PRICE REVIEW

• To reset water and sewerage price limits and to reduce prices in real terms for customers through a significant cut in bills in 2000-01.
• To maintain incentives for the companies to increase their efficiency and reduce costs while also ensuring an adequate level of investment in capital assets.
• To arrive at the price limits via an open, transparent, fair and reasonable process which includes a high level of consultation with the industry and its customers.

• To protect the interests of customers by ensuring a good quality service. We will use comparative competition between water companies to drive up standards and reduce costs. We will also maintain and develop an output focused regulatory regime that takes action where performance is unsatisfactory.
• To protect the interests of customers by maintaining and improving the efficiency and effectiveness of the system of customer representation and complaint handling provided by the ONCC and the CSCs.

• To develop an effective policy to facilitate competition, including the further progression of inset appointments and common carriage.
• To maintain the role of comparative competition as an important means of achieving Ofwat's objectives where direct competition is not possible.

• To secure a cost reflective tariff structure that encourages efficient use of water and takes into account the needs of customers.

• To continue progress towards achieving Investors in People.
• To operate an efficient and effective office with due regard to propriety.

To operate openly and transparently providing information about the industry and its regulation.

Introduction – Ian Byatt, Director General of Water Services

Welcome to this first publication of Ofwat's annual plan. I want to set out clearly what we aim to achieve for water and sewerage customers in England and Wales in 1998-99.

My office is responsible for making sure that your water company gives you a good quality, efficient service at a fair price. In this, we are supported by the ten regional Customer Service Committees (CSCs) who have their own legal duties. They look after you by representing your interests and monitoring closely the service your water company provides. They are also responsible for dealing with your complaints. The chairmen of the ten committees form the Ofwat National Customer Council (ONCC) which works on your behalf at a national level. I listen carefully to the advice the Council and the CSCs give me.

This plan concentrates mainly on the work of my office. The CSCs have their own business plans but play an important part in helping us to regulate the industry and deliver improvements for customers.

We can summarise our ongoing aims and objectives as:

• Ensuring companies continue to supply good quality drinking water now and in the future
• Making sure companies look after our environment through carrying out the investment and practices needed to dispose of sewage and effluent safely
• Keeping average prices low and promoting greater efficiency in the water and sewerage companies
• Monitoring and promoting improvements in customer service
• Helping competition develop so that customers have choice over their water and sewerage service supplier.

To help me achieve these important goals, Ofwat has teams of professional staff working in the regional CSCs and at our office in Birmingham. You will find more details about our aims, staff and financing with this leaflet. We have only highlighted some of our key tasks for the year ahead. Much of our work, particularly in the CSCs, involves dealing with customer complaints and answering enquiries on a daily basis.

The year ahead

Consumers and environmentalists alike have growing expectations about the scope for achieving lower prices and further quality improvements. Ofwat is also encouraging greater efficiency and competition in the interests of customers. This complex inter-relationship increasingly requires fair and effective regulation.

The day to day workload of the office has reached a high level, which needs to be sustained. The year ahead will be a challenging one. We will be working towards the review of water prices in 1999. But, in addition, we will have to consider how to implement a number of Government proposals that will affect the way we work. The Green Paper A fair deal for consumers proposes changes to the framework for utility regulation. New proposals for water charging, the environment and competition will also have implications for our work.

The success of Ofwat in delivering its objectives is dependent upon committed and motivated staff. Based on our successes since 1989 in securing a better deal for customers, we believe we are in an excellent position to deliver our 1998-99 business plan.

Security of water supply

Ofwat is working with the Environment Agency (EA) to ensure there is a proper balance between supply and demand for water. As part of the Periodic Review of prices in 1999 a water company may bid for an allowance in price limits in order to increase its current security of supply. The Director will consider whether new resources are needed. Before agreeing to any increase in prices to strengthen the resource position, the Director will want to be satisfied that the company is reducing leakage and has a sensible metering programme in place.

At the Water Summit in May 1997, the Director announced he would set mandatory leakage targets annually. Targets for 1998-99 were published in October 1997. We will monitor progress in 1997-98 against targets the companies set for themselves in 1996. We will publish new targets in October 1998.

All water companies have a duty to promote the efficient use of water. Ofwat is responsible for approving companies' water efficiency plans and for monitoring their activities and policies. Each autumn we publish a report on leakage and water efficiency which records and compares how the companies have performed.

Quality of service

Ofwat works to promote good practice and ensures that customers receive a good service from their water and sewerage company. The CSCs play an important role in this. We monitor levels of service and where performance is inadequate the Director, with the other regulators where necessary, will require improvement. We publish a report on levels of service each autumn.

The National Audit Office (NAO), in a recent report, recognised that Ofwat had been effective in raising service levels. The NAO also made a number of recommendations that Ofwat will pursue during 1998-99. Consultation will take place on the way in which we measure and assess performance and on the setting of service standards. We will also review the current provisions for compensating customers who experience poor service.

