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Ian Byatt, the original governor of the water sector, speaks to Utility Week about the three best moves Ofwat made in the recent price review and why we shouldn’t be too gloomy about climate change.
Byatt was the first Director General of Water – the precursor to Ofwat – from 1989 and subsequently the first chairman of the Water Industry Commission for Scotland from 2005. He has followed the sector closely ever since and last year published a book Regulator’s Sign Off: Changing the Taps in Britain telling the story of sector regulation.
The industry has gone through turbulent times and suffered reputational blows, but Byatt believes Ofwat under the direction of Rachel Fletcher and Jonson Cox will whip the industry into shape after years of “dithering” with light regulation.
Light touch vs Right touch
With the toughest-ever price review coming into effect in a matter of months, Byatt thinks the impact will be positive – thanks to the firmer hand shown by Ofwat.
“In a competitive market, the customer matters – in a monopoly market you’ve got to help the customer. You can help in terms of what I call right-touch regulation. People often talk about light-touch regulation – well that’s a lovely political phrase right there with small actions taken, thinking people won’t really notice while being assured everything is under control. That’s balls! Right-touch regulation means you regulate only when you need to. And, when you do regulate, you do it properly – no nonsense, no messing about. Ofwat has been dithering around with what you might call light-touch regulation. It’s ineffective.”
He says too many years of unproductive rule led to investors acting not in customers’ interests and struggling to tackle the pollution incidents that cast a shadow over the sector.
“I’m pleased to see confirmed action after years of dithering. Prices have been reduced substantially because profits had been unnecessarily high, and dividends were roaring away. Now the companies must work harder to make their profits and to concentrate more on efficiency.”
He recalls private equity firms, which were not subject to the regulation of a UK plc, entered the sector after the “soft” price review of 2004, and some company boards reflected the interests of investors rather than customers.
“There’s a big question mark over these private equity firms which were encouraged to come in. Ofwat is talking about improving governance, making sure boards are properly constituted with a sufficient number of independent non-executive members, not just a mass of investors. That’s important because a water company is a utility which all households in the country enjoy and it’s a monopoly. It’s got to be properly regulated and the regulation involves getting the prices right and getting the governance right.”
Taking a stand
He feels the current leadership is a strong one and speaks of his admiration for Johnson Cox and Rachel Fletcher for getting the sector turned around.
“It takes a great deal of courage because you’ve got to face up to the City. The City frightens people because they claim to know everything, but they don’t,” he says. “They are often plausible people, aggressive plausible men who go around frightening people with the power of money. You have to stand up to the power of money because, although it’s very useful, money should be our servant.”
He believes tighter regulation leading to smaller returns is positive for the sector and will not be a deterrent to investors looking for a guaranteed return.
“Where can you put money where you know you will get a steady return? In a well-regulated utility! People want their pensions in a secure place and the utility sector can provide that.”
He also praises the regulator’s move to bring competition into large projects.
“There must be proper competition to find solutions to problems – there should be an option of the most effective solutions and turn it over to the market to find the best solution. Ofwat is talking about it in terms of direct procurement which is a perfectly possible thing to use in the utility sector generally.”
What will happen next with the CMA
During Byatt’s time in the sector he saw numerous appeals to the CMA and knows the track record is less than inspiring from the perspective of the companies. He recalls lengthy, expensive appeals, which, even in 1999 – the year of a 12 per cent price drop – did not end in roaring successes for the appelants.
When the final determinations were announced in December, Ofwat director David Black warned that companies who appeal could stand to lose as well as gain. However, with most yet to announce their decision, speculation is rife concerning companies that found the draft determinations unworkable and unfinanceable. While some companies saw enough compromise in the final determination, others were left with sizeable gaps between their own view of what can be achieved and the regulator’s.
Despite greater customer engagement while writing business plans than ever before, Byatt doesn’t feel the direction of CCWater has been wholly positive and questions its separation from the regulatory office.
“I’m disappointed with what has happened because the customer service committee used to be part of Ofwat. We acted together and they were privy to the details of the price review. Now they have been taken away from the regulator as CCWater, I think they have lost their way.
“They don’t have the legal powers to question the price review and are in a different position now to when they were inside the regulatory office with the regulatory legal experts. It was a big mistake to take the customer committee away from the regulator.”
A different look at climate change
Another aspect that has changed for the regulator has been its evolving role – from the purely economic to the environment taking a far more prevalent position.
Against the daily gloom and doom about the state of the environment, Byatt paints a picture of the gains made in recent decades – such as cleaner beaches and rivers. He warns that spending on the environment can be detrimental economically.
“The environmentalists cannot bear the idea that it might be a good idea for the bills to come down; for them it has to be the environment first. Sometimes the thinking with the environment is the latest fashionable view and leaves very little discussion of trade-offs.
“The Environment Agency has been a big disappointment because they failed to pick up Thames’ and Southern’s pollution incidents. They’re much more interested in beating the drum but not making sure the drum is played to the right to tune.”
He explains a more beneficial approach would be undertaking a cost benefit analysis to highlight the advantages for customers.
“Over my lifetime the environment has improved enormously. I remember the first year I came to London the fog was in the corridors of the Treasury. You wouldn’t see the sun for a fortnight but the switch away from coal brought huge improvements. The fact that we’re paying more attention to it may be a good thing, provided we’re doing it in an intelligent way.”
Reflecting on the changes to the environment during his eight decades on the planet, Byatt is unconcerned about the impacts of climate change.
“Rainfall always varies between years but if you look at the data, there’s no trend. Some of this, I’m afraid, is imagination or wishful thinking. I believe the world is getting to be a better place and I don’t think there’s any real evidence. I would say, please let people look at the data not at their imagination.”
He says he supports the assertion of the Intergovernmental Panel on Climate Change (IPCC) which said climate change is not causing more extreme weather events.
“Yes, there has been more flooding, but we have to ask why. There has been more building on flood plains and not enough dredging of rivers,” he explains. With cleaner air, improved rivers and beaches Byatt sees the positive changes to the environment – some in part thanks to regulation.
His perspective from years in the sector gave him a unique viewpoint from which to write a history of the UK water sector.
Published last year the book is a documentation of privatisation, with copies of speeches and essays he had presented during that time.
“I thought regulation was a very interesting experiment to move the utilities away from government control – which I had seen from the Treasury and didn’t think worked well – to a better system. I thought it was important that this got properly documented.”
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