Ofwat to give companies space to step up on the social contract

Ofwat will give water companies space to deliver on its new strategic public purpose expectation – but will consider more assertive interventions if it is not satisfied with their efforts.

Giving a Beesley lecture last week, Ofwat chief executive, Rachel Fletcher (pictured), said Ofwat will promote and support the social contract agenda, including through new incentives including potentially a streamlined price control process for those who are delivering well for society and the environment.

But if progress isn’t fast enough, or not all 17 companies do enough: “Alternatives involve imposing an overarching public value licence condition on all companies. Or we could place a more formal ‘fit and proper’ test on future owners. We could consider a senior managers regime, like the FCA has introduced where executives are held directly accountable for their conduct and competence.” To this end, she indicated Ofwat would monitor companies’ progress, including their cultures, by “moderating, endorsing and collating” social contribution assessment frameworks other entities run “to form a picture of the industry as a whole”.

Fletcher reiterated the position contained in Ofwat’s new strategy: that route one for firms should be to pursue low or no cost actions. She advised them to factor in the reputational benefits they will accrue; to use market platforms such as EnTrade to drive down transaction costs; and to use partnerships to bring in new sources of funding. Fletcher argued: “There are social benefits which customers are willing to pay for. But they should only be asked to pay once other options have been explored – not as a first port of call which is what tends to happen now.”

Finally, Fletcher highlighted the issue of who decides what public benefits customers should pay for, once low cost options are exhausted. She said Ofwat will review its approach to customer research in price reviews – “In particular, we may need to think further about how local communities can be empowered and diverse interests can be heard…We may also need to think whether the targets for some public benefits should be decided through cost benefit analysis rather than customer willingness to pay.”

She concluded: “Water companies are uniquely well positioned to work as social purpose companies given their strong geographical and environmental footprint, the public service they deliver and the public ethos which runs through many who work in the industry. They can use the dynamic that comes from private ownership to bring innovation, creativity and efficiency to this task. My question is – if the water companies can’t make a success of this – who can?”