Ofwat faces rising tide of criticism as water sector crisis deepens
Angry protests over sewage pollution at beaches around England and Wales have until now been aimed at the UK’s privatised water companies.
But the risk of a financial collapse at Thames Water, the largest and most indebted water monopoly, has placed regulator Ofwat more directly in the line of fire.
Set up in 1989 to monitor the newly privatised water industry, the watchdog has been accused by politicians and experts of failing to deliver the financial or management discipline that was promised 34 years ago.
Added to the list of accusations are regulatory capture and a watchdog in thrall to the very companies and people it is expected to oversee.
Lord Andrew Tyrie, Tory peer and former chair of the Competition and Markets Authority, has called for a thorough review of regulation in the UK, saying some regulators had been “captured by vested interests”.
A regular churn of staff between the regulator and water companies — not least the appointment of former Ofwat chief executive Cathryn Ross as the new interim co-CEO at Thames Water — has added to a sense that the watchdog is overly cosy with investors and water companies at the expense of consumers.
Ofwat said it follows standard civil service procedures.
But Jonathan Portes, professor of economics and public policy at King’s College London, said it “doesn’t have to be the case that there’s corruption or even implicit rewards”.
“It’s just that the regulators spend more time talking to investors and companies than they do to consumers,” he said.
At the time of privatisation, the companies were encouraged to borrow to invest in infrastructure and improve services. But much of that debt has been used to pay dividends instead, according to a 2017 study published by Greenwich University.
“Regulation was flawed from the outset in that it provided no checks to financial engineering and excessive borrowing,” said Dieter Helm, professor of economics at Oxford university.
Asked at a House of Lords committee hearing this week why Ofwat had not raised concerns earlier over Thames Water’s debts, David Black, the chief executive of Ofwat, said he had been hamstrung by a lack of powers.
“If we went back to the early 2000s, regulators across all sectors took a relatively hands-off approach to ,” he said, adding that some of the “legacy financing structures need to be brought up to date”.
Now the water and sewage monopolies have £60bn in debt and the government is on standby for a corporate collapse or temporary nationalisation. A growing number of members of the public would like to see that made permanent, according to a YouGov poll last year.
There are other regulatory failures that need to be addressed, too, say experts.
Ofwat sets how much companies can charge customers, as well as their expenditure on infrastructure such as sewers, reservoirs, pipes and operations every five years. But its rules have been designed to reward efficiency: companies that spent less were allowed to keep some of the profits.
That incentive has failed to deliver the infrastructure needed for an expanding population.
“If you want to win the efficiency competition, you cut short-term costs sharply and that’s what they did,” said Helm. “After more than 30 years all the consequences of those past decisions are showing up in the state of the assets now.”
In recent years the regulator has been given more power to bare its teeth. Until 2022 Ofwat was unable to make changes to licences without the approval of every company in the sector. Even now companies require a 25-year warning if their licence is going to be terminated.
And no licence has ever been revoked — even Southern Water, which was on the brink of financial collapse and had received a £90mn fine in 2021 for deliberately tipping sewage onto beaches for several years.
“The licences are ill-defined, that makes it very hard to take licenses away,” said Helm.
The regulator has this year tightened licence conditions on the credit ratings it requires so it can block dividends if the company looks financially vulnerable. It will also require boards to take account of environmental and customer performance targets when they decide to make payments to shareholders. It remains unclear how those changes will play out.
Other issues include the regulator’s reliance on monopolies monitoring themselves, leaving companies to choose the extent to which they divulge information. Data on water leakage and sewage overflows are reported by the monopolies to Ofwat, for example.
Financial Times
I helped privatise UK water firms. But it’s government inaction that wrecked them
As the chair of the Chichester Harbour Trust, one of the most beautiful and important natural harbours in the UK, I witness on a daily basis its now-rapid destruction, caused in large part by an extraordinary deterioration in water quality – thanks largely, in our case, to Southern Water.
I was involved – as a banker in the 1980s and 1990s working for Kleinwort Benson and Lazard – with the privatisation of many of the utilities. In the case of the water companies, most of them were privatised as sensibly capitalised plcs. As local monopolies, they were regulated by Ofwat with a view to protecting customers from monopolistic pricing behaviour.
