Drinking Water Inspectorate – October 2012
Ofwat’s Proposals for Setting Price Limits and Market Reform – Drinking Water
Inspectorate Discussion Paper
1. Background
Ofwat is planning to implement a number of significant changes to the way water price limits
are set at the next price review in 2014
Ofwat has established a set of principles1 for future price-setting through which it intends:

To target price control regulation appropriately and proportionately, including:
o
o
o
using appropriate tools for different parts of the businesses where the
economic characteristics of those businesses are different;
focusing incentives carefully to deliver desired outcomes; and
reducing or removing regulation where it becomes unnecessary over time.

To use a risk-based approach to compliance to ensure regulation is focussed where
it matters and reduce any unnecessary burdens.

To develop clearer, simpler and more effective incentives that drive allocative,
dynamic and productive efficiency in the sectors.

To set price controls in a way that gives companies ownership of and accountability
for delivery of what customers want and need.

To design and use regulatory tools that are future-proof and capable of adapting to
support the sectors in delivering sustainable water and sewerage services as
environmental and other challenges change over time.

To continue to regulate in a way that is transparent and predictable.
These changes are likely to have an impact on the Drinking Water Inspectorate (DWI)
because we have a specific role as the regulator of drinking water quality. The purpose of
this paper is to establish our position in respect of a number of key areas where Ofwat’s
proposals impact on our duties and activities, and also where water companies’ statutory
duty to supply a safe and wholesome water might might influence how Ofwat’s changes are
implemented.
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2. Introduction
The Drinking Water Inspectorate (DWI) was established in January 1990. We are
responsible for the regulation of drinking water quality in England and Wales. We help to
protect public health and maintain confidence in public water supplies by ensuring water
suppliers provide wholesome water, and deal with problems appropriately. We report
publicly on the service provided and our own activities. Our functions include the audit and
inspection of water companies and enforcement of regulations; investigation of consumers’
complaints and incidents affecting drinking water quality; and provision of advice and
undertaking research on drinking water quality problems. We report annually to the
Secretary of State for Environment, Food & Rural Affairs, and to Welsh Ministers. The
decisions we take are as an independent Inspectorate, and we exercise powers of
enforcement and prosecution directly. Our work is wide-ranging, covering all aspects of the
quality of both public and private water supplies. Those we regulate (water companies and
licensees) have a legal duty to safeguard the quality of public water supplies. We conduct
independent technical audits to ensure the integrity of results from drinking water samples
taken by companies is beyond question and companies are taking appropriate actions to
ensure that drinking water is safe, and that where challenges exist, the risks are
appropriately assessed and safeguards put in place.
Our role in the Ofwat licensing process for water supply licensees and inset appointments is
set out in working protocols in place between the Inspectorate and Ofwat. These aim to
ensure that new applicants are technically competent and able to fulfil their statutory duties
in respect of drinking water quality.
3. The Regulatory Framework
The Drinking Water Inspectorate aims and enforcement policy are published on our website
along with the relevant legislation and guidance. The following legal instruments and
associated documents comprise the regulatory framework for the quality of drinking water in
England and Wales.

Council Directive 98/83/EC of 3 November 1998 on the quality of water intended for
human consumption (European Drinking Water Directive) – sets standards for drinking
water quality to apply in all member states, implemented in England and Wales through
the drinking water regulations cited below.

The Water Industry Act 1991 (the Act) – the primary legislation which enables
Regulations to be made and contains the duties of water companies and the powers
used by DWI.

The Water Act 2003 – primary legislation which, inter alia, designates the post of Chief
Inspector of Drinking Water, gives greater autonomy to the DWI and contains amended
provisions in respect of fluoridation

