Changing climate prompts Ofwat review

Ofwat was set up 20 years ago to regulate the water industry when it was privatised. It can prosecute companies that fail to deliver a good service at a fair price. However, water companies are facing increasing costs as they invest in infrastructure to meet environmental and customer improvements under their licences. These pressures are set to increase as water shortages increase in the UK and population levels grow.

The Coalition Government, meanwhile, has pledged to reform the water industry to ensure more efficient use of water. It is set to publish a Water White Paper early next summer, which will set out its policies for the future of water management.

According to the Environment Agency, water resources are already under pressure in many parts of the country, with some 25 million people living in areas where there is less water per person than Spain or Morocco. As the supply of water dries up, it expects demand to increase with population growth – which could mean as many as 20 million more people each using, at current levels, 148 litres of water a day.

"Ofwat has been successful in holding down household bills while water companies invest in their infrastructure," said Environment Secretary Caroline Spelman. "But we need to make sure the regulator is in good shape to help the industry prepare for a changing climate and a growing population, at the same time as keeping bills affordable.

"It’s important to reassure water companies and bill payers that Ofwat provides good value for money by carrying out its duties without unnecessary red tape."

The review will be run within Defra but led by David Gray, an external reviewer who recently looked at airport regulation on behalf of the Department for Transport. Gray also has knowledge of financial markets, Government and utility sector regulation.

The Oftwat review is due to be completed early next year.