Commission recommends new integrated water regulators to replace Ofwat
One of the Independent Water Commission’s most important recommendations is the creation of a new integrated water regulator for the sector in England, and a new economic regulator for Wales.
These new bodies would replace Ofwat, the criticised regulator which the Guardian reported on Friday was to be abolished.
The new integrated regulator in England would combine the functions of Ofwat, the Drinking Water Inspectorate, as well as taking on the water functions from the Environment Agency and Natural England.
The commission says this could ‘significantly strenthen’ oversight of water companies, arguing:
A single regulator would be able to oversee all operations of a water company from all angles and come to a ‘whole firm view’ of performance issues and compliance failures – some of which may interrelate and may not have been adequately understood in the current model, where cooperation between regulators is limited. This could deliver greater accountability in the regulatory framework with one organisation and one board responsible and accountable for the outcomes of the sector.”
It could also mean “more joined-up approach to regulation overall”, allowing issues to be tackled faster and more effectively.
There would also be increased accountability for delivery, as well as reduced regulatory burden by simplifying water company and stakeholder interactions with regulatory bodies, the Commission suggests.
A more joined-up, coherent and streamlined approach to regulation could also benefit investor confidence, the Commission suggests, adding:
Although a merger inevitably presents uncertainty in the short-term, in the long-term it should create greater stability overall for the regulatory system – establishing the clear and objective conditions necessary to attract investment.”
Key events
New turnaround regime could allow ‘regulatory forbearance’ for water companies
Water companies could be let off fines if the government accepts one of the recommendations from the Independent Water Commission.
Today’s report argues that a formal turnaround regime should be established to help improve the performance of strugging water companies, through new government legislation.
That regime should allow “enhanced power of direction” (allowing regulators to steer a company) as well as regulatory forbearance (allowing companies to dodge financial penalties).
The report says:
The Commission believes it is important that, where companies fail to comply with requirements, there is accountability and consequence. However, these may sometimes need to be pursued within the context of the broader public interest.
A turnaround regime would comprise a set of defined tools for the regulator to deploy when a company enters the regime, the Commission explains, adding:
These tools would include both supportive levers to improve performance, and sanctions to ensure there is sufficient consequence that prevents moral hazard and that ensures enforcement in relation to regulatory breaches.
The prospect that water companies could swerve financial penalties could enrage water users, who are understandably furious about the rise in pollution incidents.
Back in March, the Guardian revealed that Thames Water was asking to be spared billions of pounds of costs and fines over the next five years, claiming that potential investors would be scared off otherwise.
Shares in stock market-listed water companies are rising a little in early trading, as investors digest Sir Jon Cunliffe’s report into the sector.
Pennon Group, which operates South West Water, Bournemouth Water and Bristol Water, has gained 0.2% so far this morning.
Severn Trent has risen by 0.26%, while United Utilities, the UK’s largest listed water company, are up 0.1%.
Campaigner Feargal Sharkey: Steve Reed should resign over ‘utter shambles’
Helena Horton
Former Undertones frontman and water campaigner Feargal Sharkey said environment secretary Steve Reed should resign over a fail to grip the issue of sewage pollution.
He told ITV’s Good Morning Britain:
“I think Steve has got to reflect very carefully on the shambles that the last 12 months has been. He should go.
The Labour government has had 14 years to look at this, he should have walked into the office on July 5th last year and taken control of the industry. He has failed to do so.”
Sharkey said Labour’s handling of the issue has been an “utter shambles”, adding “it was announced on Friday a 60% increase on serious sewage pollution, there is no control of sewage pollution in this country”.
The singer added that the responsibility for the water sector lies ultimately with ministers:
“Where Jon [Cunliffe] and I agree is he castigates the board of Ofwat and the Environment Agency. He says he wants to abolish Ofwat but then I don’t see how you don’t add the Environment Agency to that. And both these organisations have their boards appointed by the Secretary of State for the Environment. Steve Reed could have come in on his first day and abolished both the boards of those organisations.”
