuals or groups who have a financial stake in an organisation, but also those likely to be affected by the consequences of that organisation’s activities. They may include shareholders, managers, employees, suppliers, customers, creditors, society as well as the public at large. It was important that the process of regulation took into account the interests of these groups.

The expectations of stakeholders will influence how each company seeks to achieve its objectives and while most stakeholders will share common expectations, in some situations conflicts of interest may arise. For this reason, the regulatory framework for water services is made up of a whole series of environmental, quality and economic regulators, designed to represent the various groups of stakeholders in different ways and to provide a comprehensive framework of enforcement.

European Commission

The European Commission has three main tasks:

  • to make proposals for European Union laws.
  • to ensure that laws are carried out.
  • to manage EU policies to ensure fair competition within the Union.

The British government, on behalf of the public has, along with the other member governments of the European Union, agreed to minimum environmental standards. These standards are expressed in European Directives which are then passed into British Law. Activities of the Water Service Companies and the Water Supply Companies are affected by the requirements of these European Directives, including the EC Drinking Water Directive, the EC Bathing Water Directive and the EC Urban Waste Water Treatment Directive. These Directives are binding on the UK government, NOT the Water Companies themselves and have to be achieved within a specified time period. If the Commission considered that the UK or any other member state had failed to fulfil any of its obligations, then it could take legal proceedings designed to require that member state to comply with the appropriate directives. The directives only become binding upon Water Companies when they are translated into the law of England and Wales.

Secretary of State for the Environment and Secretary of State for Wales

The main functions of the Secretaries of State are to:

  • appoint companies to act as water and sewerage undertakers, the Director General of Water Services and individuals to serve in the Environment Agency.
  • provide a regulatory framework by means of subordinate legislation. For example, this might involve setting standards of performance on the Water Companies or to set out criteria for the classification of river quality.
  • approve various codes of practice, including conservation and recreational duties.
  • enforce statutory obligations.
  • control the activities of the Environment Agency, such as designating water protection zones, making drought orders and appointing technical assessors of water quality.

Director General of Water Services (OFWAT)

OFWAT stands for Office of Water Services. The Director General acts both as the industry’s economic regulator and watchdog. To do this the Director General:

  • protects the interests of customers in respect of charges and quality of services.
  • promotes economy and efficiency on the part of the Water Companies by setting price limits and tough efficiency targets.
  • has a duty to facilitate competition between suppliers and potential suppliers, ensuring that a framework exists in which competition can develop.

Water Services Association | Regulating a utility