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:
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.
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`
The privatisation of water has always puzzled and annoyed me. If I’m unhappy with the price or service from my gas, electric, or telecoms provider I can simply change supplier. With water I can’t, and doing without water isn’t an option – which is probably why companies like United Utilities have such shocking disregard for their customers. Every time a constituent rings with a complaint about water I know I’m in for a long slog. The sector either needs a radical overhaul of the regulation, or it needs to be opened-up to some proper competition.
A hundred years ago Birmingham Corporation (the forerunner to the City Council) bought a large area of the Elan Valley in Wales and built enough reservoirs to hold a year’s supply of water for the city. A year’s supply means you are never held hostage by anything as unpredictable as weather. It also built a gravity fed syphonic pipe line to bring water to the city and a network or reservoirs in the city to hold water locally. Birmingham hasn’t run out of water in the 10 years I’ve lived here.
The UK has no shortage of rain. The reason we have hosepipe bans is that we are too blinkered, too short sighted, to penny pinching and to NIMBYistic to build a decent water distribution system. The solution is so simple that it was done, locally, over 100 years ago.
It doesn’t help of course that we have had a London centric attitude to business for many decades. There has been a net migration to the bottom right hand corner of the country for generations – the coner of the country with the least reserves of drinking water (and housing and roads and schools and…) Perhaps as well as building lakes and pipes, we should start to move jobs and people back to the rest of the country where they have enough drinking water.
seem to be in agreement of some of the other commentators. The WE of the we have periodic hose pipe bans is a very specific we, a geographical we. perhaps people use too much water (though having lived inlondon the temptation to shower a minimum of once a day is high.
Water rates are exceptionally high for thos ethat live in small dwellings and bedsits. far and above those paid by houses that probably have washing machines and people who can afford to heat their water to have many baths/showers. Unfortunately many cannot be on metres (which proves to me that the billing should be different.10 years ago I lived in a literal bedsit with a shared bathroom, there were three bedsits on my floor our bills came to more than huge houses nearby.
The flooding of a village, Capel Celyn in north wales for a resevoir for water for england caused an upsurge in support for plaid cymru….water is political
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.
Personally I’d very much like to see the water industry renationalised. Water is a fundamental resource and it’s wrong for companies to make huge profits out of what should be a shared national resource. Water should belong to every citizen, not just to a small number of shareholders.
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.
I think a point missing from the article is that while the water boards were privatised, unlike predecessor monopolies in other sectors, little was done to commodify water (e.g. the UK has one of the lowest water meter adoption rates in Europe), and little was done to encourage competition between suppliers. What has resulted is possibly the worst outcome – incomplete privatisation run by regional corporate monopolies with perverse incentive structures.
It really is quite surprising that one of the last privatisations turned out to be the most disastrous – one would expect the full lessons to be learnt. Water is a complicated resource; but not magnitudes different from piping gas or distributing electricity to millions of homes.
The government needs to decide whether it wants a private water sector or a public one, and finish the privatisation job started in the 1980s (or of course renationalise). Full privatisation means allowing companies to require metering before serving customers, allowing new entrants to market and removing barriers, and merging the economic regulator into the Competition Commission. There is no need for the economic regulator to get involved in determining acceptable water leakage rates – this should be resolved due to competition between water companies and if necessary the Environment Agency.
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.
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!