UK’s washed-up water watchdog is part of a bigger problem

Water in the UK is cheap. The problem for the industry watchdog is that this year it is also scarce. Sewage and leaks, on the other hand, are abundant.

What water regulator Ofwat has done well — or well enough — is keep prices down, over the past decade if not before. The average household energy bill is about to go up to £3,549 a year. The average annual water bill is less than an eighth of that at about £1.15 a day. As a narrow economic regulator with a remit prescribed by parliament, you could argue that it’s done OK.

Of course, pretty much no one does argue that. Because there is sewage in our rivers and on our beaches, while operators’ environmental performances are getting worse, not better. Because it is only after “many years of stagnation” that the water sector is managing to reduce leakage and the network still leaked the equivalent of 250,000 litres every 10 seconds last year. Because water companies’ shareholders have extracted tens of billions of pounds in dividends at the same time as loading them up with debt in the decades since privatisation.

One obvious conclusion is that Ofwat has prioritised bill cuts ahead of investment, conscious that customers have to pay for big infrastructure projects and wary of putting up costs for consumers when a cost-benefit analysis is not straightforward.

The problem with that conclusion is that it’s the water companies’ argument and water companies are after all the offenders here. That does not make it wrong.

Ofwat unsurprisingly argues that conclusion is wrong, pointing to evidence from its latest five-year price review as proof it is tough and getting tougher. Its stance is broadly that operators should be able to get better results from the investment they’re already allowed — and that they are.

But as much as anything can be clear in a murky industry, what Ofwat has achieved isn’t good enough. It’s not sufficient to have delivered low bills and efficiency improvements. The failure to tackle leakage and sewage sooner are the result of an overly narrow focus.

Unfortunately, some past shortcomings have to be regarded as water under the bridge. Yes, the industry turned out to be a gusher for private equity and infrastructure investors after privatisation. No, the companies didn’t invest as much as they should have. Yes, regulators have come up short. But it is impossible to recover all that has been lost over the years from the current crop of water utility shareholders.

Nationalisation arguments aside, what is needed now is a step change to tackle long-term shortfalls. Incremental improvements won’t cut it.

That will be tricky given Ofwat’s current 2024 price review is being conducted under the shadow of the cost of living crisis. Even where it now seems to be accepted that more investment is needed, there will be a temptation to kick the can a little further down the river. The Department for Environment, Food and Rural Affairs slipped out a plan last week to force firms to spend £56bn over 25 years to tackle sewage spills (with households footing the bill). But most of the front-loaded targets still don’t have to be achieved until 2035 — at least one more Ofwat price review away.

The bigger issue is that the failure of forward planning doesn’t seem to be confined to Ofwat, but seems to span the UK’s economic utility regulators. The energy watchdog Ofgem has demonstrated similar short-sightedness. Part of the legacy of Ofgem’s earlier focus on keeping down consumers’ bills is the graveyard of failed suppliers. Another is its failure to adapt the electricity network for net zero.

This suggests the framework for economic regulation isn’t fit for purpose. Politicians are the ones who need to fix that. Indeed, the business department published a policy paper on the topic in January this year, pledging to set out “clear strategic direction” for utilities regulators — though it hasn’t actually done so yet. Defra followed up with new “strategic priorities” for Ofwat in February.

But public faith in the likes of Ofwat and Ofgem is at a low ebb. Scepticism that they are the ones to hold companies to account if they are allowed to invest and charge more has to be high. It will take more than a set of strategic priorities to restore trust in UK economic regulators’ ability to regulate. A reset is required.

cat.rutterpooley@ft.com
@catrutterpooley