Water industry’s future set for review

The government is preparing a white paper into the future of the water industry, with a particular focus on water resources. Financial regulator Ofwat is also under review.

The environment department (DEFRA) asked for public opinions on the future of the water industry in England in September as it began work on a white paper, due to be published next summer.1

Reform of the industry, particularly with the aim of safeguarding water resources, was a manifesto promise of the Tory party.

Announcing an online survey where people can have their say, environment minister Richard Benyon said: “There’s a growing population and a changing climate putting more pressure on our water supplies. Recent events have shown just how fragile our water supplies are and how we need to manage them properly in the future.”

Issues to be covered include:

  • Securing water resources for the future
  • Increasing choice and competitive opportunities, driving innovation, improving customer service and value
  • Creating a regulatory system that protects customers and minimises burdens
  • Ensuring fair and affordable water charges
  • Giving customers incentives to conserve water

The government sees the white paper as an opportunity to focus on new challenges 20 years after privatisation of the sector.

Even the industry itself has been calling for change, with papers from Water UK and from Severn Trent Water (ENDS Reports 425, p 6 and 424, p 13). Particular issues include more emphasis on listening to customers and an end to perverse regulatory incentives which encourage unsustainable investment strategies.

This mood has doubtless been set by two reviews commissioned by the previous government: the Cave review into competition and innovation (ENDS Report 427, pp 52-53) and the Walker review into charging (ENDS Report 419, p 48). The 2007 summer floods and the Flood and Water Management Act have also done their bit to highlight the risks and dependence of society on water and its management by the industry.

An important input to the white paper will also be DEFRA’s review of financial regulator Ofwat. Environment secretary Caroline Spelman and Welsh ministers announced this in late August, calling for evidence from interested parties.2

The review will consider Ofwat’s increasing remit and its boundaries with government, the regulator’s effectiveness and whether it delivers value for money, its contribution to sustainable development and whether it can learn lessons from other economic regulators.

DEFRA has asked for evidence to be submitted by 29 October.

Environmental issues that may surface are Ofwat’s relative prioritisation of sustainability issues including investment in renewable electricity generation, water quality benefits from catchment gains and cutting leaks through water mains replacement.

Another issue may be the regulator’s reliance on comparative competition – judging firms’ efficiency against their
peers. The mechanism was supposed to take the place of competition, since companies are still largely monopoly service providers. But the regulator has been accused of fossilising the industry structure by opposing mergers of firms and
the efficiencies that might follow.

The review will be headed by David Gray, a non-executive director of the Civil Aviation Authority and former managing director of Ofgem. It will finish in early 2011 to feed into the white paper.

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