The move, as part of its first major consultation into price limits for customers' water and sewerage bills for the five years from 2010 to 2015, describes the approach Ofwat will take to enure that water companies deliver good value.
Ofwat Chief Executive Regina Finn said, "The approach we set out here has its foundations in the robust challenge that Ofwat has always brought to its scrutiny of companies' business plans to make sure they deliver value for money for customers.
But in the light of the challenges of the future we do propose to make some changes to the way we set price limits."
Companies must publish a 25-year 'strategic direction statement', showing how each company proposes to deal with long term issues like climate change, the development of competition andmore housing.
Finn said, "Innovation and creativity will be essential if the water sector is to meet the challenges it faces at a price customers regard as fair.
"Competition is generally the best driver of that type of innovation and our decisions in setting price limits will support our aim of promoting competition in consumers' interests. In the meantime, the longer term focus should concentrate companies' minds on how they can innovate to meet the needs of their customers in the future."
However, companies will be required to deliver only one core business plan.
Other proposals include incentive-based regulation for capital expenditure, which would allow companies to choose their own risk-reward trade off, and a requirement to use cost benefit analysis across all parts of the business to make sure that companies make the best choices for their consumers.
Finn said, "We aim to see a result that delivers best value for consumers and the environment at a fair price. A key part of this will be the cost of finance to the industry. When we look at this we will consider the significant premiums to regulatory value being paid for water companies in recent years, along with other evidence."
Following consultation on the methodology paper, which ends in January 2008, Ofwat will publish its final guidance paper in March 2008 to enable water companies to deliver their draft business plans in August 2008.
Responses to the consultation paper should be sent by 24 January 2008 by email to email@example.com, or by post to Rhiannon McHugh, PR09 Planning Team, Ofwat, Centre City Tower, Birmingham B5 4UA.