This approach was carefully thought through by the government on the basis of the business and demographic environment of the time. For some years this worked well in terms of operational efficiency, reliability of water supply and water treatment, and was a good deal for the customer – perhaps too good.
However, from about the start of the 21st century, two key issues were allowed to arise – neither of which was addressed by successive governments – that had not been envisaged at the time of privatisation.
The first was that these sensibly capitalised plcs were acquired by private equity and infrastructure funds, largely based outside the UK. They used substantial amounts of debt for acquisition, with a view to paying down the debt as rapidly as possible from the strong positive cashflows that these companies generated; this in order to maximise the equity returns. Second, extraordinarily, this policy was aided and abetted by the regulatory regime.
This regime disincentivised companies from investing for the long term, in an attempt to minimise water price increases for customers. This was at a time of significant population and housing growth, leading to increased demand for water supply and treatment.
Despite warnings to successive governments of impending serious problems, nothing was done. The result is we now have a water industry that is probably 15 to 20 years behind in terms of infrastructure investment. The recent statements coming from ministers, and their lack of a coherent long-term policy, bodes ill for the UK. We can all, of course, blame the water companies, but at the heart of this is the failure by the government to recognise the long-term issues, and to act.
Housing and development policy must be linked to the water challenges. At present, water companies are more or less compelled to connect up new developments whether or not they have the necessary water supply or treatment facilities. This is in large part the reason for deterioration of Chichester harbour.
The present government appears to have no coordinated strategy to join up policy on housing and water. With the likely acceleration in housebuilding promised by government and opposition, this will massively increase the dire problems facing rivers, harbours and beaches.
What is now required is, first, a complete change in the regulatory approach. The government needs to introduce a new regime of regulation by Ofwat – to encourage companies to invest massively in increasing and accelerating infrastructure and capacity investment. Second, it needs to legislate to introduce rules for the recapitalisation of the water companies. They are all heavily indebted and none of them are likely to be financially viable – as we are seeing with Thames Water – if they execute the investment the country requires. To be clear, this should not in my view involve nationalisation, but it will almost certainly require the government to provide significant financial support. It will also mean that customers will need to pay more for their water.
And then there needs to be a policy of marrying housebuilding and development targets with water and other infrastructure.
John Nelson is the chair of Chichester Harbour Trust and a former chair of Lloyd’s of London
The Observer
Britain ‘plunged back into 1970s’ amid record slump in customer satisfaction
Britain is returning to the gloom of the 1970s as customer satisfaction collapses at the fastest pace on record, new data shows.
Energy and water companies were the worst performers in the country as high inflation and staff shortages triggered the sharpest year-on-year drop in customer satisfaction since the Institute of Customer Service began tracking the data in 2008.
Joanna Causon, the institute’s chief executive, said: “In some respects the current environment shares a number of characteristics similar to those experienced in the 1970s – a difficult economic situation with high interest rates, high inflation, and a wide range of labour disputes across a range of industry sectors.”
A post-Covid staff shortage in everything from hospitality to call centres has increasingly drawn comparisons with the 1970s, as has the biggest wave of industrial action in years as train staff, nursing and teaching unions attempt to bring the country to a standstill in an attempt to boost their pay amid high inflation.
The UK Customer Satisfaction Index slumped year-on-year from 78.4 to 76.6 in July, its lowest level since January 2015, when companies were struggling to recover from the financial crisis.
Ms Causon said: “There is a perfect storm going on with labour shortages, skills shortages, maybe too much short-termism, and then companies not where they need to be in terms of tech, all against a backdrop of consumers probably being under more financial pressure than they have ever been.”
Utilities companies, which have not only made enormous increases in bills but have also been wracked by scandals such as sewage dumping and forced installations of prepayment meters, performed worst.
While the overall index for customer satisfaction fell by 1.8 percentage points, energy and water companies recorded respective drops of 5.3 and 3.5 percentage points.
Customer satisfaction in these sectors has also been dampened by environmental concerns, Ms Causon said.
The Institute of Customer Service would not disclose the worst performing companies, but earlier this year, Ofgem, the energy regulator, raised “serious concerns” about the utility company E.On, which it found to have “severe weaknesses” in its customer service performance.
