Water companies could be heading for a showdown with the Competition Commission if they do not agree to proposed changes to their operating licences.
Industry regulator Ofwat wants to change the way price controls are set for water companies - instead of setting a single price limit that is fixed for five years, the regulator plans to introduce a flexible system that allows it to specify the number, nature and limits of the controls it sets, and their length, each time they are set.
Consultation closed on Wednesday, and the changes would come into force at the end of the current five-year price control period in 2015.
Under the Water Industry Act 1991, Ofwat has the right to modify the conditions of a water company’s licence if the company agrees to the changes.
But if the company does not agree to the modifications, the Act also gives the regulator the right to refer it to the Competition Commission.
Ofwat has set aside a six month period from March to October to refer any water companies that do not agree with the licence modifications, after which it wants to make a start on consultations for the next price review using the new approach.
It says the existing price-setting framework is “insufficiently flexible to best help the companies meet the challenges they face in the future”, which it says include climate change, population growth, rising customer expectations and increasingly stringent environmental standards.
“If we try and meet the challenges the sectors are facing with the rigid price control framework we have today then we risk weak or perverse incentives which result in unsustainable outcomes that are not aligned with customer priorities and diminishing efficiency gains,” the regulator said in the consultation document.
“We need a framework where the companies are incentivised to respond efficiently, flexibly, innovatively and sustainably to these challenges so that they deliver the right outcomes for customers and other stakeholders in a less certain future.”
NCE understands that more than one water company has expressed concern about the proposed changes.