How a regulatory system works in practice
A Water Services Association case study

Page 1: Introduction

The term utility is widely used today to include those public services which supply water, sewerage, electricity, gas, telecommunications and waste disposal. All of us use these utilities every day - when we have a bath or a drink of water, light a gas fire, boil water for a cup of tea or coffee, or turn on the light.Until the 1980s, most of these utilities were owned and run as part of the public...
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Page 2: The need for regulation

In order for the privatisation process to be successful, it was necessary to make sure that the public interest was protected. In the production of something as important as gas, electricity or water, it is essential to ensure that these services are run in the best interests of the whole community. While most of these utilities were to benefit from operating as private sector companies in new...
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Page 3: Interaction between regulators

There is an argument which says that the activities of the regulators of the various utilities - water, gas, electricity, telecommunications - should be closely co-ordinated. This has not happened yet. However, it is vital for the water industry’s three regulators to work closely together, to allow each to fulfil their own responsibilities, with a minimum of conflict with the others.So...
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Page 4: Review

It is against this background that the Director General of Water Services must plan for and conduct his periodic reviews, which he does every five years. His review is part of what is called a medium-term incentivised regulatory system. This means that the Director General sets price limits which he believes will provide a strong incentive to the water companies to increase their efficiency and...
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Page 5: The external environment

Water and sewerage are natural monopolies. The characteristics of the industry (water is heavy and costly to move about) do not assist the introduction of competition. The Director General therefore seeks to substitute comparative competition - comparing performance of companies spurred on by the incentives he gives them - for the true competition of the marketplace. Over time, with other...
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Page 6: Conclusion

The periodic review of 1999 provides a challenge for the regulation process in the water industry. Regulation involves maximising the interests of stakeholders in utilities. We will all benefit from improvements to water supplies and sewerage and most people are prepared to pay for such improvements. However, it is essential to strike a balance between the needs to invest in the long-term growth...
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