Weekend press: Under-fire UK water companies lash out at ‘labyrinthine’ regulatory system

In our latest round-up of the weekend’s utility sector media coverage, water companies have lashed out at Ofwat for creating a “labyrinthine framework of intense complexity”, which is stalling investment, while thousands in Devon no longer have to boil drinking water following a parasite outbreak. Meanwhile there is debate over the use of pension funds to invest in nuclear power and the price cap is predicted to fall again in July.

Under-fire UK water companies lash out at ‘labyrinthine’ regulatory system

Britain’s privatised water companies have lashed out at Ofwat for creating a “labyrinthine framework of intense complexity”, which is stalling the investment needed to manage pollution and leakage.

Water UK, which represents the utilities, said the regulator had consistently prioritised lower bills and operational efficiency over improvements to the infrastructure network.

In a written submission to the House of Commons’ environmental audit committee last week, WaterUK said Ofwat’s regulatory processes were “slow and insufficiently flexible, which is why it will take seven years to get meaningful investment into overflows”.

“The public clearly do not think this system of econometric overengineering is delivering for them,” the industry body added.

The row comes ahead of a draft decision by Ofwat on June 12 over how much water companies will be allowed to increase bills over the next regulatory period, which runs until 2030.

Water companies argue they need to raise customer bills by about one-third to maintain services and make vital infrastructure improvements.

However, the regulator will need to balance companies’ demands with a cost of living crisis and growing public fury over sewage outflows and water leakage.

There are also concerns over companies’ increased borrowing, with about one-fifth of customer bills going towards servicing debt, according to the Competition and Markets Authority.

Thames Water, the UK’s largest water company, is struggling under the weight of an £18bn debt mountain and it may be temporarily renationalised. Its owners have said Ofwat’s regulatory regime has made the company “uninvestable”.

Ofwat had “a difficult job in assessing these [business] plans but, in my view, has made this more difficult for themselves by creating a labyrinthine framework of intense complexity”, Stuart Colville, deputy chief executive of Water UK, said in the submission.

The regulatory regime required companies to produce nearly 1,000 different documents in total, as well as 53,000 pages of business plans every five years, he added.

Since water companies submitted their business plans last October, Ofwat has sent an average of 20 queries each working day, with a default deadline to respond within 48 hours.

Responding to the submission, Ofwat told the Financial Times the performance of water and wastewater companies “is simply not good enough”.

“Given the sector is asking for £100bn of customers’ money over the next five years, it’s only right that the regulator thoroughly scrutinises what is proposed and challenges robustly any points that require further detail or clarification,” it said.

Financial Times

Thousands in Devon no longer have to boil drinking water, says supplier

Thousands of people in Devon can now safely drink their tap water again without having to boil it first, the region’s water supplier has announced after a parasite outbreak.

South West Water said about 14,500 households in the Alston supply area could use their tap water safely, although about 2,500 properties in Hillhead, the upper parts of Brixham and Kingswear should continue to boil their supply before drinking it.

SWW added that an additional £100 compensation would be paid to customers in the areas that continued to be affected.

About 16,000 households and businesses in the area had been told earlier this week not to use their tap water for drinking without boiling and cooling it first.

The UK Health Security Agency said on Friday that 46 cases of cryptosporidiosis, a disease that can cause symptoms including diarrhoea and vomiting, had been confirmed in the town and that more cases were expected.

The water company said the decision on Saturday came after “rigorous testing” and was made in consultation with UKHSA and the local authority’s environmental health department.

SWW’s chief customer officer, Laura Flowerdew, said: “Following rigorous testing this week, it is now safe to lift the boil-water notice in the Alston water supply area. This decision has been supported by the government’s public health experts and the local authority’s environmental health department.

“This situation has caused an immense amount of disruption, distress and anxiety. We are truly sorry this has happened.

“The public rightly expect a safe, clean and reliable source of drinking water and, on this occasion, we have fallen significantly short of expectations. We will not stop working until this has been fully resolved.

“With the boil-water notice still in place in Hillhead, upper parts of Brixham and Kingswear, we are urging customers who are unsure if they are still affected to visit the postcode checker on our website or call us so we can check for them.”

SWW said it would continue to offer bottled water at three stations in the area, having so far provided 386,000 bottles of water to customers.

