How will regulatory overhaul affect water industry in England and Wales?
Cunliffe calls for abolition of regulator Ofwat but steers clear of proposing nationalisation of the embattled sector
The death warrant for water regulator Ofwat appeared in a 454-page report published on Monday by the Independent Water Commission, after it pored over 50,000 responses and met almost 250 organisations and individuals.
Sir Jon Cunliffe, the former Bank of England deputy governor who chaired the review, was ordered by ministers to rip up the current system of oversight for water companies in England and Wales — but stop short of nationalisation.
His report comes against a backdrop of public anger over the industry’s generous pay packets, high levels of sewage pollution and rising household bills.
What will be the immediate consequences of the report?
The commission called for Ofwat to be abolished, with a new regulator also replacing the Drinking Water Inspectorate while assuming the water-related functions of the Environment Agency and Natural England.
In Wales, Ofwat’s economic responsibilities should be integrated into Natural Resources Wales, an existing body, Cunliffe said.
The report warned that the regulatory landscape for water was far too fragmented and said “fully joined-up regulation is essential for the system to meet the demands of the future”.
Speaking after the review was published, environment secretary Steve Reed promised to legislate quickly to introduce a new regulator.
Cunliffe, who gave a separate speech on Monday, said Ofwat had been encouraged to monitor the sector with a light touch and keep bills down. It had also lacked the powers or capability to supervise the industry’s complex financial structure, he added.
This had “allowed some companies and their owners to take decisions which reflected their private interests but badly damaged both their companies and in the longer term the public interest”, he said.
The report did not name individual companies, but Australian investor Macquarie increased Thames Water’s debt from £3.4bn in 2006 to £10.8bn in 2017 while extracting billions in dividends and loans.
Reed has so far accepted four other recommendations from Cunliffe.
They include strengthening the legal powers of the water ombudsman, the Consumer Council for Water, and reforming self-monitoring of wastewater compliance by companies.
Most of Cunliffe’s recommendations will be considered by ministers at leisure.
Has Ofwat’s demise been welcomed?
Surfers Against Sewage, a campaign group, described the proposals to axe the regulator as “putting lipstick on a pig”, given that the industry’s financial and ownership structures will remain intact.
But Water UK, the industry trade body, said the report offered “fundamental change” and a “significant step forward”.
“These recommendations should establish the foundations to secure our water supplies, support economic growth and end sewage entering our rivers and seas,” it said.
What about nationalisation?
Nationalisation was deliberately kept outside the inquiry’s scope. Reed said it would cost taxpayers about £100bn that could otherwise be spent on schools and hospitals.
Cunliffe insisted that Britain had been the “dirty man of Europe” before then prime minister Margaret Thatcher’s 1989 water privatisation and that the sell-off had been a success at first. Only in recent years had the performance of the industry “plateaued”, he said.
What is the proposed turnaround regime?
Cunliffe argued against “punitive measures on poorly performing companies that make it harder for them to recover”.
The management of heavily indebted Thames Water, which provides water and sewerage services to about a quarter of the UK population, has been begging for a more lenient approach to pollution spills to help it survive.
The commission proposed the regulator should have a new turnaround regime to support the recovery of poorly performing companies.
This could allow the regulator to “defer or waive fines” if they damaged a utility’s ability to make infrastructure investments. Restrictions on management bonuses and shareholder dividends were mooted as a condition of entering the regime.
What will the shake-up mean for water bills?
Reed vowed water customers would “never again be hit with unaffordable rises in their bills”.
In December, Ofwat announced that water companies could raise customer bills by an average of 36 per cent over five years to 2030.
When ministers boast about £104bn of new investment for the water sector, they gloss over the fact this is being funded by those higher bills.
The Cunliffe report suggested bills were previously held down between 2009 and 2024 at the behest of politicians and the regulator, throttling much-needed investment in the network.
Reed’s argument is that if water companies had paid less in dividends and bonuses, they could have invested more in infrastructure upgrades.
But Cunliffe was sanguine that bills needed to rise to provide necessary investment.
“We have to recognise that the cost of producing water and waste water services is likely to increase over the medium and longer term,” he said.
Will there be tighter restraint on executive pay?
In addition to sewage spills, there has been public anger about high pay packets at underperforming water companies.
Ofwat has new powers to restrict bonuses for water bosses, but only six have been banned this year.
By contrast, Thames alone was able to pay bonuses worth £2.5mn in April to 21 senior staff as a reward for taking on a punitively high-interest loan. Meanwhile Southern Water has sidestepped the ban by doubling its chief executive’s overall packet.
Yet Cunliffe’s report shied away from tougher restrictions on water executives’ pay.