Ofwat sets out programme of reform to rebuild public trust

Ofwat’s chairman Jonson Cox has set out a programme of reform to bring the water sector “back in balance” and rebuild public trust.

Cox has written to the environment secretary Michael Gove to set out the regulator’s agenda to improve corporate behaviours.

It comes in response to Gove’s signal of a crackdown, earlier this year, on executive pay and offshore financial arrangements to address the “concerning” behaviour of water companies.

Ofwat plans to reform company licences; address concerns around executive pay; increase transparency around dividends and profits; ensure companies are financially resilient and encourage companies to share financial outperformance from additional gearing with customers.

Cox said: “Some water companies appear to be focused too much on financial engineering at the expense of public service. Alongside this, we’ve seen significant service failures, most recently following last month’s cold snap and quick thaw, which led to tens of thousands of customers being left without water.

“All of these things have damaged trust in water. Ofwat has been pushing water companies to up their game for some time; but we need to go further, faster.”

He added: “That is why today (10 April) we have set out an agenda of reform to bring the water sector back in balance, including getting back to a proper sense of public service provided under private ownership.

“We expect the water sector to own the challenge by taking the lead in engaging with customers and the wider public about how it can redefine its role and rebuild trust. Companies who wish to be leaders in the sector will step up, voluntarily accept the need for change and put customers’ interests at the heart of everything they do, as an essential step in rebuilding trust.”

In his letter to Gove, Cox said the regulator wants company licences to “reflect what is expected of those privileged to run and own public service monopolies”.

Ofwat said it “may potentially need support and new powers” to implement some of the changes it proposes.

In an annex supplied with the letter, Ofwat outlined: “A more up-to-date regime for updating licences would be consistent with a modern regulatory regime for the sector and with the powers of other regulators.”

Rachel Fletcher, Ofwat’s chief executive will issue an implementation letter to companies, which will set out how the regulator will progress with these plans during the rest of the year.

Over the next six months, Ofwat said it will take forward several formal consultations “to get to the position where it can implement the initiatives outlined”.

A spokesperson from the Department for Environment, Food and Rural Affairs, said: “It is vital that concerns over poor corporate practice by the water companies are addressed. That is why the environment secretary asked Ofwat to investigate what action should be taken to ensure high standards and responsible behaviour. We are grateful for Ofwat’s report and will respond in due course.”

Ofwat stressed water companies will need to bring in these changes in parallel with “planning to deliver further efficiency and performance improvements” over the 2020 to 2025 period, as part of the PR19 price control.

Tony Smith, chief executive of the Consumer Council for Water, said: “Action by the regulator Ofwat to force all water companies to treat their customers fairly, and be seen to be fair and trustworthy, is long overdue and something we have repeatedly called for.”

“Water companies need to respond positively to this challenge. The legitimacy of the water industry in customers’ eyes is on the line.”

Michael Roberts, chief executive of Water UK, added: “All companies take very seriously their responsibility to act in the public interest and to operate to the highest standards.

“We support the direction of travel to tackle issues of concern, in a way that recognises that the sector is diverse and that not all the issues are relevant for all the water companies. We look forward to discussions with all involved on next steps.”