Today’s launch of the Independent Water Commission is a welcome move from the UK and Welsh governments.
Yes, it will take time to complete its work and to report, but there have been too many short term and partial attempts to address the problems in the water industry. A comprehensive review of the regulation of the sector is needed.
The immediate prompt for the announcement is of course the continuing troubles at Thames Water. The company has been brought to the brink of financial failure and has been heavily criticised for its record on leaks and sewage, and for the handsome rewards to successive owners and executives over the years.
But though Thames Water is the poster child, this is not just about one company or even the companies as a whole. Much like Murder on the Orient Express, almost everyone involved since privatisation has had a hand in contributing to this situation.
It’s true that over thirty years a range of companies and their owners chose to load them up with debt and extract very large dividends. And in a wave of M&A activity, acquirers then sought to repeat the trick but in some cases they overpaid for companies that were by then financially much weaker.
But Ofwat allowed all this to happen by permitting the high levels of gearing and then through successive weak price control reviews. It’s no use a regulator complaining that companies in this period behaved irresponsibly. If your approach to regulation is based on the hope that private equity firms will choose not to act in line with their own commercial interests, you’re going to end up looking quite naïve.
Governments have not helped matters either, with contradictory forays over time into areas of supposedly independent decision-making, occasionally backing investors but more often pressing for new conduct requirements on the companies which have become ever more stringent but which do not seem to have improved performance.
There are two factors that make the regulatory failure particularly worrying and why it is particularly important to learn the lessons.
First, for many years UK utility regulators took so much pride in their supposed achievements. When I was at Ofgem in the mid-2000s we and our counterparts in other sectors were quick to point to the apparent success of the British model. Privatisation was supposed to have led to greater efficiency, because of the incentives on companies in the private sector, and greater investment because the companies would no longer be constrained by the dictates of the Treasury. Meanwhile the regulators would accurately assess the companies’ costs so that we could secure savings for consumers and allow a reasonable return for investors. For a while, it seemed as though we had managed to do it all. We could point to improved operational performance, falling costs to consumers and increased investment. But the early wins post-privatisation could not be sustained and hid deeper weaknesses.
Second, of all the sectors, water ought to have been the most straightforward to regulate successfully. Unlike telecoms with its fast technological change or energy with its volatile prices, geopolitical uncertainty and huge climate impact, water comes to us free from the heavens and then it needs to be treated and piped to customers, with the infrastructure maintained and replaced over time. If regulators cannot get it right with regional monopoly water companies, what hope have we of successfully regulating the biggest digital platforms operating in some of the most dynamic markets on the planet?
The UK and Welsh governments have done the right thing in launching this commission and in Jon Cunliffe they have found an excellent public servant to lead it. It’s in all our interests that he succeeds and that the lessons are learned not only by Ofwat (if it continues in its current form) but by all the regulators.
