Water review in England and Wales: seven key takeways

The Guardian

2 days ago

The biggest review into the water industry in England and Wales since firms were privatised in 1989 has said that the sector is 'broken' and requires fundamental reform.
Sir John Cunliffe, the former Bank of England deputy governor who led the Independent Water Commission (IWC) review, has published a 465-page report to attempt to address an industry beset by underinvestment, rising pollution incidents, soaring customers bills and meaty shareholder payouts.
The report makes 88 recommendations to government with significant ramifications for the industry and consumers. Here are some of the key takeaways.
The report has said that a fundamental 'reset' of the water sector is needed with the proposed scrapping of existing regulators and replacing them with one body for England and one body for Wales.
In England, this would lead to Ofwat and the Drinking Water Inspectorate being scrapped, and the removal of the environmental regulation functions for the Environment Agency and Natural England.
Under the proposal a new combined, integrated regulator that would be 'less desk-based' would be set up.
In Wales, Ofwat's economic responsibilities would be integrated into Natural Resources Wales.
The government said on Monday it would adopt the plan.
The IWC recommends that meters should be made compulsory for a 'wide range of circumstances', in a drive to force consumers to reduce household water consumption. That includes installing them for households in areas where there is not 'water stress'.
It suggests that the water industry could look to the energy sector, where suppliers must install a smart meter if they are replacing a meter or installing a meter for the first time – unless there is a good reason not to.
Proponents of smart meters argue they encourage households to use less water. However, larger households with high water usage would be at risk of paying more than a standard flat rate tariff.
Water companies could be let off fines if the government accepts a recommendation to allow them 'regulatory forbearance'.
The report argues that a regulatory regime should be established to improve the performance of struggling water companies, including tightening oversight of ownership and governance.
However, as well as this 'enhanced power of direction' the regime should allow 'regulatory forbearance', which would see companies dodge some financial penalties potentially further enraging campaigners already furious about the rise in pollution incidents.
In March, the Guardian revealed that troubled Thames Water – which could collapse into a temporary nationalisation – was asking to be spared billions of pounds of costs and fines over the next five years, claiming that potential investors would be scared off otherwise.
The government will also adopt a recommendation to upgrade the existing Consumer Council for Water (CCW) to a fully fledged ombudsman for customers. It currently runs a voluntary ombudsman scheme.
The report suggests a nationwide social tariff to help consumers who cannot afford their bills, which the CCW has campaigned for.
The change would give customers a clearer route to resolving complaints, such as issues including sewage floods in their gardens and taps running dry because of burst pipes.
The report says that the new water regulator would need to be able to offer 'suitable' remuneration, which would mean it would not have to follow 'public sector pay controls'.
The argument runs that to be effective the regulator will need to be able to hire and develop 'high-calibre' engineers and staff with financial expertise to provide proper oversight of the infrastructure and funding operations of water companies.
'Attracting skilled staff will require the regulator to offer suitable remuneration, outside public sector pay controls,' the report says.
The high pay of water company executives has long been a source of anger among critics of the industry, most recently reignited by Southern Water's chief executive receiving a doubled pay package.
However, Cunliffe, said: 'We are not proposing the regulator should set pay scales for the industry. They do need to recruit, and you have to attract the best people. What really makes the public angry is when the pay is there but the performance is not.'
The report said that the current metrics Ofwat uses to measure infrastructure resilience, such as sewer collapses, mains repairs and leaky pipes, is short-termist and 'backward-looking'.
The report calls for new national resilience standards for infrastructure to help guarantee the maintenance of underground pipes and other water and water waste assets.
It also says that the requirements for companies to map their assets should be strengthened.
The commission suggests the new regulator should have the power to set minimum capital levels for water companies.
That system could mirror the regime in the banking industry, where financial cushions meant to shock-proof the banking system from another 2008-style crash were introduced.