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Thames Water has secured a stay of execution in the form of a financial rescue that will allow it to limp on for a while longer. Yet the water industry’s biggest crisis since privatisation in 1989 is far from over.
In a bid to fix the failing water sector in England and Wales, Sir Jon Cunliffe, former deputy governor of the Bank of England, will shortly issue a call for evidence as part of a sweeping review.
He has his work cut out. The industry brings multiple layers of complexity. First: the regulators. There are at least three — including the Drinking Water Inspectorate, economic regulator Ofwat and the Environment Agency. That’s not including others in Wales and Scotland.
Their goals, too, are at least three-fold. Billions of pounds in investment are required to upgrade infrastructure and build reservoirs to meet climate and population changes. Several water companies need to reduce indebtedness and balance public anger over rising bills and sewage spills.
Add to that a squabbling dramatis personae. As well as investors and companies, there are environmental and consumer campaigners, some of whom blame financial backers for overloading certain water companies with debt and extracting generous dividends. The Cunliffe review will not consider renationalisation, to their disappointment.
So far, one part of the strategic trilemma has trumped the others: keeping bills low. Ofwat recently rubber-stamped an average 36 per cent rise in customer bills over five years from April, yet that is the first time in 15 years it has allowed bill prices to rise in real terms.
This has allowed financial rust to set in, and not only at Thames Water. In its last review of financial resilience, Ofwat said 10 out of 16 companies either required action or were of “elevated concern”. Water company executives blame the regulator for prioritising low bills over greater infrastructure investment. This is not entirely wrong.
The energy sector seems to have done a better job. It shares some features with water oversight — including the “regulated asset base” approach to working out acceptable returns for companies. Some water executives and consultants say energy regulator Ofgem does a better job of balancing bill-setting with the improvements needed to meet climate targets.
Energy also has one thing water at present does not: someone looking at the big picture. The National Energy System Operator, a body taken back into public ownership last year, has drawn up national plans detailing the upgrades to Britain’s electricity grid it thinks necessary to meet climate targets. Something similar for water would help address the muddle.
There are no quick fixes to problems decades in the making, of course. Yet the sheer complexity — even just at Thames Water — has got in the way of thinking simply. That is one way Cunliffe can add value.
nathalie.thomas@ft.com