Ofgem also flagged a further 11 suppliers, including British Gas, EDF, OVO and Scottish Power, which showed “moderate weaknesses”. Ofgem highlighted problems such as long wait times for customer service.
According to the latest data from the regulator Ofwat, of the nation’s water companies, Thames Water provides the worst level of customer service, followed by Southern Water. South East and SES Water also have ratings significantly lower than the average.
The Telegraph
Energy bill support: More than 700,000 households miss out
More than 700,000 households in Great Britain have missed out on £300m worth of support for energy bills, according to BBC analysis of government figures.
These are households in places such as park homes and houseboats who did not have an energy supplier to apply a one-off £400 payment automatically.
The government said in February that more than 900,000 such households were eligible.
But only about 200,000 applications were made before the 31 May deadline.
The government announced last year that all households would get £400 taken off their energy bill over winter. For households who pay their bills by direct debit, the support was given through monthly payments from October to March.
However, for those with non-conventional energy set-ups the government launched the £400 Energy Bill Support Scheme Alternative Funding earlier this year.
BBC Verify analysis of data from the Department for Energy Security and Net Zero shows that of the more than 200,000 applications made under the scheme:
- almost 125,000 had already been paid by the beginning of June
- nearly 6,000 had been approved but not yet paid
- almost 13,000 were on hold or being validated by local councils
- around 60,000 were rejected or cancelled.
Matt Cole from the charity, the Fuel Bank Foundation, said it was disappointing that so many people had missed out and believed it was down to a number of factors.
“The launch of the scheme in spring this year rather before winter when it was needed most, the reliance on families self-identifying that they were eligible rather than them automatically receiving it, and the somewhat complex process to claim help will all have contributed.”
The government said it had spent more than £50m “supporting 130,000 households without a domestic energy supplier”.
This data suggests just over £300m of the possible £360m in Great Britain had not been claimed before the deadline.
A government spokesperson said: “We spent billions to protect families when prices rose over winter, covering nearly half a typical household’s energy bill.
“We’re now seeing costs fall even further with wholesale energy prices down by over two thirds since their peak.
“We are urging councils to process applications and complete final checks as quickly as possible to ensure all those eligible receive the support they need.”
BBC News
Nuclear option to the fore as Tories prepare to unveil roadmap to net zero
In London’s Science Museum sit full-size turbine engines that tell the story of 300 years of steam power. This week, the museum will play host to the government’s dreams for a new industrial renaissance – this time for nuclear energy.
The secretary of state for energy security and net zero, Grant Shapps, has chosen the venue to set out his ambitions for the UK’s nuclear programme. He is expected to illuminate the path towards the government’s existing commitment to build 24 gigawatts of nuclear power capacity – the equivalent of a quarter of Britain’s total generating capacity – by 2050.
The event, scheduled for Thursday, will also be the official launch of the arm’s-length government body that has the task of driving the delivery of new nuclear energy projects.
The first priority of Great British Nuclear (GBN) will be in streamlining the government’s ambition for small modular nuclear reactors.
These mini-reactors offer rare bright points of optimism in the government’s nuclear plans. The attempts to bring forward investment in traditionally sized reactors have yielded only the much-delayed and overbudget Hinkley Point C nuclear plant in Somerset so far.
The hope is that GBN will be able to accelerate the rollout of the mini-reactors by operating one step removed from the political wrangling of Whitehall and Westminster. In turn, mini-reactors are expected to offer a cheaper alternative to traditional nuclear power plants and be quicker to build.
It is paradoxical, then, that both plans have been heavily delayed by political upheaval in recent years. Under Boris Johnson, the government put nuclear power at the centre of its energy strategy, announced in April 2022, in response to climate concerns and a desire to ditch Russian gas.
Each new government has given rise to new rows over the cost of supporting small modular reactors. The current government hopes to announce the first competition winners in the autumn. Industry sources are hopeful that Shapps may use his forthcoming speech to clarify how the competition will progress.
Any clarification will be gladly received by executives at the jet-engines-to-nuclear-reactors company Rolls-Royce, which says that its small modular reactors could begin providing “stable, secure supplies of low-cost power” by the early 2030s.