Surfers Against Sewage: this is putting lipstick on a pig
Abolishing Ofwat will not stop sewage dumping or profiteering, unless the finance and ownership structures in the water industry are also changed, warns campaign group Surfers Against Sewage.
Giles Bristow, chief executive at Surfers Against Sewage, says:
“Look past the glossy veneer of today’s Independent Water Commission recommendations and you’ll see it utterly fails to prioritise public benefit over private profit. This is not transformational reform, this is putting lipstick on a pig – and you can bet the champagne is flowing in water company boardrooms across the land. Prime Minister, you must abandon the dangerous fantasy that the current privatised water industry can be patched up – it can’t, and the public knows it. Your party was elected on a pledge to clean up our rivers and coasts; now deliver on that promise, and go far beyond these half measures.
“For 35 years, profit has come first – and our waters have paid the price. Only one path forward remains: a full, systemic transformation that ends the ruthless pursuit of profit and puts the public good at the heart of our water services. We welcome Sir Jon’s calls for a national strategy, enshrining public health objectives in law and regional water planning. But we won’t be taken for fools — abolishing Ofwat and replacing it with a shinier regulator won’t stop sewage dumping or profiteering if the finance and ownership structures stay the same.
“Voters are tired of swimming in sewage and drowning in ever rising bills. They won’t accept any more toothless tinkering or PR spin—they demand specific, radical reform. Delay any longer, and you risk losing not only public trust but the confidence of your own MPs. Let the water companies keep raking in dirty profits at our expense, and the electorate won’t forgive you.”
One of Sir Jon Cunliffe’s many recommendations is that regional planning for the water sector should be based on river basin districts.
His report explains:
The Commission believes that more effective planning at the regional water system level is needed to deliver what people want where they live, within the broader strategic guidance from government.
It is clear to the Commission that decision-making across the water system is fragmented – across both regions and sectors – and is failing to deliver much of what society demands and expects, including for the economy. Reflecting this view, the Commission is recommending a new approach to the planning and management of regional water systems.
Helena Horton
Emma Hardy, the Minister for Water and Flooding, has told BBC Breakfast said she will be “looking at the report all the way through the summer” in order to create a white paper outlining how many of the 88 recommendations in today’s report will be adopted.
She explained:
We are going to introduce a water bill next year that will change the law and put many of them into law. Exactly how many of the 88 we will put into law we will figure out over the summer.”
On the recommendation to abolish Ofwat and create a new regulator, Hardy said:
It’s a really important recommendation, the secretary of state will be talking about this later today.”
Report criticises Ofwat’s ‘desk-based’ approach to regulation
Sir Jon Cunliffe’s report contains some specific criticism of how Ofwat has regulated the water industry.
The Commission says Ofwat “relied too heavily on a datadriven, econometric approach”. That means the regulator failed to take sufficient account of company-specific conditions and challenges.
The “over-reliance” on industry-wide benchmarking has led to “sub-optimal outcomes for the sector, for customers, for investors and for the environment”, the report finds.
It adds:
The increasing complexity of the challenges facing water companies – and of the challenges facing the regulator in regulating private monopoly utilities – require a broader, less monolithic and a less desk-based approach to economic regulation and to the oversight of companies’ performance against their licences.
Also, Ofwat’s approach failed to provide sufficient oversight of water companies’ delivery of infrastructure, management of their finances, or the health of the sector’s infrastructure, the Commission concludes.
But, it adds, the blame lies in Westminster too! The report says:
The Commission recognises that, until more recently, Ofwat was encouraged by the government to scale back its oversight of the sector, that it has paid closer attention to these issues in recent years
GMB: It’s time to renationalise water
The GMB union are calling for the privatisation of the water sector to be reversed.
Gary Carter, GMB National Officer, says this morning:
The Cunliffe report lays bare what GMB has said for years – water privatisation has been a disastrous failure.
