Leader: Leaner Ofwat is ready for tough decisions

They say bad news comes in threes. The three exclusive stories we report on UK water this week may be good or bad news, depending on your perspective, but one thing’s for sure: taken together, they give a clear indication of the road ahead.

1.    Analysts tell us of their concerns that Ofwat is sending “mixed messages” on M&A, with its response to the CMA’s inquiry into South West’s takeover of Bournemouth Water highlighting the consumer detriment that could arise from the loss of a comparator (news, p14). But cast your mind back just a few months to chairman Jonson Cox’s speech setting out his vision for the sector, and the regulator’s position could not be clearer. Cox queried the traditional approach to M&A, of a larger company absorbing a smaller one, and called for a “dynamic and diverse” approach to takeovers. As companies split out in preparation for market opening, such deals are moving closer. That the first post-PR14 acquisition was a traditional one does not indicate either that the rest will be, nor that there will be no more.

2.    Handing responsibilities for flood defences to water companies is rising back up the agenda, with Ofwat chief executive Cathryn Ross suggesting they “are in the frame” for a wider role (p8). Some water companies are on board, such as Severn Trent, while others will be more reluctant. Shifting the cost of flood defences from the taxpayer to water companies’ regulated asset base may look like a no-brainer to the Treasury, but it has potentially huge implications for companies that need careful consideration – not least whether they are best placed to deliver the most effective and efficient flood defences for the public.

3.    Talking of Ofwat, after nearly two years in the role, Ross has overhauled the regulator’s management structure (p13). Hamstrung for the first year in post by the necessity of getting PR14 over the line, she has since been furiously planning for the years ahead, setting out the regulator’s vision and business plan. The new structure appears to be the final piece in the jigsaw. It is lean, focused on high-profile challenges such as market opening and the Thames Tideway Tunnel, and in potentially bidding farewell to two of the regulator’s most well-known faces, Sonia Brown and Keith Mason, unsentimental to say the least. While Brown and Mason are at liberty to apply for any of the four new leadership roles, the overhaul shows a regulator that is willing to take tough decisions and is not afraid of change. It will expect the same of the industry.