The Guardian

Water firm’s response to outbreak contemptible – MP

A water firm’s response to a parasite outbreak in Devon has been “contemptible and just generally incompetent”, an MP has said.

Conservative Anthony Mangnall, whose Totnes constituency covers Brixham, said anger over South West Water’s (SWW) response following an outbreak of cryptosporidium had been “palpable”.

The water company on Tuesday said tap water in the town was safe to drink, but U-turned less than 24 hours later.

SWW has apologised for the disruption, but Mr Mangnall said the company had failed its customers.

Health officials have said there are 46 confirmed cases of cryptosporidium linked to the outbreak, with more than 100 other people reporting symptoms.

Many residents have told the BBC they are angry with SWW’s communication since the start of the outbreak.

Mr Mangnall said: “The predominant failure is the fact that earlier in the week, South West Water was asked whether or not this was to do with their network and they categorically ruled it out, only for them to change their position 24 hours later.

“I think this is contemptible and just generally incompetent – it’s put a lot of people’s health at risk.

“That, to me, is one of the most serious indictments because they were made aware of this by a large number of people, including myself who raised this with them, and so to not actually respond in a manner that would safeguard public health, I think is deeply problematic.”

BBC

Pension funds need ‘compelling’ returns from UK nuclear projects to invest

Local authority pension funds managing hundreds of billions of pounds have told UK chancellor Jeremy Hunt that returns from new nuclear power plants need to be “compelling” to attract their cash.

The chancellor is looking to pension funds to help finance the government’s ambition for nuclear power to meet a quarter of the UK’s electricity needs by 2050.

Several town hall pension funds, managing more than £100bn in assets between them, were called to a meeting with Hunt this week, where the role of large retirement plans as potential investors in the Sizewell C nuclear project in Suffolk was discussed.

The head of the Sizewell C project spoke at the meeting, according to sources close to those who attended.

London CIV, which manages £17bn of pension assets for local authorities in the capital and attended the meeting, outlined the criteria needed for it to invest. “Any infrastructure solution, including nuclear power, will need to provide regulatory clarity, a solid business model and a compelling inflation-linked return stream,” said London CIV.

“This is ultimately about what our partner funds need. As they are our shareholders, we’ll collaborate with them to identify whether this area is worth exploring.”

Laura Chappell, chief executive of the Brunel Pension Partnership, which manages about £35bn in assets for eight local authority pension funds, attended the meeting and with other funds offered views to Hunt on the “problems, pitfalls and potential of investing in nuclear in the UK”.

“Any infrastructure solution, including nuclear power, will need to provide regulatory clarity,” said Chappell in a statement to the FT.

Chappell echoed that potential infrastructure projects would need to have a “solid business model, consistent policy, and a compelling investment proposition”.

The pitch to pension funds comes against a backdrop of high-profile challenges for the nuclear sector in the UK.

France’s EDF said in January that the Hinkley Point C 3.2GW nuclear plant it is building in Somerset was on course to cost up to £46bn in today’s prices and would be delayed by two more years to 2029 — compared with an initial budget of £18bn and completion by 2025.

EDF has said the Sizewell C project, which it is developing with the UK government, will be cheaper to build as lessons will have been learned and supply chains developed during the building of Hinkley.

However, in March, Ofgem, the regulator, asked energy secretary Claire Coutinho to provide certainty over costs of Sizewell C, saying its “attractiveness to potential investors” was predicated on this.

Hunt’s meeting with pension leaders came more than a year after the government flagged its intention to consult on reforms that would make nuclear a more attractive investment for UK pension funds.

However, the government is yet to consult on these reforms, which would pave the way for nuclear power to be classified as “environmentally sustainable” under the UK’s upcoming “green taxonomy”.

The Treasury declined to comment on the pension meeting, including who attended, but said: “We want to incentivise private investment in nuclear as a crucial source of reliable low-carbon energy and a driver of economic growth.

“We have already begun to engage with industry on the topic and will consult on a UK green taxonomy in due course.”

Financial Times

Water investors have withdrawn billions, says research

Shareholders in some of the UK’s largest water companies have taken out tens of billions of pounds but failed to invest, new research claims, with firms planning to raise household bills to fund future spending.

Investors have withdrawn £85.2bn from 10 water and sewage firms in England and Wales since the industry was privatised more than 30 years ago, analysis by the University of Greenwich suggests.

