Ofwat complains of ‘burdensome’ Section 13 licence change process as it sets out compromise package

The "Section 13" process for changing water company licences is "burdensome", Ofwat said as it set out a compromise plan this morning.

The regulator pointed out that in other sectors, including energy and rail, licence changes could be made alongside price reviews. Such plans by Ofgem or the Office of Rail Regulation only need approval from a majority of companies, rather than unanimous consent.

Ofwat said “there are merits” in such frameworks and government had indicated it was minded to review the process for the water sector.

It made the remarks as it published a third version of licence modification proposals, following attempts in December 2011 and October 2012 that were rejected by the industry.

The latest notice specifies that Ofwat will be able to set two RPI-linked wholesale price controls, one for water and one for sewerage, of five years. It enables separate retail controls of up to five years, with some flexibility to change the definition of retail activities.

The regulator has scrapped proposals to allow itself to move up to 40 per cent of company revenues outside the inflation-linked wholesale price control. That is an important concession to the industry, which was concerned that move created too much uncertainty for investors and would push up the cost of capital.

However, it rejected a call from industry body Water UK to index retail controls against RPI. It said: “No ordinary retail business, operating in a competitive market, gets an automatic pass through of RPI to its end customers. We are not convinced that water customers should be subject to automatic increases in the retail part of their bills.”

It also declined to keep references to the weighted average charges increase for wholesale controls. Committing to such detail would pre-judge the outcome of Ofwat’s consultation on the methodology for the 2014 price review (PR14), it said.

Companies have until 23 January to respond to the latest proposals, which they are expected to accept. The PR14 methodology consultation is due to follow soon after.

Utility Week understands some are concerned about the legal interpretation of a clause requiring companies to use “all reasonable endeavours” to work constructively with the regulator on separate price controls for specific wholesale activities in future.