Regulation by output (albeit with an associated investment level assumption related to pricecap) rather than input is one of the ways in which the Water Services Regulation Authority (Ofwat), the economic regulator of the water industry in England and Wales, incentivises companies to effective asset management. The paper discusses how such arms-length regulation operates, and considers the appropriate output indicators for such a regime. The paper draws on experience of some ten years of operation and annual monitoring of trends in serviceability indicators, which are the foundation upon which the regulator judges the appropriate financing for capital maintenance at periodic reviews. It describes the UK water industry΄s risk based approach to capital maintenance planning common framework (CMPCF) jointly developed by companies and regulators in 2002, and Ofwat΄s approach to its assessment of resulting company business plans. The paper highlights issues arising from the periodic review of prices in 2004 (PR04) and developments needed for the next one in 2009. Companies will need to develop their asset information and analytical tools to enable better forecasting of asset deterioration and the likely impact on service in both medium and long term, to develop a more robust, service driven, risk based approach that delivers economic capital maintenance plans. [ABSTRACT FROM AUTHOR]