Drinking Water Regulations applying to England and Wales:
a. The Water Supply (Water Quality) Regulations 2000 (SI 2000/3184)
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b. The Water Supply (Water Quality) (Amendment) Regulations 2001 (SI
2001/2885)
c. The Water Supply (Water Quality)(Amendment) Regulations 2002 (SI
2002/2469)
d. The Water Supply (Water Quality)(Amendment) Regulations 2005 (SI
2005/2035)
e. The Water Supply (Water Quality) Regulations 2000 (Amendment)
Regulations 2007 (SI 2007/2734)
f.
The Water Supply Regulations 2010 (SI 2010/991).
g. The Water Supply (Water Quality) Regulations 2010 (SI 2010/994, W.99) –
The Welsh Regulations
h. The Water Supply (Miscellaneous Amendments) (England and Wales)
Regulations 2010 (SI 2010/996)

i.
The Private Water Supplies Regulations 2009 (SI 2009/3101)
j.
The Private Water Supplies (Wales) Regulations 2010 (SI 2010/66, W.16)
Other legal instruments in place:
a. The Water Industry (Suppliers’ Information) Direction 2009 – made under
the Act, specifies the format and timing of water companies’ provision of
information to DWI.
b. The Drinking Water (Undertakings) (England and Wales) Regulations
2000 (SI 2000/1297) as amended by the Water Supply (Miscellaneous
Amendments) (England and Wales) Regulations 2010 (SI 2010/996) –
relates to legally binding water quality improvement programmes to meet
drinking water standards
c. Council Directive 98/34/EC The Technical Standards and Regulations
Directive - requires Member States to notify all new technical regulations
when they are at the draft stage
d. Security and Emergency Measures (Water and Sewerage Undertakers)
Direction 1998
e. The Security and Emergency Measures (insert name of company)
(Licensed Water Suppliers) Direction (insert year) – this is a pro forma for
a named licensee
f.
The Security and Emergency Measures (Water Undertakers) Direction
2006 – this updates the 1998 Direction in light of the Water Act 2003 and
provisions for licensees
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4. Ofwat’s Proposals
This section outlines our position in relation to relevant aspects of Ofwat’s proposals for
change.
4.1 Consumer Engagement
Ofwat has asked water companies to establish Customer Challenge Groups (CCGs),
chaired by an independent person. The aim of these independent groups is to challenge
water companies’ business plan proposals; to ensure that water companies have sought
the views of customers and other stakeholders in the development of their business
plans and to challenge the phasing, scope and scale of work required to deliver the
outcomes, including statutory outcomes, contained in companies’ business plans.
The DWI has a position on all of the water companies’ CCGs in England and Wales and
our representatives support the process by acting as an independent member of each
group with the overall remit of ensuring that company business plan proposals reflect
the views of consumers and place drinking water quality at the forefront of such plans.
We will work closely with each company in the development of any business plan
proposals that affect drinking water quality to ensure that statutory requirements for the
supply of safe and wholesome water are met; that proposals are based on Regulation
27 risk assessments (Regulation 28 in Wales) and that there is sufficient capital
maintenance provision to ensure that compliance with the Regulations is maintained,
the quality of drinking water does not deteriorate, and where it is currently deficient, it is
improved. Formal proposals for drinking water quality schemes will be subject to
enforcement through the putting in place by DWI of the appropriate legal instrument
(notice or undertaking) to ensure that consumers are protected. This will ensure that
proposals are risk-based and provide adequate protection for consumers. In the
development of drinking water quality programmes of work, companies are required by
us to demonstrate that they have considered a range of options, with final proposals
based on sustainable and innovative approaches that are cost-effective, with the scope
of work appropriately phased to deliver the required outcome in a reasonable timescale.
Unlike the last price review, this time Ofwat is not requiring companies to submit 25 year
Strategic Direction Statements, nonetheless we expect proposals to be set in the
context of long-term strategic plans covering at least the next 25 years.
We understand that Ofwat has not yet decided what it expects from inset appointees
and licensees in terms of engagement with customers and business plans. However, in
relation to drinking water quality our requirements will be as reflected above, given that
insets and licensees must comply with the same legal requirements.
4.2 Outcomes
Statutory programmes of work to remedy deficiencies in drinking water always require
companies to demonstrate that the desired outcome in relation to drinking water quality
has been met, over and beyond delivery of the outputs. Therefore our requirements
already align with such requirements. It is essential, however, that companies have a
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clear understanding of the outcome and outputs that they are required to deliver, with
key milestones identified.
All companies have a statutory obligation to supply water that meets EU and national
drinking water standards. Compliance is not therefore an ideal goal or target that is open
to negotiation. It is equally self evident that consumers must have confidence that their
drinking water is safe and clean and suitable for domestic purposes. These are our
stated objectives for drinking water quality2. Consumer research has shown that what
water companies’ customers value most above all else is a safe, reliable supply of
drinking water that meets all the standards. Therefore as an outcome, this goal is
consistent with consumers’ views. Through the customer engagement and customer
challenge processes, companies should seek the views of customers on identified and
essential drinking water quality improvements and customers’ willingness to pay for
these in relation to other outcomes, for example environmental performance and sewer
