It seems that not a day goes by that business water rates are not a major news story, which is primarily the result of a water sector that has seen a rather significant level of chaos over the past few years and the difficult decisions that are likely to be required to get it back on track.
The biggest reason for this is that customers, both business and residential, are seeing significant increases in their water rates despite performance levels so poor that all but two of the regional water companies operating in England have to lower bills as punishment.
People are naturally unhappy with this, but some people and organisations have taken this a step further and taken Ofwat to court, accusing the governing body of acting “unlawfully”.
The case revolves around the hypocrisy that has frustrated so many businesses and individuals alike; bill-payers are charged more despite the poor performance and seemingly being rewarded for failure.
Double Charging
The plaintiff, River Action UK, has argued that Ofwat has broken its own policies and, as a statutory body, is therefore acting unlawfully in the process.
The specific issue is with PR24, Ofwat’s price review, which has set the price increases that water companies are legally allowed to impose over the next five years, to pay for upkeep and improvements to ageing infrastructure.
Ofwat has a policy that customers should not have to pay twice for infrastructure upgrades, but River Action and its legal partners Leigh Day argue that the policy has been effectively broken, as Ofwat expects customers to pay again for infrastructure upgrades that should have already been made and funded.
They argue that Ofwat failed in their approach to ensuring water bill payments were used for infrastructure upgrades rather than shareholder dividend payments or bonuses, and since that money no longer appears to be available, customers are charged again for improvements that were promised years ago.
The case is being heard in Manchester and specifically focuses on the case of United Utilities and Lake Windermere, a protected set and designated area of outstanding natural beauty that has seen thousands of hours of raw sewage pumped into it.
The first fundamental complaint is that Ofwat relied on simulation modelling rather than evidence of sewage discharges, which implies that it ignored the water companies breaching their permits by discharging raw sewage into waterways.
Part of the allegation is that Ofwat ignored evidence to the contrary of the model, and the other part is that Ofwat did not sufficiently ascertain whether the modelling system was even legally adequate for the purpose.
The other major complaint is in the clawback system, which allegedly can be used by Ofwat to reclaim misused funding, as has allegedly been the case for several years. The argument is that it is flawed and incomplete, as the money that should have been available to claw back is seemingly gone.
Whilst an Ofwat spokesperson has denied both claims, their comments were limited due to the ongoing legal hearing.
The Precipice Of Change?
Ofwat is set to be abolished, which suggests that significant change is on its way, particularly if the River Action legal case is not rejected out of hand and it leads to a reconsideration of the price rises already agreed to or the 2029 price review.
The key theme of the legal case is that change is not only long overdue but has also been promised for years without being delivered, and it adds further pressure to provide a meaningful change that does more than shuffle the deckchairs.
The UK government has been keen to avoid outright nationalisation or the special administration regime due to potential costs that have been previously disputed by River Action and others, and has consistently advocated for a market-based solution.
This has allowed bond fund manager Pimco, according to Sky News, to sell off Thames Water debt bonds, a decision that has been taken as either a positive step that a market-based solution is possible, or an attempt to escape exposure to the £20bn of debt that has become an albatross over any potential sale.
Part of the issue with any potential rescue deal by existing creditors is that it is contingent on any governing body overseeing the water industry offering leniency for any sewage or environmental breaches for at least another 15 years, according to The Guardian.
This has previously caused an impasse to the approval of any plan between Thames Water’s creditors and Ofwat, even with the commitments to pay no dividends or sell the business before 2030.