Companies are under pressure following sewage spills and water leaks, which critics have blamed on under-investment in the country’s infrastructure.

Ofwat, the industry regulator, said it “strongly refuted” the figures.

“While we agree wholeheartedly with demands for companies to change, the facts are there has been huge investment in the sector of over £200bn,” a spokesperson said.

Water UK, which represents the industry, said investment in the sector was “double the annual levels seen before privatisation”.

Water and sewage firms want to increase customers’ bills by an average 33% over the next five years to fund improvements in the services for households.

But David Hall, visiting professor at the Public Services International Research Unit at the University of Greenwich, claims that water companies have invested “less than nothing of their own money” and are “treating their customers like a cash cow”.

The University of Greenwich examined the company accounts of the top 10 water and sewage companies in England and Wales including Thames Water, United Utilities and Severn Trent.

It said that between privatisation in 1989 and 2023, money invested by shareholders in the largest firms shrunk by £5.5bn when adjusted for inflation.

Over the same period, the amount of “retained earnings” – profits left over once things like dividends have been paid out, that can be used to invest in a business – had dropped by £6.7bn in real terms.

Meanwhile, the total amount that these firms paid out to their shareholders in dividends grew to £72.8bn, when taking inflation into account.

Ofwat said the dividend figure was “simply wrong”.

“[It] does not represent the true total given it is inflation-adjusted. Ofwat offers the figure since privatisation as £52bn,” the regulator said.

Taken together, the fall in shareholders’ investment and retained earnings – or profit – and rising dividend payments mean that, according to the University of Greenwich, owners have withdrawn £85.2bn.

Water and sewage firms want to spend around £100bn over the next five years.

They argue that they need more money to improve their infrastructure to help limit leaks.

But Prof Hall said: “You put the prices up because you can and you get more money out of the customers, and then you pass it on to the shareholders because the business you’re in is providing a good return to your shareholders.

“That’s why the companies do what they do and we shouldn’t expect anything different.”

A spokesperson for Water UK said: “Investment requires financing through dividends.

“Water companies now want to increase the pace of investment, with a record plan over the next five years, to ensure the security of our water supply in the future and significantly reduce the amount of sewage entering rivers and seas.

“We now need Ofwat to give us the green light to get on with it.”

BBC

Energy price cap set to fall again

Household energy bills are expected to fall to their lowest in two years from July, offering relief for squeezed households.

Analysts at Cornwall Insight, the consultancy, expect energy regulator Ofgem to reduce the annual price cap by £116 to £1,574 from July when it gives its latest update on May 24. It will mean an average household on a default tariff pays £500 per year less than in July last year, when it was £2,074.

The cost of keeping the lights and heating on will, however, still be hundreds of pounds more than before Russia’s invasion of Ukraine, which caused wholesale gas and oil prices to spike.

Dr Craig Lowrey, Cornwall Insight’s principal consultant, said the latest projections offered more relief to bill payers after April’s reduction. He added: “Of course, we must recognise lower prices don’t erase all the problems. The very fact we are still seeing bill levels which are hundreds of pounds above pre-crisis levels underscores the ongoing challenges faced by households.”

The forecast cap is slightly higher than the £1,560 the group had previously predicted for July, after energy prices rebounded from February’s 30-month low as fears grew of new disruption to energy supplies arising from the Israel-Hamas conflict. Brent crude oil now costs around $83 a barrel, from a high of $112 in the summer of 2022, and natural gas has fallen by 90 per cent from record peaks reached in the months after the invasion of Ukraine.

Cornwall Insight has forecast that the price cap will rise slightly at October’s three-monthly Ofgem review before falling again in January 2025. The annual cap was set at £1,137 when it was introduced in 2019 in an effort to prevent energy companies from overcharging customers by capping the amount a supplier can charge per unit of gas or electricity. Ofgem announced a detailed review of the cap earlier this year that would make significant changes to the way it was calculated, in particular to the daily standing charge which costs a typical consumer several hundred pounds a year even before any gas or electricity is used.

Lowrey said: “While the cap is certainly not the ticket back to long-term energy bill affordability, Ofgem’s review could pave the way for fairer, more efficient energy bills. However, given the breadth of reforms being considered by the regulator, it is worth remembering that such changes will inevitably lead to trade-offs.”

The Times

Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.