flooding. In doing so companies need to consider their statutory duties and consumers
should not be exposed to an increased risk of being supplied with unwholesome water,
in order to meet some other service outcome.
There may be potential for different interpretations of what is meant by an outcome, and
therefore customer challenge groups need to clarify companies’ views on this early in
the process. We anticipate that Ofwat will play a key role in securing that at a high level,
there is consistency of approaches between companies.
The proposal to adopt a Totex1 approach for financial incentives should encourage
companies to consider longer-term and potentially more sustainable opex-intensive
solutions such as catchment measures. We appreciate that measuring performance and
delivery of such outcomes will involve further discussions with Ofwat as the process
develops and KPIs are established. Water companies have a statutory requirement to
carry out risk assessments of their supply systems, and measures of outcome delivery
for drinking water schemes must include meeting the relevant drinking water standards
and where appropriate, reducing the number of consumer complaints about drinking
water quality (consumer contacts per 1000 population). Where outcomes are longer
term and more general in nature, for example covering a range of quality parameters,
one possible means of assessing delivery of outcomes is use of reduction in quantified
risk score (i.e. risk is a function of consequence x likelihood and can be converted into a
numerical value). For drinking water quality proposals, we require companies to
demonstrate that a proposal is based on an identified risk to consumers and that the
solution is robust, sustainable and mitigates the risk to an acceptable level. Companies
should ensure that they adopt performance measures that lead to investment in areas of
poor performance.
Forecasting whole life costs can be difficult because of unpredictable external factors
such as RPI and energy costs and further guidance may be needed from Ofwat on
these areas.
Incentive mechanisms for delivery of outcomes should be clear, simple and not
encourage perverse behaviours. From the Inspectorate’s perspective this means that
public health must be the highest priority for all water companies, and consumers must
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Drinking Water Inspectorate – October 2012
not be exposed to increased risk of receiving water that is not safe and wholesome, in
order to achieve other outcomes.
4.3 Retail/Wholesale Split and Market Reform
We note Ofwat’s proposals to put in place separate price limits for retail and wholesale
activities along with a separate sub-limit for operation of networks.
It is vitally important that if a consumer contacts their water supplier about a drinking
water quality issue, they receive an immediate and appropriate response. We would
have serious concerns if customers switch to retail-only organisations and then
experience difficulties in reporting a water quality or sufficiency concern or it not being
acted upon expeditiously. Consumers through turning on their taps are an integral part
of the drinking water quality monitoring regime and the information they provide is vitally
important to the safe operation of any water supply. Everyone in the supply chain must
understand this and be competent and able to take the correct action.
There are some uncertainties about accountability and responsibility for delivery of the
requirements of legal instruments, where a retail-only company is the supplier and we
would welcome clarity in this area at the earliest opportunity. It is essential that there is
clear accountability for the quality of drinking water in all circumstances. All companies
that supply water for public supplies have statutory duties to comply with the monitoring,
risk assessment and reporting requirements of the Regulations and it is the
responsibility of the DWI to ensure that all companies can fulfil their statutory duties.
Depending on the activities that are ultimately included in Retail, we would have an
interest in new entrants’ competence in respect of water supply hygiene and protection
of public health where repairing leaks and fitting meters are offered as services, or any
other services that involve working on water supply systems. We anticipate that, in
accordance with the existing licensing process, we would interview new applicants to
ensure that companies are fully aware of their statutory duties, the requirements of the
Regulations, the role of the DWI and the importance of adequate arrangements for
handling and responding to water quality contacts from consumers.
For new entrants supplying water into any part of an incumbent water company’s
system, whether that be untreated (raw) water, partially treated or fully treated, again in
accordance with the existing licensing process, we would seek to interview new
applicants to assess companies’ competence and to be assured that all access code
provisions are adequate and adhered to; that appropriate monitoring and reporting
arrangements are provided for, including for dealing with events and incidents; and that
sufficient resources are deployed to protect consumers, meet regulatory requirements
and reasonable consumer expectations, and deal with any specific issues applying to
each arrangement.
Water companies have statutory duties under Sections 73, 74 and 75 of the Water
Industry Act to take action to prevent contamination of public water supplies. This
includes, under Section 74, responsibility for enforcing the requirements of the Water
Supply (Water Fittings) Regulations 1999. It will need to be clear at all times who has
responsibility for discharging duties under each of these sections of the Act.
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4.4 Abstraction Incentive Mechanism and Water Trading
Under Regulation 15 of the Water Supply (Water Quality) Regulations, water companies
have duties to carry out risk assessments and monitoring of new sources used for public
supply. These duties fall to the company responsible for making the public water supply.
New and out of use sources fall into the following two categories:

