EFRA calls on Ofwat to explain how it will deal with tied hands on enforcement

The Environment Food and Rural Affairs Committee has called on Ofwat to explain in its forward work programme for 2024-25 how it will balance its need to regulate with protecting the financial viability of the water companies.

In a letter to Ofwat chief executive David Black, responding to the work programme consultation, the committee chair Sir Robert Goodwill highlighted that the regulator is in a “challenging position” in regard to enforcing regulations and issuing fines to water companies, given these could prompt a company to fail.

“Enforcing regulations and issuing fines against consistently failing entities will place a further financial burden on these entities and increase the risk of corporate failure. In thecase of Thames Water, shareholders of the parent company have made it clear that future infrastructure funding is contingent on Ofwat taking a positive view of its proposed bill rises and taking a lighter touch on its regulatory enforcement measures.”

Sir Robert continued: “We are concerned, therefore, that it may not be in your organisation’s interest to use the full extent of its powers given the impact that the failure of a major business would have on the stability of the sector and the public purse. Challenging dividend payments to Kemble Water, the parent company of Thames Water which itself generates no income, has the potential to undermine its business and require Government action through a special administrative vehicle.” 

Elsewhere the letter called for: 

• Ofwat to complete investigations into malpractice “in a more timely manner” given delays undermine public trust. 
  

• Companies to demonstrate willingness to change before being allowed regulatory support – “Increased bills to fund investment and regulatory leniency should only be preceded by a demonstration of a willingness to invest and a change incorporate culture that places public good at the heart of decision making.” The letter argued: “It is unacceptable that certain actors in the sector have been able to take on large amounts of debt while failing to act as custodians for theinfrastructure they have inherited. This is yet more concerning as we look ahead to a period that will require huge amounts of capital investment in new infrastructure; infrastructure that was neglected in favour of profit and dividends to shareholders.” It continued: “We are also concerned that an increase in bills will produce a justifiable perception of unfairness from consumers who are being asked to shoulder the burden of improvements by companies who have consistently and publicly failed on delivering their core obligations.”
  

• Government to be pressed to ensure that shareholders not customers to bear the brunt of any corporate failure, and to insist on more transparency on the corporate structures that have until now “shielded the ultimate owners of our public utilities from scrutiny”. 
  

Sir Robert Goodwill’s assessment of elements of the sector was scathing. He said certain companies tasked with meeting their responsibilities to the public – providing clean drinking water, protecting waterways from environmental harm and future proofing our access to resources – “have failed to do so and have demonstrated a model of management that is both undesirable and avoidable”. He added: “We acknowledge the huge challenges faced by the water industry, but also that these challenges have been known about and neglected for many years by those tasked with addressing them.”

• Acting for the Government, Lord Douglas-Miller last week moved that the draft Order and the draft Regulations laid before the House on 15 January relating to the Water Industry Act 1991 (Amendment) Order 2024 be approved. These pertain to alterations to the water industry’s Special Administration Regime. The motions were agreed.