England’s water regulator overemphasises the price charged to consumers at the expense of the “urgent” need for infrastructure investment, a cross-party committee of MPs has warned.
The House of Commons public accounts committee has written to Tamara Finkelstein, permanent secretary at the Department for Environment, Food and Rural Affairs, urging the government to work with the regulator Ofwat to remove some of the “fundamental barriers” that exist to improving “water resilience”.
The MPs found that the regulatory system was expensive, unclear in its aims, overly focused on “narrow compliance requirements”, and concerned with keeping household bills low at the expense of infrastructure investment, the letter said.
One water company told them it was “not clear what the regulatory framework is designed to achieve”, even though it added £15-£16 per year to each customer’s bill, according to the letter.
A 25-year investment horizon, rather than the current five-year regime, was needed to match the 25-year water resources planning process, the committee’s letter added.
“It is the committee’s view that the regulatory regime does not adequately recognise the urgent need for long-term infrastructure investment to improve resilience and the emphasis on price is overplayed,” it said.
The letter followed recent hearings between MPs and water companies, during which the politicians warned that England faced a “serious risk” of running out of water within 20 years.
The call for action comes as Northumbrian Water, Anglian Water, Yorkshire Water and Bristol Water appear before the Competition and Markets Authority this week to appeal against Ofwat’s latest price settlement, which clarifies how much water companies can charge customers and how much they should invest in infrastructure over the next five years.
The watchdog, led by former Anglian boss Jonson Cox, has demanded that companies cut water bills by an average of £50 over this period and shrink their permitted return on investment from about 3.75 per cent to 2.96 per cent, potentially lowering dividends.
In the letter to Ms Finkelstein, Meg Hillier, the public accounts committee chair, appeared to give qualified support to the water companies. She said that, although she recognised they had their own agenda, the argument that they were being asked to prioritise cuts to bills over investment in infrastructure had been convincing. Thames Water, for example, said it had proposed an £11.7bn investment programme but Ofwat capped this at £10.1bn.
However, Ofwat is concerned that companies could potentially raise bills and underinvest, retaining the excess for distribution to shareholders.
Dieter Helm, a utilities specialist at Oxford university who is calling for wider reform of the regulatory system, said that whilst there was a “legitimate question” to be asked about dividends as not all of the money raised from bills had gone into investment in infrastructure.
“If you look at the catalogue of problems listed in the PAC letter this shows that after 30 years of privatisation the price cap isn’t the answer,” he said.
“You can carry on cutting bills but that’s not going to deliver the sustainable water system we need.”
EU directives to improve water quality triggered a brief spending surge in the 1990s, with capital expenditure — including improvements to sewage treatment plants — averaging £5.5bn a year in the first two decades after privatisation in 1989. But despite growth in population and housing stock, spending declined by 10 per cent to £4.56bn a year in the decade to March 2018 — even though water bills rose, according to research published by Greenwich university based on annual Ofwat reports.
Ofwat said: “We have pushed companies hard on the amount of customers’ money needed to improve efficiency and performance. We have not done this by cutting investment in infrastructure, but by limiting returns to shareholders. That is the right thing for customers, the environment and the future.”
Defra said it would respond to the letter in due course. “We have previously made it clear that water companies must do more to address the needs of customers who struggle to afford their bills — as well as take action to improve infrastructure and protect the environment,” it said.