Our rivers and waterways have been fouled, while bills rocket and fat cat bosses get rich.
Meanwhile the water infrastructure crumbles through lack of investment.
It’s a disgrace – and one Ofwat has overseen.
Now is the time to fundamentally reform the water sector and renationalise this vital resource.”
The government has confirmed that it will create a water ombudsman with legal powers to protect customers in disputes with their water company, as the Guardian reported last night.
This single, free point of contact will build on the Consumer Council for Water’s role (see earlier post) which is currently voluntary for water companies to follow.
The changes will bring dispute resolution processes for water in line with other utilities such as energy, the Department for Environment, Food & Rural Affairs says.
DEFRA add:
[Environment Secretary] Steve Reed is expected to announce ‘root and branch’ reforms on Monday to clean up rivers, lakes and seas and make the water sector one of growth and opportunity that serves hard-working families and businesses, as part of our Plan for Change.
He is expected to make assurances that government action will protect hardworking families from massive water bill hikes in future.
Public ownership of water left UK ‘dirty man of Europe’, says Sir Jon Cunliffe
Helena Horton
On BBC Radio 4’s Today Programme, Sir Jon Cunliffe said Ofwat has “failed” because “for many years it didn’t have the powers”.
He added:
To be blunt about it, it was directed by government to take a light touch to regulation.”
Cunliffe defended the review’s terms of reference set by the environment secretary, Steve Reed, which banned it from exploring the nationalisation of water.
He said:
I understand that many people who responded to our work are concerned about profit in the provision of water through a monopoly system and how that has impacted what has happened. However I believe the system can work.
There was that massive increase in investment, and I am old enough to remember how it was before and the public funding of our water systems left us as the ‘dirty man of Europe’.”
The former Bank of England deputy governor defended the high pay of water company executives after widespread anger caused by Southern Water’s chief executive receiving a doubled pay package.
He said:
We are not proposing the regulator should set pay scales for the industry. They do need to recruit, and you have to attract the best people. What really makes the public angry is when the pay is there but the performance is not.”
Commission recommends ‘new mandatory Water Ombudsman’ to handle complaints
Today’s report also recommends upgrading the existing Consumer Council for Water into a fully fledged ombudsman for customers and transferring responsibility for consumer advocacy to Citizens Advice.
This new ombudsman would give customers a clearer route to resolving complaints, they say.
Mike Keil, chief executive of the Consumer Council for Water (CCW), is ‘delighted’ by the recommendation, saying:
People should also be able to use water without the worry of being able to afford their bill, but April’s unprecedented rise in charges has compounded the struggles of millions of households. More people are turning to CCW to complain about not being able to afford their bill at a time when over 2 in 5 households have told us they’ve cut spending on essentials like food to make ends meet. The case for a single social tariff for water has never been more urgent or compelling and we’re pleased the Commission has recognised this.
“CCW already runs a successful voluntary ombudsman scheme for water customers and one of our key asks of the Commission was to make this mandatory, so people can have absolute confidence that when they complain they have robust protection.
“We’re delighted the Commission has recommended building on our work at a time when we’re seeing more people turn to us for help resolving complaints against water companies.”
Reaction to this morning’s report into the water industry is pouring in.
Water UK, the trade association for the sector, says the Cunliffe review is a ‘significant step forward’ towards fixing the industry, while pointing out that ministers must choose which recommendations to take forward.
Everyone agrees the system has not been working. Today is a major moment and this fundamental change has been long overdue. These recommendations should establish the foundations to secure our water supplies, support economic growth and end sewage entering our rivers and seas.
“The Independent Water Commission has written a comprehensive, detailed review of the whole sector, with many wide-ranging and ambitious recommendations. We now need some time to consider the detail and understand the implications.
“Crucially, it is now up to Government to decide which recommendations it will adopt, and in what way, but the Commission’s work marks a significant step forward.”
Concerns raised about profit motive of privately owned water customers
Today’s report also highights concerns about the “ownership model” that operates within the water industry, after it was privatised in 1989.
