At the time, Fletcher referred to water’s “dark week”, which she now sees as a turning point for the industry embracing the opportunity to deliver greater value for society through individual company culture and purpose.
Fletcher left Ofgem for the top job at Ofwat in 2018 when Cathryn Ross’ moved to BT. Her experience regulating the energy sector included being senior partner for consumers and competition and a member of the Ofgem board.
During her 13 years at Ofgem, Fletcher led the electricity price control review, introduced the Low Carbon Network Fund. Next week she joins Octopus Energy as director of regulation and economics as the disruptor brand grows into a large supplier.
During Fletcher’s time steering the Ofwat ship she championed companies moving into the space beyond being service providers towards something that’s not purely transactional. As employers and environmental stakeholders there is a major role being played within communities.
“If you think about where we were three or four years ago, I don’t think the industry had as much conviction about the role it plays in society nor was it as ambitious as it is now. Water UK wrote a statement of ambition about the kind of industry it wants to be, and we’ve seen steps taken over the past few years towards that ambition.”
Building trust
For the regulator’s part there has been significant work to restore public trust in the sector starting with board leadership requirements being added to company licenses mandating a duty to stakeholders – not only shareholders – and a responsibility to further that purpose through company culture.
Fletcher says during the almost 12 months this has been in place it has given boards a greater focus. However, she doesn’t feel formalising public purpose into licenses would necessarily be effective because it is difficult to find a meaningful modification.
“Companies are seeking to embed that broader purpose to make it more enduring rather than being reliant on personalities at the top,” she says.
“What’s important isn’t about changing the license, it’s about cementing a mindset in the individual companies about what they’re there to do, what’s important, and getting that mindset driving all sorts of decisions from paying dividends, who do you employ, what do you look at when bringing people into the organisation. We’re beginning to see that happen.”
An example of this has been the green recovery proposals made by the sector to accelerate investment to the tune of £1.3 billion to add value in the economic recuperation following Covid-19.
“It’s one illustration of many that companies are not content anymore to just run a profitable water and waste business that’s the right side of compliance. Now they’re really creatively thinking about how as a water and wastewater treatment company can they add value.
“When I came in at the beginning of 2018 the industry was being criticised by the Secretary of State for its corporate behaviours and offshore financing, now it’s well on the way to embracing the public value it can create. It’s hugely rewarding to see.”
Fletcher sees the regulator as a small cog in a large complex system and the Time to Act Together strategy, which acknowledges that, is a highlight of her time in the role. Since its publication in 2019 Ofwat has focused on the longer-term challenges of climate change, population growth and the wider public values the sector can create.
Collaboration is key
These strategic changes will be more effective by working with other parts of the system, Fletcher believes.
“Coming from the energy sector I was looking at water and thinking how are we preparing for the future? It was clear there were big gaps in the approach. Fast forward three years and that’s in a hugely stronger place down to collaboration and joint working.”
She says regulators and government began speaking with one voice and the industry response brought the energy to reform water resource planning. The formation of the Regulators Alliance for Progressing Infrastructure Development (RAPID) further exemplified the goals of the strategy in action.
“You can draw a golden thread from what we were trying to achieve with the incentives in the price review and the strategy. We’ve had 18 months to embed the strategy and we’ve got amazing work underway.”
The innovation fund is an example Ofwat getting into that enabler space – to facilitate the sector to tackle some of the challenges from climate change, population growth and changing customer expectations by exploring how technologies can cut through those challenges.
Another change from within, Fletcher says, is Ofwat is embracing the idea that only a few months since the price control closed, there’s potentially more money on the table to assist the green recovery. Together with other regulators, Ofwat invited companies to bring forward future investment and accelerate planned work. “This is a real indication of Ofwat thinking in a different way than the Ofwat of old.”
The Ofwat of new will be more forward thinking in the next price review, Fletcher says, as she describes PR24 as “really moving things forward”.
“The early stages on our thinking on PR24 includes how we get the industry to think about the next 10, 15, 20 years and how the big investments will be scheduled and phased in a way that makes the investment achievable but keeps things affordable for customers.”
The next AMP will emphasise nature-based and lower carbon solutions, which Fletcher says effectively bring greater environmental benefits for every pound of customer money spent.
Challenging the sector
The current price review was designed to push the sector on performance commitments. The challenging approach caused four companies to request a referral to the Competition and Markets Authority (CMA).
“PR19 was set out to be tough, but, it’s a truism that you don’t know what’s achievable until you try,” Fletcher says. “Part of our role as a regulator is to be challenging to get a sense of what is possible. ”
After 12 months of representations and hearings, the CMA’s conclusion was as close to a happy medium as all parties could have hoped for.
The major differences between the CMA’s determination and Ofwat’s was where they landed on cost of capital, which is down to different judgements on the available evidence. Fletcher says Ofwat never expected the CMA to end up with the same answers as itself.
“A different expert body looking at different evidence a year on is bound to land at different judgements on different parts of the settlement. But fundamentally they agreed that performance improvements were needed, that investors need to earn their money and that customers didn’t need to pay more for better service: those are all really important stakes in the ground.”
She adds that learning from the response to PR19 and the four appeals is “part and parcel of what regulators should do” and something Ofwat is taking on board for PR24. “Regulators shouldn’t stand still, we always learn from price reviews and how we can do better next time.”
As Fletcher prepares to return to a sector that she spent 15 years in, she says she will miss the deep connection with the natural environment the water sector has.
“I’m confident we’ve got an industry that really wants to do good for the natural world. I’m going to miss that because in energy the focal point is net zero, but I don’t want to lose sight of the fact that protecting biodiversity and our natural resources has to be looked at as a part of sustainable living just as much as reducing emissions is. We have to focus on both – we can’t work to reduce emissions but destroy waterways that we enjoy and benefit from so much.”