Ofwat mulls licence change to embed social contract

Ofwat is considering whether a commitment to protect the environment and support the wider community should be enshrined in water company licences.

Chief executive Rachel Fletcher told Utility Week it was a “live debate” for the regulator but insisted that it would only go down the route of licence change if there was an appetite from the sector.

Fletcher, who has previously put forward the case for a social contract for the industry, insisted the debate was being led by the water companies. She said some were already considering changing their articles of association to enshrine a responsibility towards not just shareholders but the wider society, however others favoured a regulatory approach. Since this article was first published, Anglian Water has announced it has changed its constitution.

Fletcher spoke to Utility Week during yesterday’s Future30 event, which saw senior directors from across the water sector attend with rising stars from their company to listen to a diverse range of external speakers. Fletcher said this new generation was helping to drive changing attitudes.

She said the signing of a Public Interest Commitment, co-ordinated by Water UK, had also helped to fuel the conversation.

“There is a widespread feeling that companies want to embed that social and environmental commitment into their business”, she said. “Some are very far down the track in terms of considering changing their articles of association.  Other companies are more in the mindset of saying they would like a licensing condition to make sure this is an enduring commitment.

“We are open to discussing this with companies. What I do not want to do – and this is why I haven’t leapt in with both feet to propose a licence change – is for this embracing of public purpose to be something that is imposed on the industry.

“If it is seen as just another obligation from Ofwat then it will become a tick-box exercise as opposed to a collaborative process.”

Fletcher said this debate was likely to form part of a wider question for company boards as to what their real purpose is.

She added: “I want to see how those conversations pan out. We are ready as a regulator to help in any way we can and if the industry thinks the right course of action is licence change then we will explore that.”

Future focus

Ofwat is currently working on its vision for the future and Fletcher said the key terms underpinning this were excellence, stewardship and value.

She explained: “What we are talking about is how we as a sector articulate what it is we stand for and strive for. Each company and regulator might have a slightly different narrative but I think those three themes are a pretty good encapsulation of where everyone is trying to go.”

She went on to describe these pillars of the vision in more detail: “When people think of excellence in terms of service they might think of John Lewis or maybe Amazon in terms of the sheer efficiency of service. I want the water industry to competing for those kind of benchmarks.

“Stewardship is recognising that the water sector manages long-lived assets. It is managing a natural resource and it needs to have stewardship around relationships and reputation.

“We are very deliberately talking about the water sector being able to do more than just provide value for money. The value they deliver shouldn’t just be seen as the value to the billpayer. In the course of doing their business they can clean up rivers and help generate local employment.

“As a regulator we shouldn’t just be thinking about value for money. We should be regulating in a way that actually encourages and incentivises companies to have social and environmental values.”

Southern discomfort

Last week Fletcher wrote to chief executives urging them to ensure lessons were learnt from the record penalty for Southern Water.

She said the approach had been welcome by many leaders and there was clear evidence that “stocktaking” was underway across the board.

“This case has reverberated across the industry”, she said. “It shocked many people and has made them look again at their own internal arrangements in terms of culture and governance.

“I wanted to write the letter to make sure no-one could miss the importance of looking inwards.”

She said the “deliberate cover-up” exposed at Southern “spoke of a culture that is so far removed from the culture I believe we have in the water sector, of public service”. She added: “We all know technical problems will occur and mistakes will get made but it was the deliberate and systematic attempts to cover-up poor performance and effectively mask the lack of investment that was so shocking.”