The Independent Water Commission says there are four main areas where the ownership model impacts company performance:
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profit in the provision of water and wastewater
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public listing versus ‘private’ (for example unlisted) ownership
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particular types of private investors and the investment vehicles they use
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Ofwat’s control and powers over water company ownership
However, the potential nationalisation of the water industry was out of scope of the Commission, under the terms of reference set by the government.
The report says many members of the public raised concerns about the profit motive of privately owned water customers, explaining:
A large number of respondents stated that they believed there was a conflict between the profit-making incentive of companies and their environmental and customer focused duties.
“Some respondents commented that the Commission’s Terms of Reference should have allowed the Commission to look at nationalisation and publicly funded solutions.”
Commission recommends new integrated water regulators to replace Ofwat
One of the Independent Water Commission’s most important recommendations is the creation of a new integrated water regulator for the sector in England, and a new economic regulator for Wales.
These new bodies would replace Ofwat, the criticised regulator which the Guardian reported on Friday was to be abolished.
The new integrated regulator in England would combine the functions of Ofwat, the Drinking Water Inspectorate, as well as taking on the water functions from the Environment Agency and Natural England.
The commission says this could ‘significantly strenthen’ oversight of water companies, arguing:
A single regulator would be able to oversee all operations of a water company from all angles and come to a ‘whole firm view’ of performance issues and compliance failures – some of which may interrelate and may not have been adequately understood in the current model, where cooperation between regulators is limited. This could deliver greater accountability in the regulatory framework with one organisation and one board responsible and accountable for the outcomes of the sector.”
It could also mean “more joined-up approach to regulation overall”, allowing issues to be tackled faster and more effectively.
There would also be increased accountability for delivery, as well as reduced regulatory burden by simplifying water company and stakeholder interactions with regulatory bodies, the Commission suggests.
A more joined-up, coherent and streamlined approach to regulation could also benefit investor confidence, the Commission suggests, adding:
Although a merger inevitably presents uncertainty in the short-term, in the long-term it should create greater stability overall for the regulatory system – establishing the clear and objective conditions necessary to attract investment.”
Introduction: Independent Water Commission pushes for ‘fundamental reform’
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
England and Wales’s water industry requires “fundamental reform” to address the problems that have dogged the sector, a new review has found.
A new official report into the water sector, just released, is recommending a swathe of new measures, including new regional water authorities with responsibility for ‘integrated and holistic water system planning’.
The Independent Water Commission has found that a fundamental ‘reset’ of the water sector is needed, to raise standards across the industry, in a 465-page report which just landed.
Sir Jon Cunliffe, the former civil servant and central banker who led the Commission, is warning this morning that “no single, simple change” will fix the water industry, which has been beset by under-investment, rising pollution incidents, soaring customers bills and meaty shareholder payouts.
Cunliffe says:
This sector requires fundamental reform on all sides – how we manage the demands on water, how the system is regulated, how companies are governed and how we manage the critical infrastructure on which we all rely.
He also calls for “a long-term, cross-sector strategy for water”, explaining:
It may sound academic, but it is profoundly important. A clear set of national priorities for water – covering the water industry, agriculture, land-use, energy, transport, housing development – is essential. Without it, we will continue to be dogged by inconsistency, short termism, unintended consequences and risk willing the ends without ever fully understanding the means required.
Cunliffe’s report has 88 recommendations in total, which include:
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a long-term, cross-sector strategy for water.
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the modernisation of the legal framework for water
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regulatory changes, including a new integrated regulator for water
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greater transparency in areas such as operator self-monitoring and scrutiny of water company reporting
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the introduction of a single social tariff, to improve affordability and customer service
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Changes to the economic regulation of water companies, including “a company-specific supervisory function” that would feed into the current price review structure
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New national resilience standards for infrastructure, to help guarantee the maintainance of underground pipes and other water and wastewater assets