The Director General of Water Services (the Director) is the economic regulator of the water and sewerage industry in England and Wales. His general duties are laid down in Section 2 of the Water Industry Act 1991.
The Director's Primary duties
He is required to act in a way he considers is best calculated to ensure that:
- the functions of a water and sewerage company, as specified in the Act, are properly carried out;
- companies are able to finance their functions, in particular by securing a reasonable rate of return on their capital.
Lenders and shareholders should be in a position where they can expect to receive a return sufficient, but no more than sufficient, to induce them to make loans and hold shares, if the company operates efficiently.
The Director's Secondary duties
Protecting customers - Subject to the above, the Director has a duty to customers to ensure that:
- no undue preference is shown and that there is no undue discrimination in the way companies fix and recover charges, and that rural customers are protected. This means that a customer's bill should, in general terms, reflect the costs which that customer imposes on the water and sewerage systems for a supply of clean water, disposal of dirty water and draining surface water.
- other aspects of customers' interests are protected - including quality of service and benefits from the sale of land transferred to the companies at privatisation, or acquired since then.
These duties are, in practice, complementary because customers benefit if efficient companies remain financially viable.
The Director has, however, called for his responsibility to protect the interests of customers to be made his single primary duty, putting customers' interests clearly at the heart of water regulation.
Promoting economy and efficiency - The Director must encourage companies to operate efficiently. The price limits he sets contain tough efficiency targets for companies. He monitors standards, comparing performance between companies, against each company's targets and with other sectors. Where necessary he seeks improvement.
The Environment Act 1995 placed a duty on the companies to promote the efficient use of water by their customers. This duty is enforced by the Director.
The Director must give companies incentives to reduce operating costs and the cost of sustaining their assets, raise money cheaply, and complete environmental projects at low cost. Where companies are successful in doing that, savings are passed on to customers at the next price review in the form of lower prices.
Subject to meeting the Director's requirements the companies are free to take their own management decisions.
Competition - The Director has a duty to facilitate competition between suppliers and potential suppliers, ensuring that a framework exists in which competition can develop. He encouraged the Government to change the law, widening the scope for competition by allowing 'inset appointments' to be granted to another company seeking to serve existing large customers within the home Appointee's area. He would also like to see the introduction of a limited common carriage obligation on companies and consideration given to extending cross boundary access to non-domestic water supplies.
General Environmental Duty - The Director is also required under Section 3 of the Act to exercise his powers subject to the requirement (among other things) "to further the conservation, enhancement of flora, fauna and geological or physiographical (landscape) features of special interest". He should also have regard to the preservation of public amenities, such as freedom of access to the countryside and seaside. However the Director is only required to do these things so far as they are consistent with his primary duties.
The Director sets price caps which allow the companies to finance their functions. This gives companies the incentives for greater efficiency. The Director does not control profits or dividends. Companies are given scope to increase efficiency and hence profitability and to share these rewards with shareholders and customers.
The Director limits the annual price increase, or 'K' factor, for each company to reflect what it needs to charge to finance the provision of services to customers. He does not approve tariffs, but checks they are in line with the company's charging limit.
A major review of price limits must take place after ten years, or after five if the company or the Director chooses. Certain adjustments can be made between reviews for a limited number of reasons. The current price limits were set in 1994. The Director will reset price limits in 1999 to operate from the year 2000. (See Ofwat Information Note 38).
Enforcing company licences
Companies operate under Licences granted by the Secretaries of State for the Environment, Transport and the Regions and for Wales or by the Director, to provide water and sewerage services in England and Wales. The Licences impose conditions on the companies which the Director is required to enforce (see Information Note 23).
Changes to a Licence can be made by the Director with the company's agreement, or following reference by him to the Monopolies and Mergers Commission on public interest grounds.
Disagreements between companies and regulator are normally settled through consultation and agreement. Where the Director feels the company is in breach of the terms of its Licence he has powers to secure compliance by means of an Enforcement Order. If a company does not comply with the Order (or otherwise put matters right), then the Director can ask the High Court to appoint a special administrator to run the service, instead of the company, until arrangements can be made for a new company to take over. A Special Administration Order would require the Secretary of State's consent.
The Director also has powers to secure an Enforcement Order if he feels a company is in breach of a duty - for example, the general duties to supply water or provide sewerage services to customers. Again, if the company does not comply with the Order, the Director can ask the High Court to appoint a special administrator.
Handling other disputes
The Director also has enforcement powers in respect of claims and complaints, including:
- Guaranteed Standards Scheme - Customers are entitled to compensation from companies that do not meet certain guaranteed standards. Disputed claims are referred to the Director. His decision is binding on both parties (see Info. Note 4).
- Connection Charges - Section 45 of the Act enables the Director to determine disputes about the amount charged for new water connections.
Drainage - Section 94 of the Act imposes a duty on the companies, enforceable by the Director, to provide public sewers to ensure that an area is effectually drained. This Section also imposes a similarly enforceable duty on companies to clean, maintain and empty public sewers. Section 105 gives the Director power to deal with appeals about adoption of private sewers and sewage works.
- Pipeline powers on private land - Section 181 of the Act gives the Director powers to investigate complaints. If he considers a company has failed to consult the complainant sufficiently, or has acted unreasonably, then he can award up to £5,000 against the company (see Info. Note 22).
Public interest and monopoly power
If a company acts against the public interest by misusing its monopoly position, the Director can refer the case to the MMC. An example of this might be a requirement that the customer purchase something connected with the water and sewerage service only from the company or another nominated source. This may lead to an Order from the Trade and Industry Secretary requiring remedial measures or an end to the practice.
Under the Deregulation and Contracting Out Act 1994 the Director can accept undertakings from companies instead of referrals to the MMC.
Appointment of the Director
Ofwat is a non-ministerial government department for which the Director has full responsibility. The Director is appointed for a fixed term by the Secretaries of State. He must comply with the statutory duties laid down in the Water Industry Act 1991. He may only be removed for incapacity or mis-behaviour. He is required to carry out his statutory duties and, in the performance of these, he has to make a wide range of judgements about how to use them to achieve his objectives. He is not subject to direction about what those judgements should be. Regulators are independent of Ministers.
The Director must make an annual report to the Secretaries of State which is laid before Parliament and published.
Relations with CSCs and ONCC
The Director appoints the chairmen and members of the ten regional Customer Service Committees (CSCs). They have statutory duties to identify concerns and represent the views of customers and investigate customers' complaints. Each company is allocated by the Director to a CSC. The link between the CSCs and the regulator means that the customer interest has a significant and continuous presence in his work and they work closely together. He regularly consults the CSCs for their views on policy matters affecting the interests of customers.
The Director established the Ofwat National Customer Council to strengthen customer representation. The Council speaks for all water customers and helps the Director to protect customers' interests.
The Director has recommended to the Government that the Council, like the CSCs, should become a statutory body. This will further strengthen representation for customers. There is no prospect for early legislation, but in the meantime the Director will act as if he were under a duty to have regard to representations from the Council, as well as from CSCs.
Other water regulators
The Director does not set environmental standards but works closely with:
- the Environment Agency which regulates and enforces water quality standards in inland, estuarial and coastal waters;
- the Secretaries of State who set standards concerning the quality of drinking water which are regulated by the Drinking Water Inspectorate.
INFORMATION NOTE NO. 26 MARCH 1994 (revised December 1997)