New and current requirements to improve quality

Customers' drinking water

Ofwat and the Drinking Water Inspectorate (DWI) will continue to work together to monitor the progress being made by water companies in improving the quality of the water supplied at the customer's tap. The DWI has stated that the standard of drinking water is already very high and customers are paying in their bills for even higher standards. Ofwat and the DWI will monitor companies' performance to ensure that these stringent standards are being achieved, by improving treatment works and the distribution system.

The environment

Ofwat and the EA are working together to ensure that the companies are carrying out the improvements expected of them. These improvements are being paid for by customers in their bills. Customers will see the benefits through reductions in the level of pollution to fresh water, estuaries and the sea from sewage effluents. The improvements to unsatisfactory combined sewer outflows will also both improve the aesthetic appearance and the quality of water in rivers and help to reduce the number of pollution incidents.

Customers in some areas are also paying in their bills for companies to change the source of their drinking water to alleviate the low flows in some rivers. Ofwat and the EA will work together to ensure that the companies are carrying out these environmental improvements as expected.

Water charges

Current prices

The Director set price limits in the 1994 Periodic Review to cover the period 1995-96 to 2004-05 with the potential to undertake a Periodic Review in 1999 – which he is now doing.

Each January companies submit their tariff proposals for the year starting 1 April. In February 1999 Ofwat will check that the average increase in the proposed tariffs is within the price limit the Director has set each company for the charging year 1999-2000. Additionally we will take into account the views of the CSCs when we check the tariff structures and charging policy of each company to see whether the companies are following Ofwat's requirement that their tariff structures should reflect the costs imposed by different customer groups.

A particular concern for 1998-99 will be ensuring that the tariffs for large industrial customers properly reflect the continuing cost of supply and are not pitched at an artificially low level in order to avoid losing the large customer to a competitor.

Future prices (Periodic Review 1999)

In 1999 the Director will reset the price limits for all water and sewerage companies for the five years starting 1 April 2000.

To balance a wide range of interests the Director has established an open process. He is consulting on key issues throughout 1998 and assessing the implications for his price limit determinations in 1999. During 1998-99 Ofwat will be assessing the costs of quality programmes and the options for service improvements.

In April 1998 the Director will publish his letter to the Secretaries of State to raise awareness of the impact of quality obligations on bills and to influence the standards to be set. In October he will publish a consultative document Prospects for prices. This will indicate the possible level of price limits needed to allow companies to maintain their assets and service levels and to improve the environment. This document will reflect the results of companies' consultation with their customers on prices and services. The responses to Prospects for prices will help the Director in setting new price limits in 1999.

Helping competition to develop

Competition can lead to better services and lower prices. Introducing competition into the water industry is, however, more difficult than in other utilities as there is no national network for transporting water

The Government has indicated in its recent consultation paper on charging that it would like to look at the ways in which competition could be developed. Ofwat would welcome the opportunity of working with the Government to explore these possibilities.

Current opportunities for competition are mainly through the use of inset appointments. These are where a new entrant or existing water company takes over the provision of services to a large business customer (or greenfield site) in another water company's area.

We will aim to deal with inset applications and requests for the Director to settle disputes about bulk supply terms or sewage connections quickly and efficiently.

Managing Ofwat

Established in 1989, Ofwat is a relatively small organisation. In 1998-99 Ofwat will employ some 200 staff; about 50 of them work in the various CSC offices. Our staff includes consumer, scientific, engineering, economic and financial specialists. We require £11 million to finance our work. Our annual income is provided by a charge to the water companies of less than 0.17% of their total revenue of £6.5 billion, a cost of 45p per year per household.

This table shows how we divide up our budget between the main blocks of our work:

Price limits and monitoring	38%
Consumer support	30%
Information systems	10%
Office costs	22%

As Ofwat requires greater year on year efficiency from companies, the same discipline applies in managing our budget. As workloads increase and regulatory priorities change, we will respond flexibly by rigorously reviewing expenditure to ensure resources are available to meet the Director's objectives.

During the year we will review our performance, with the aim of improving our overall effectiveness and efficiency.

Our standards of service

We aim to provide a high-quality and efficient service. We have set out our performance standards and targets, plus how to complain if you are not happy with our service in a booklet Customer charter: our standards of service.

We publish a wide range of information about our work and the water and sewerage industry. If you would like to find out more, or obtain a copy of any of our reports, please contact our Library and Information Service on 0121 625 1361.

Highlights for 1998-99

Director's and ONCC submissions to Green Papers on regulation
and charging policy (May)

Director's Annual Report 1997 (June)

ONCC and CSC Annual Reports 1997-98 (July)

Publication of Prospects for prices: strategic options and issues (October)

ANNUAL REPORTS ON:

Tariff structure and charges (May )

Financial performance and capital investment (October)

Leakage and water efficiency (October)

Levels of service (November)

Operating expenditure and efficiency (December)