Expert analysis of the UK water sector
Excerpts from the latest edition of The UK Water Report.
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Customers in control
Six months into post, Roch Cheroux is building a customer-led corporate strategy for Welsh Water – and will work to put customer priorities at the heart of reformed regulation in Wales.
By Karma Loveday
When Roch Cheroux took over as chief executive of Welsh Water in January, he inherited a business in a state of change: there was a headline-grabbing headcount reduction plan, a demanding PR24 settlement, and a once-in-a-generation regulatory reset underway in both England and Wales.
But if there is any theme that runs through his early months in post, it is a determination to shift the company – and, where possible, the wider framework – decisively towards long-term, customer-led thinking. Cheroux sets out an agenda that combines structural overhaul inside the company, deep engagement with customers, and a strong view on what the future Welsh regulatory model needs to deliver.
Cheroux brings more than two decades’ experience as a chief executive, and a career spent entirely in the water sector, spanning continental Europe, the Baltics, Australia and South East Asia. He describes it as a “privilege” to have worked in so many different countries, cultures, environments and commercial structures. And the experience of moving between private, listed and government-owned models is central to the first reason why the Welsh Water job appealed.
“In our case, all the money that we generate goes back into water assets or social tariffs,” he points out. “The attraction of here was really the model – the not-for-profit, not-for-dividend model,” he says. “It really aligns with my personal value. As a water company, you always work for your customers… but doing it in a commercial structure like ours is probably taking that to the next stage.”
The second reason the job appealed is it comes with a rare opportunity of helping to craft a brand new regulatory framework. The current framework clearly has not delivered what customers want and expect. “So, it's a really interesting time where we've got the possibility to think about something different. That’s England and Wales, but in Wales it's even more different because of the devolution that is going to happen and the creation of something completely new. England will take the current regulatory system and morph it into one big regulator, whereas here it's creation from scratch.”
"The attraction of here was really the model – the not-for-profit, not-for-dividend model. It really aligns with my personal value."
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Who decides? The role of customer evidence at PR29
How much weight will be given to customer insights as we shift towards a supervisory approach at the next price review.
By Anna Northall, Frontier Economics
As water is reformed, one area that needs further thought and clarification is the role of the customer – in particular, the role that customers play in informing regulatory price control decisions, and how this interacts with the shift to a supervisory approach.
The shift to supervision and a company specific approach presents an opportunity for the supervisory teams to review customer research in detail, and to form overall judgements that take customer views as well as other evidence such as benchmarking results into account. Further thought would help to make the supervisory approach as effective as possible, and make it clearer to customers how their views are being used to inform decisions.
Another interesting aspect to consider is how ongoing customer engagement can be used to inform price control planning and regulatory decisions. The consumer involvement rule has recently come into force and requires water companies to involve consumers in decisions that are likely to have a ‘material’ impact on consumer matters. Consumer panels, led by CCWater, have also recently been introduced. There is a question around how the insights gained from this regular customer engagement can be used to inform the supervisory decisions that are made through the price control.
So what options are there for the customer role at PR29, and what next steps should the industry to take forward and explore these issues further?
"Further thought would help to make the supervisory approach as effective as possible, and make it clearer to customers how their views are being used to inform decisions."
Pragmatic public control?
What fate might await struggling water firms under a Burnham administration?
By Karma Loveday
Part of PM-in-waiting Andy Burnham’s bid for “good growth in every postcode and hope in every heart” entails greater public control of transport and utilities. There has been little yet in the way of detail, but the gist is that he would adopt a pragmatic approach.
Speaking to Newsnight last month, he suggested that the government could step in using a “spectrum of interventions” – from tougher regulation to full public ownership – depending on the situation. “I’ve not used the word nationalisation because that allows a more pragmatic approach, because it’s not the same with all of these services in all parts of the country.”
For Thames Water, there is “an overwhelming case for public ownership,” he said, citing its ongoing financial crisis paired with what he defined as its continuing payment of dividends. He asked: “How can that possibly be right?”.
There was the implication that other struggling water firms could face a similar fate, but that others might warrant more modest intervention. That said, Burnham criticised the private ownership model as a whole, arguing: “There’s a situation in the water industry where the shareholders never lose, and the bill-payers never win.”
