This year has been filled with anticipation for a change to the status quo in the business water sector, one that has been characterised by crisis, controversy and somewhat moribund companies at the centre of the issues.
However, whilst the state of Thames Water has been the biggest story due to the scale and immediacy of the financial crisis involved, there have been sweeping root-and-branch changes proposed throughout the entirety of the sector.
The most recent of these is that Ofwat, the primary regulator for the water industry, is to be abolished and its Chief Executive, David Black, has announced that he is stepping down from his position.
The end of Ofwat is one of several suggestions made in the Cunliffe Report, but it is both by far the biggest and has the largest long-term consequences for customers. Here are the main takeaways and what to expect going forward.
Why Is Ofwat Disappearing?
Established at the same time as the privatised water sector in 1988, the Water Services Regulation Authority has been the regulatory authority associated with the financial aspects of the business of supplying water and wastewater services in England and Wales.
The overall regulation of the water sector is complex and involves three other public bodies, each of which has somewhat overlapping duties. The goal of abolishing it is to ensure that all of the duties surrounding the water sector are under the purview of one singular regulatory entity.
Ofwat are tasked with ensuring private water companies fulfil their regulatory duties, but as has been seen with overlapping investigations, many of its duties are shared with the Environment Agency and Natural England (with regards to conservation and ecological impact) and the Drinking Water Inspectorate (with regards to potable water quality and public health).
During the peak of the crisis surrounding raw sewage entering beaches and areas of outstanding natural beauty, there were questions surrounding regulatory jurisdiction, as the vastness of the infractions overlapped between several of the regulators.
Alongside the end of Ofwat, the DWI will also be integrated into this new regulator, and the water and environment regulation functions of the other two regulators will be taken away from them and given to the new body.
Meanwhile, in Wales, the responsibilities Ofwat previously had will be merged into Natural Resources Wales, a similarly combined governing body that manages the not-for-profit Welsh Water.
Upgrading The Consumer Council For Water
The Consumer Council for Water is an independent public body that supports business and domestic customers with complaints against water companies, provides advice and support and advocates for consumers with matters such as affordability and service disruptions.
It acts as a de facto voluntary ombudsman, but the recommendation is that they will be upgraded to an official full ombudsman with several enhanced powers to help manage complaints, report and fix issues, and create a social tariff to help the affordability of water bills for people in arrears or who are struggling to meet them.
Formal Turnaround Regime
A more controversial part of the plan is the establishment of a formalised system to help poorly performing companies, both in terms of finances and performance levels, turn themselves around.
At present, whilst Ofwat has established a Turnaround Oversight Regime on companies such as Thames Water, its implementation has lacked clear guidelines regarding when and how companies enter or exit the monitoring system.
The proposed turnaround system would incorporate clear targets and a range of support levers to help struggling companies.
This includes, somewhat contentiously, a form of regulatory forbearance, which would allow a regulator to defer or even dismiss penalties in cases where it would affect the ability of said company to invest in infrastructure improvements or for other reasons seen as within the public interest.
This has been contested as potentially causing a moral hazard, where water companies would act recklessly or unethically because those fines and penalties could be waived off in dire situations.
The report suggests this would be tied into enhanced monitoring and regulation more broadly, and forbearance may come with conditions that would lead to regulators stepping in and taking more direct control or having greater restrictions over decision-making.
Is Nationalisation An Option?
One criticism of the report, as well as an opportunity under a new, larger regulator, is whether the sector should be brought under public ownership, using an approach similar to either Scottish Water’s nationalisation or Welsh Water’s not-for-profit organisation.
The Cunliffe report was not allowed to explore nationalisation as an option, as at the time of the establishment of the report, the official stance of the government was that it would take too long and would be too expensive to do so.
This stance has softened somewhat, given the nationalisation of British Steel, the preparations for the special administration regime of Thames Water that has some similarities to nationalisation, and the general political popularity of nationalising utilities.
