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Water price regulation: lessons from the United Kingdom

Water price regulation: lessons from the United Kingdom

Australia can learn from regulatory changes in the United Kingdom, which could help water utilities put the customer front and centre in a competitive market.

Water price regulation is transforming – from frameworks that focus on incentivising cost efficiency and efficient pricing structures, to better engagement with customers about their values and priorities, and using financial and reputational incentives to improve performance.

Cost efficiency is still in focus. Customers want affordability and better value for money; therefore, it remains front and centre. But customers expect more than just affordable water services.

Similarly, regulators are looking to change the dynamic with regulated businesses. They want to move away from what has traditionally been quite an adversarial relationship dominated by information asymmetries and regulatory gaming, 
to offering better guidance on how to interpret their requirements, incentives for better-quality submissions, and rewards (reputational and financial) for the best-performing businesses.

UK water companies have submitted their regulatory submissions (called business plans) to UK regulator Ofwat under the new PR19 framework. This will set prices for 2020–2025.

The United Kingdom has historically been a leader in price regulation, with some Australian jurisdictions fast catching up – notably Victoria and the PREMO (performance, risk, engagement, management and outcomes) framework.

While the UK water sector exhibits some material structural differences, such as ownership (privately owned), levels of competition (in the form of retail competition), and network performance (Ofwat is driving step-change improvement in network resilience and leakage reduction), there are a number of similarities to recent reforms in Australia, including:

  • placing the customer at the centre of the price-setting process, so that they can influence proposals
  • designing outcomes, as well as performance measures and targets that reflect customer priorities
  • linking financial and reputational rewards with performance
  • improving affordability, and value for money, supporting those in hardship, and resilience of the industry.

There are a number of lessons from the United Kingdom that may resonate for both water price regulation in Australia and the businesses responding to the regulatory framework.

With cost-of-living pressures increasing, the community needs arrangements that not only protect its interests, but also ensure that it gets maximum value from the services provided. There is scope to improve how the provision of services is funded to focus on performance and delivery, manage risks, and drive innovation through listening to customers more.

The ever-changing water environment also makes it critically important to get the regulatory framework right. This includes:

  • drought and the need for better water management
  • the uptake of digital metering, which will provide an extensive source of rich data on customer behaviour.

There is a lot we can learn from the UK experience that can drive better sector performance, better outcomes for customers and long-term financial sustainability.  

To read this article in full, make sure to pick up a copy of Future Water 2019!

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