He declined to say how he would fund the upfront cost of public ownership, except to say “you do it over a long period of time”. There has been talk of 10-year plans to reduce costs. He said: “Yes, there could be upfront cost from putting things under public control…but the country saves money for a long period of time afterwards.”
There’s a situation in the water industry where the shareholders never lose, and the bill-payers never win.
Watchdogs need new tricks
Water regulation needs to adapt to the emerging digital world.
By Martin Hurst, Sustainability First
In the past, a reassuring thing about the water industry to a policy maker and regulator was the relatively slow pace of technological change. Some of the approaches to networks in the year 2000 would be recognisable to the Victorians. It is abundantly clear that this is no longer the case. Machine learning and its applications (pattern recognition, predictive maintenance, real time anomaly detection), digital twins, bioengineering and satellite-based approaches are all moving quickly, some at breathtaking pace.
It is essential both that regulation enables and encourages the emerging technologies, and that regulators go further and incorporate these tools in their own ways of working. Furthermore, demands on water are also moving rapidly through data centres, hydrogen production, climate change impacts and growth hubs.
Regulation needs to think about these combined challenges from multiple angles: technical (engineering and data systems); the efficiency and growth benefits; the environmental and consumer angles; and in how they can be absorbed into the practice of regulation.
"It is essential that regulation enables and encourages emerging technologies, and that regulators incorporate these tools in their own ways of working."
(Stone) Age as a proxy
Using asset age as a proxy for determining long-term investment seems to be gaining momentum in regulatory circles – but that would be a seriously regressive step.
By Michelle Ashford and Adrian Rees, AliumBlue
Where asset management’s role in regulatory methods is concerned, we seem to be in danger of rediscovering approaches the sector had already moved way beyond and calling that progress.
At first glance, the sector and its stakeholders are asking the right questions about whether regulatory analytical methods are fit for the future and how could they improve. More people are now focusing on whether current investment is enough to support long-term service, resilience and environmental goals. This focus is needed and overdue.
However, the way some are tackling these questions could end up moving us backward instead of forward. Recent work has promoted a simple strategy: list the assets, set their expected lifespans, spread replacement costs over those years, and come up with an annual estimate of long-term needs.
It is easy to see why this goes down well. It is transparent, relatively straightforward to implement, and produces a number that feels grounded and justifiable.
The problem is that this apparent clarity hides a deeper issue. In reality, this method depends a lot on asset age as a stand-in for condition and replacement needs. It is an overly simplistic interpretation that moves away from established asset management practices.
Age has always played a part. It's a handy way to organise things and can be a useful starting point in some cases. Age-based modelling may provide a high-level estimate, even a cross-check, but it is a blunt proxy for exposure to deteriorating factors. And on its own, it's never going to be enough.
Best practice in the water sector and beyond says that decisions should be based on condition and its rate of change, performance, criticality and risk, not just how old something is. Two assets of the same age can have very different risks, depending on their design, use, maintenance and environment. Treating them as the same just because they're the same age is a rough shortcut at best. Age is not condition – it never has been.
"Age is not condition – it never has been."
On the campaign trail
‘Let’s Save Water’ launches, with ambition to cut consumption and reset attitudes to water.
By Karma Loveday
A sector‑wide, PR24-funded national Water Efficiency Campaign has just gone live across England and Wales. It has the much-needed ambition of nudging per capita consumption (PCC) down. But its architects really want it to do even more: to change how society thinks about water.
The campaign’s messaging strategy hinges on a key phrase that is central to making water scarcity real for the public: “In England, we’re using water faster than nature replaces it.”
The campaign intends to back the phrase with clear proof points, illustrating pressures in England – where demand is outstripping natural replenishment – and in Wales, where climate change is making supplies less predictable. It will lean heavily on scientific voices to explain the underlying hydrology and climate dynamics, while also tackling the intuitive objection that ‘it’s raining outside, so how can there be a shortage?’ Landing this ‘why’ is the campaign’s initial focus.
The delivery strategy rests on three marketing tasks:
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Awareness – raising understanding that England and Wales face a real water scarcity challenge, including the risk that by 2055 there could be a 5bn litre per day shortfall if behaviours don’t change.
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Understanding – clarifying the roles of both the industry and individuals. The sector is investing billions to fix leaks, upgrade infrastructure and increase supply, but “here’s still more to do, and “small changes from all of us can make a difference”.