15(1)(a) A new source which has not been used for drinking water supplies
(regulation 4(1) purposes) at any time since 1st January 2004. This includes
sources not used previously by any company, and sources used but abandoned
prior to 1st January 2004.

15(1)(b) A source which has been used since 1st January 2004, but has not
been used during the six months prior to the date proposed for supply to
commence. This also includes sources used by a company less frequently than
once in any 6 month period, and sources that have been abandoned at any time
since 1st January 2004 for a continuous period of six months or longer.
The DWI has recently issued guidance to companies on Regulation 15 in Information
Letter 06/2012 – Regulation 15 Compliance Arrangements. The guidance applies to the
introduction of new (including out-of-use) sources whose development and introduction
to supply are part of routine water supply planning. Such planning includes water
resource management plans; bulk supplies and water trading between companies;
abstraction trading; drought planning and planned emergency supply arrangements.
This guidance applies to existing water companies, inset appointees and combined
licensees, and will apply to future new entrants supplying water for public consumption
under whatever guise. All planned and contingency supply arrangements must satisfy
Regulation 15 requirements before being introduced.
Any changes to public supply arrangements must be risk-assessed in accordance with
both Regulation 15 and Regulation 27. The impact of changes to quality on consumers
must always be considered in these risk assessments and measures put in place to
mitigate risks associated with changes in quality that include changes to aesthetic
appearance, taste, odour, hardness, Langelier index and plumbosolvency
characteristics. In areas where water supplies are artificially fluoridated, the agreement
of the responsible local authority will be required before any change to the level of
fluoride in water supplied can be accepted.
The DWI has oversight of local authorities in relation to implementation and enforcement
of the Private Water Supplies Regulations. If any proposal for abstraction trading
involves a private water supply, the DWI will consider the information held by the
responsible local authority; whether or not that supply meets the drinking water
standards and whether or not the controls listed in the risk assessment are adequate
and in place.
As indicated above, it is essential that there is clear accountability for the quality of
drinking water in all circumstances. It is also essential that consumers are protected
from trading arrangements that could be terminated or altered without warning, thereby
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exposing them to an increased risk of either an insufficient or an unwholesome water
supply.
Consumers should not be disadvantaged (i.e. exposed to greater risk of loss of supply,
water-use restrictions, contamination incidents or deterioration of quality) if their water
supply company opts to export water or import “new” water. For example, if a company
proposed to import water that is covered by a legal instrument for non-compliance with a
drinking water quality parameter, we must be consulted so that we can comment on the
increased risk to which consumers will be exposed and the adequacy of the proposed
risk mitigation.
Any incentives applied to encourage water trading must not discourage companies from
maintaining existing mutual aid arrangements that can be critical in mitigating risk during
major quality and loss of supply events.
For more information on the issues raised in this paper, please contact Jacqueline Atkinson,
Inspector, Telephone Number: 03000 686402. email: [email protected]
References
1.
2.
Future Price Limits – Statement of Principles, Ofwat, May 2012
Securing safe, clean drinking water for all – Drinking Water Inspectorate - Our Strategic Objectives for
2010-2015 (published on DWI website).
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