Regulation in focus for the government’s water reset

The government has indicated that it will back bumper PR24 investment, but that a regulatory overhaul could be at the heart of its wider review of the water sector, details of which will be released in autumn.

Providing a written statement to Parliament last week, water minister Emma Hardy shared: “To build on the critical first steps of the Water (Special Measures) Bill, this Government will carry out a review of the water sector regulatory system and will fundamentally transform the water sector through future legislation. The review will focus on the private regulatory model and will not change plans for much needed investment in PR24. It will ensure that the framework that underpins our water sector delivers long-term stability, with incentives aligned to clear, achievable targets that reflect the needs of customers and the environment at a catchment, regional and national scale, supporting the Government's growth mission.”

Sources have suggested a new Strategic Policy Statement is expected, to reframe the focus of regulation in line with Labour’s water objectives, but Defra did not reply to a request seeking clarification on this.

According to an FT report, senior economist Dan Corry, who was head of the Number Ten Policy Unit under Gordon Brown and head of think tank New Philanthropy Capital, has been appointed to head up the review of regulation.

In various Parliamentary sessions last week, secretary of state Steve Reed was quizzed by his shadow Steve Barclay and shadow water minister Robbie Moore on whether there would be any “regulatory easements” for struggling water firms as part of the plan.

Moore, for instance, asked: “Some water companies are better managed than others, so will the secretary of state guarantee that in his efforts to hold water companies to account, no offer of a regulatory easement will be provided — in other words, no permission to lower standards, relax environmental permits or reduce agreed levels of investment will be provided to any water company, no matter their financial circumstances, by the Government or the regulator?”

Reed did not give a direct answer, but emphasised that “I want to make sure that regulation is as tough as possible to ensure that the practices and, frankly, the abuses that were going on can no longer happen.”

Informing the review  

In separate but related developments, the National Audit Office is currently carrying out its own research on regulation, which could inform the broader piece.

Meanwhile, the House of Lords last week debated the Industry & Regulators Committee report, Who watches the watchdogs? Improving the performance, independence and accountability of UK regulators. The report called for better Parliamentary oversight of regulators, via the creation of new independent statutory body, the Office for Regulatory Performance, to advise Parliament and its committees and provide an annual report card on each regulator’s performance.

It also called for clarity on regulators’ statutory responsibilities, with former chair of the committee Lord Hollick citing Ofwat as a cautionary tale: “Imposing multiple statutory responsibilities on regulators can muddle them and their accountability. Some regulators have been given too many objectives and matters to have regard to without any clear guidance on priority. This makes it difficult for a regulator to achieve its objectives and for Parliament to assess its performance.

“Take the case of Ofwat, which prioritised keeping consumer costs down instead of increasing essential investment in the water infrastructure to meet population growth and replace its failing century-old system. Where there is a lack of clarity in the job role given to regulators, they often reach for the most cautious solution and avoid raising bills, even where this might be necessary. This lack of clarity undermines the independence of regulators; Parliament and the Government need to be clearer when setting and prioritising objectives and not remain mute on the issue.”

Invest for growth

In other questions and debates in the House last week, Hardy was challenged by MPs regarding rising bills and cost of living pressures – for example, Ayoub Khan, independent member for Birmingham Perry Barr, called for action “to stop private water companies ripping off consumers in the West Midlands and to keep bills at an affordable level”.

Hardy stood firm by the need for PR24 to proceed as planned. She said: “We recognise the impacts of the cost of living on all our constituents, but the years of under-investment by the Conservatives mean that we need £88bn-worth of investment in the industry. Customer bills will be ring-fenced under the changes brought about by the government, and if that money is not spent on infrastructure improvement, it will be refunded to customers.”

To progress this investment agenda, Hardy, Reed and financial secretary to the Treasury, Lord Livermore, courted water investors at a roundtable in the City of London last Tuesday. According to a press release: “Ministers discussed the importance of private sector investment into water companies and how they can work together to clean up our rivers, boost economic growth around the country by creating tens of thousands of jobs, and increase the resilience of our water supply that underpins every single home and business in the UK…The discussion marks a step-change as the Defra repositions itself as a key economic growth department.”

With companies and investors warning the PR24 draft determinations are uninvestible, significant movement seems to be needed before the final determinations are published for finance to flow. Jon Phillips, chief executive of the Global Infrastructure Investor Association, which represents more than 25 investors in the UK water industry, said: “The roundtable was an important opportunity for the government to hear directly from private investors in the UK water industry. By working together we can attract the investment that is necessary. We fully support the government’s ambition to put the sector on a stronger footing.”

Two year jail terms

Separately, Hardy shared in response to a written question on criminal proceedings for water lawbreakers, that under the Special Measures Bill, bosses could get up to two years in prison for obstructing regulatory investigations. “In addition, the Bill will provide for potential imprisonment where the obstruction is attributable to the consent, connivance or neglect of a senior officer of the company,” she said. 

• According to reports in the financial press last week, the company most in need of immediate investment – Thames Water – has made some progress. Multiple creditors, headed by US investors, were reportedly buying Thames debt for cheap in the hope that any subsequent value write down will be limited and profit from debt restructuring achievable.