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Action – giving people concrete, everyday ways to use less water.
The numeric ask of individuals has been carefully calibrated: an average reduction of 28 litres per person per day. This is deliberately framed as modest and achievable, rather than a demand for radical lifestyle sacrifice. Mark Wiltshire, Ofwat’s senior director of communications and engagement, comments: “It’s not asking people to give up their lifestyles. We’re not asking people to share a bath.”
"It’s not asking people to give up their lifestyles. We’re not asking people to share a bath."
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Ofwat to relax retail price caps
Price protection to end for around 20,000 mid-sized businesses.
By Karma Loveday
Non-household customers using between 5Ml and 50Ml of water a year will be taken out of price caps altogether, under proposals out from Ofwat for consultation until 14 August. This amounts to a significant relaxation of its Retail Exit Code (REC) price protections, as has been called for by retailers since the market has matured.
The plan entails shrinking the current ‘Group 2’ customer boundary, from those consuming 0.5Ml-50Ml annually (hotels, farms, supermarkets etc), to contain only the smaller users in that group: 0.5Ml-5Ml users. Those consuming over 5Ml will join an expanded Group 3 (currently 50Ml+ consumers, which are typically the likes of manufacturers, large breweries and power plants), where no caps are applied.
Ofwat estimated that around 20,000 business customers would, for the first time since market opening, no longer be subject to explicit REC price cap protections and “may therefore need to actively engage with retailers to secure the most favourable terms.” The philosophy is to “focus regulatory protections on customers who need them most, while reducing explicit regulation for customers where competition instead can be expected to provide protections as well as benefits.”
Those remaining in Group 2 will continue to be protected by the current form of cap (wholesale charge plus allowed gross margin). This is currently 8% in respect of clean water services and 10% for wastewater services. Under the consultation, the gross margin element would be increased and harmonised to a single rate of 13%. Ofwat said this implied on average, a before inflation increase in bills of around 4%.
Prices will rise too for the market’s smallest customers, those in Group 1 who consume less than 0.5Ml a year – typically the likes of small shops or offices. Again the current form of cap for that group will be retained but each element beyond the wholesale charge would be increased. Customers will see on average a before inflation increase of around 4.5%, or around £29 on an average annual bill of around £650, in 2027/28.
"The philosophy is to focus regulatory protections on customers who need them most."
Why net zero needs a water market
If net zero is to be credible, water must be recognised as a strategic commodity and priced accordingly.
By Steve Thompsett, JBA Consulting
The UK cannot deliver net zero, energy security or economic growth while treating water as an invisible input. The water–energy nexus is often described as a technical dependency: energy needs water, and water needs energy. That is true, but it understates the challenge.
The real issue is commercial. New energy technologies, industrial clusters, housing growth, agriculture and the environment are being asked to compete for a finite and increasingly climate-stressed resource, while relying on planning, pricing and regulatory arrangements designed for a more stable world.
If water is becoming a constraint on growth, it must also become a market signal. Balancing the nexus requires commercial water markets that reveal scarcity, reward efficiency, enable reuse and storage, and direct investment to where water creates greatest value.
"If water is becoming a constraint on growth, it must also become a market signal."
CONTENTS
This month's articles
Interview
Customers in control - Welsh Water CEO Roch Cheroux interview
4
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Industry Comment
Watchdogs need new tricks - AI and regulation
10
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Report
Pragmatic public control? - What a Burnham premiership could mean for water
14
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Industry Comment
Regions in a growth story - making markets work better
16
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Report
On the campaign trail - Let's Save Water launches
20
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Feature
Immersive learning - CCW revamps its company assessments
24
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News Review
Court imposes record £1.8m fine for Brixham crypto
27
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Summit Report
Getting our shovels in the ground - Infrastructure Summit report
II-XV
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Industry Comment
Who decides? The role of customer evidence at PR29
8
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Industry Comment
(Stone) age as a proxy - asset management debate
12
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Report
Affordability ascends as investment increases - WICS' SR27 Draft Determination
15
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News Review
Company results selection (Anglian, Pennon, Welsh Water, Southern Water)
19
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News Review
RAPID looks to expand
23
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News Review
Defra consults on statutory Water Ombudsman
26
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Industry Comment
More in common - lessons for water reform from telecoms and oil & gas
28
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