Water Sector Regulation Deja Vu

Michael Gove's pointed criticism of the water industry and the subsequent proposals for regulatory reform from Ofwat, along with talk about amending licences, strengthening governance and introducing more competition seem strangely familiar.

Cast your minds back five years or so and the CEO of Ofwat Regina Finn was proposing similar stuff, and at the same time Pamela Taylor the CEO of Water UK was pushing the industry should set standards for governance and openness. In the short term both of these initiatives were stopped by some powerful lobbying by big water companies, which in the end lead to the ousting of Regina Finn.

Had the Government been more supportive then perhaps we would not have got to the position we are in now when trust in the industry has eroded to the point where re-nationalisation looks like a viable option. And perhaps big water companies should think through the consequences of their lobbying as the position they may find themselves in may be worse for them than that against which they fought so verciferously against five years ago. Ironically as ownership models have evolved water companies are making many of the suggested changes themselves.

The industry should have taken governance more seriously a long time ago. I remember speaking to the MD of a large water company and suggesting that it would be a good idea to publish their ownership structure in the annual report, but the response was that the public would find it too confusing! Water companies need to be more open and transparent, especially about their ownership and their finances. Water companies need to review their board structure and composition. Changes in regulation mean that the way water companies make money has started to change, outcome delivery incentives (ODIs) mean that companies get rewarded for delivering things related to environmental and customer benefits, yet how many boards have changed to reflect this, in my view there is a clear financial imperative to have more environmentalists and customer experts on water company boards.

The arguments against the proposals put forward by Regina, Pamela and others were always that any changes would frighten investors. This was rubbish then and its rubbish now, the UK water sector is a great place to invest and measures to increase resilience, strengthen governance, increase transparency and enhance competition will make it more attractive to serious long-term investors not less.

I think the things we should learn from the regulatory story over the past five years is that Government should support independent regulation and not cave in to lobby groups, and that the water industry should act in the long term interests of the sector rather than short term financial interests, and it should take action to get its house in order long before the pubic and politicians have to call upon them to do so.