But Rolls-Royce is not alone. In the time that it has taken for the government to launch its competition, the marketplace for small modular reactors has become a little crowded.
Hitachi has submitted a design for regulatory approval, while infrastructure group Balfour Beatty and Holtec, which manufactures components for power plants, have agreed to propose a Holtec design, with the support of Hyundai.
Rolls-Royce is understood to be sanguine about the rising competition, and comfortable in the belief that it can offer a compelling and competitive nuclear option. Still, it cannot have escaped its notice that if there had been fewer delays in the first place, it might have enjoyed more of a head start.
The Observer
Planned power reforms set to redraw map for British electricity bills
Surfers flock to Thurso on Scotland’s northern coast every year to ride the big waves generated in the Pentland Firth, one of the most dangerous stretches of water in the world.
But the attraction of the most northerly town on the British mainland could become more mainstream under a radical proposal to put the UK on the path to net zero: some of the cheapest wholesale electricity prices in Europe.
If implemented, the changes would split Britain’s electricity market into seven charging zones or hundreds of different nodes to try to make the network more efficient, leading to large variations in price depending on proximity to generation.
The concept, known as “locational pricing”, is one option being considered by industry regulator Ofgem and the government as part of a plan to decarbonise the grid by 2035.
Its proponents argue that the most radical model could redraw the industrial map, encouraging more wind turbines to be built in the south of England and encourage new green industries, such as gigafactories and hydrogen electrolysis, in Scotland, which is by far the biggest producer of renewable energy in Britain.
But the proposed reforms are controversial with energy investors and face questions over the model’s fairness and effectiveness.
Even the Scottish government has yet to be convinced, despite the potential advantages.
“ offers theoretical benefits for consumers, but much more work is needed to understand how those benefits could be secured,” said Gillian Martin, Scotland’s energy minister.
The reforms are being considered as part of efforts to tackle the escalating costs of managing the electricity grids as less predictable renewable generation replaces fossil fuels, along with a growing mismatch between where electricity is generated and where it is most needed.
Supply and demand has to be constantly matched to avoid blackouts, but this is becoming more difficult with limited capacity to move electricity from Scotland to areas of high demand in England.
National Grid’s electricity system operator spent £1.9bn last year on “constraint costs” such as paying wind farms to turn off. It has warned that without reform there would be a “dramatic and accelerating” increase in these costs, which are funded by consumers.
It believes a shift to the nodal locational pricing model is the best solution to keep costs down. A recent report by FTI Consulting, commissioned by regulator Ofgem, found the move could save £48.8bn in accumulated network costs by 2040.
The same study found that zonal pricing would have much less of an impact on network costs, a view shared by National Grid, which said it was only a “partial and temporary solution”.
The modelling for nodal pricing shows significant regional variations in average annual wholesale rates. Scotland, northern England and northern Wales will have prices “among the cheapest in Europe” with Thurso some of the lowest of all. In contrast, the south of England will have the highest in Britain.
Under FTI’s most extreme pricing scenario the annual average wholesale cost of electricity would range from £37.00 per megawatt/hour up to £58.70 per MWh by 2040.
The radical proposal has been rejected by SSE, one of Britain’s biggest clean energy investors, which argues the move would make revenues far harder to predict, pushing up the cost of capital. Generators would also no longer be entitled to compensation if they were unable to produce electricity due to network constraints.
“The 2020s needs to be a decade of delivery,” said Alistair Phillips-Davies, chief executive of SSE, which is planning to invest up to £40bn by 2030. “Evolution of market design is the way to take investors with us. Experiments will scare them away.”
There are benefits to variable consumer pricing, according to Ofgem. “It could enable consumers that can be flexible to behave in a way that is most beneficial for the system and to be appropriately compensated,” it said.
This would help drive much-needed behavioural change by encouraging consumers to charge items such as an electric car at times when prices were lower, for instance.
Octopus Energy, one of Britain’s largest energy suppliers, is keen to see the model introduced. “Not everybody needs to participate to get some very significant savings overall,” said Rachel Fletcher, its director of regulation.
Financial Times
Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.