Opinion: Time for water reform

Water is an industry in need of reform, the last monopoly. Uniquely, water is the one utility essential to life itself. Our water supplier depends solely upon where we happen to live.

Regional water boards became Public Limited Companies in 1989 and these were privatised the same year. There was no fundamental restructuring such as with gas and electricity. We have no National Grid for water; we can have drought in the south-east and floods in the north-west with no means of transferring excess water to those with shortage of supply. We have periodic hosepipe bans, restrictions on usage, and from time-to-time we see roads being dug up because yet another main has burst.

Between privatisation in 1989 and 2009, the cost of water to consumers rose in real terms by 42%.

Are we getting 42% better service? Has water quality improved? Has there been investment to bring about new technology and ways of running a more efficient industry? No. A quarter of all our water is lost in leakage. Forty two billion gallons a year.

OFWAT’s main aims are to ensure that the water industry provides good quality and efficient service at a fair price. 25% leakage and a 42% price hike? How does OFWAT purport to be meeting its objectives in these circumstances? Also, water quality is largely in the purview of the Drinking Water Inspectorate, one part of a fragmented regulation trying to deal with an unfragmented industry:

Water regulation diagram

The economic regulation of the industry is subject to debate. OFWAT has no duty to promote innovation, and there are questions in respect of its economic regulation too.

When Mid Kent Water and South East Water merged, OFWAT claimed a loss of value worth some £200 million over 30 years. The Competition Commission put that figure at just £9 million. They can’t both be right.

A few years ago, millions of us living in the Severn Trent area were defrauded. The company provided OFWAT with inaccurate leakage data, and were allowed to increase prices based on their submission. It was only thanks to a whistleblower, David Donnelly, that this came to light, the company being the only one ever prosecuted by the Serious Fraud Office under Section 207 of the Water Industry Act 1991 for providing false information to OFWAT.

The company pleaded guilty, and were fined £2 million. OFWAT also penalised the company, to the tune of £35.8 million. We had a lengthy and expensive criminal legal process to yield a seventeenth of that which was imposed by the regulator.

It is my view that the regulatory system needs radical overhaul, simplification and sharper teeth. In the light of a non-competitive marketplace, what is the point of prosecution of a water company anyway? Civil penalties can be more severe. You can’t put a company in jail either.

In the autumn, the Regulatory Enforcement and Sanctions Act 2008 (RESA) came into force. It allows for regulatory offences to be investigated to criminal standards, but essentially dealt with as an administrative matter; appeals would be made to a specialist tribunal in much the same way as one might appeal a benefit decision to the Social Security Tribunal. RESA also allows pre-emptive “stop notices” to be employed if it is felt that there is a risk to human health, the environment or the financial interests of consumers.

However, the economic regulation of water, i.e. the OFWAT role is not in the first tranche of bodies due to work under RESA.

As the future of OFWAT and CCW was deferred, there is a real opportunity to make a difference. Regulation could be simplified into economic and environmental; Enforcement could be done under RESA, with criminal sanctions only being employed in the light of overwhelming evidence of individual criminal conduct. The “new” OFWAT’s brief could be changed, to require innovation, to require leakage levels to be reduced to levels reflecting environmental priority rather than pure economic value to the water companies. A proper enquiry could be made into the establishment of a National Water Grid.

That way, we have at least a chance of the water industry meeting the needs of the nation’s growing population, and also mitigating some of the potential effects of climate change for future generations.

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11 Comments

  • Really quite simple – devolve power further so that those regions with a surplus of water can grow their economies. Too much london-centric thinking on this – instead of thinking `how can we penalise those who live in surplus water areas` it should be `how can we attract people away from areas of water shortages`

  • Water is the one thing that really does need to be re-nationalised in my opinion, I could never understand that something as vital as water is run (without competition) by organisations whose bottom line is always going to be profit not service.

  • Andrew Duffield 20th Dec '10 - 5:32pm

    Agree with nige and George. The crux of the problem is contained within the first line of this article. Water is a natural monopoly – part of the Commons. There is an alternative to re-nationalisaion of course – collection (via taxation) of water’s economic rent. This could be simply achieved through auction, say every 5 years, of the rights to each region’s water supplies – similar to the G3 bandwith auctions. I move.

  • >Personally I’d very much like to see the water industry renationalised.

    There’s another option, been running in Wales for years.
    Welsh Water/Dwr Cyrmu is run by a not-for-profit company with no shareholders.

  • Grant Williams 21st Dec '10 - 8:27am

    Hi Chris – the point you raised about commodification etc was in the original version, but it was way too long for an op-ed. I’ve an even longer version that I generally save for nights I run out of Horlicks…

    You are quite correct, an opportunity was missed, but then it does seem that the privatisation was done in a bit of a rush; if it took from 1973 to 1989 to turn water boards into PLCs, surely they could have waited a little longer to get the basic industry structure sorted out.

    The whole industry has been a strange setup for years; in 1945 there were over a thousand water companies, and even though the regional boards were established, there were still oddities like where I live where we have South Staffordshire Water that was always a private company AND Severn Trent who deal with the effluent side of things. We always thought they were a sh*t company… 😉

    The problem with auctions is that the timeframe needs to be such as to allow for investment if you haven’t restructured the supply side. Water infrastructure investment tends to be expensive, and there is a woeful lack of spend on R&D (see the Cave Report on that and other issues).

    Personally I would start with putting the water companies under RESA as soon as possible, do the supply side / infrastructure review, then having done so consider the structural / ownership / regulation issues. Not an easy set of tasks, but I would suggest attainable within the remaining life of this Parliament.

  • Grant Williams 21st Dec '10 - 11:21am

    Cassie’s comment about Welsh Water being run as a not-for-profit company is an interesting one, as it is certainly an model that could be explored further. It actually comes from a complete financial disaster aided and abetted by unexpected taxation by Gordon Brown on public utilities… you can quite understand why the Insolvency Act has special provisions regarding water companies!

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