Ofwat: the regulatory farce

We live in a liberal market economy, a free, capitalist world where companies are able to compete with each other resulting in market forces that drive down cost to consumers by creating efficiencies in the system and processes of providing that service or product.

Sounds great huh? Except, have you ever tried to switch water suppliers in the UK? It’s not possible (unless you’re a very large business of course). In our free market economy there exists multiple regional monopolies on water provision. This means you don’t get a choice, you can’t pick the cheapest, or the one with the best service. You get what you’re given and if you don’t like it then you’ll need to move several counties away.

Not only that but our beloved water regulator (the one that the taxpayer funds) Ofwat, doesn’t appear to have much of an appetite for regulation. Earlier this year the Observer newspaper acquired data from the Environment Agency under the Freedom of Information Act that showed more than 1,000 pollution incidents committed by the 10 biggest water companies over nine years resulted in only £3.5m in fines with two thirds of the incidents simply resulting in a caution.

This means an average fine of just £10,800 for multiple and persistent disregard of the regulations, and the environment, for example, United Utilities allowed sewage to pour into Cumbria’s river Keekle on 22 occasions in 2012. All the while the water companies are making huge profits and paying billions in dividends to shareholders but next to nothing in tax.

Water companies don’t have to repair leakages if they can demonstrate it would cost them more to repair than the cost of the environmental damage caused by the leak (a pretty large grey area in my opinion). Ofwat provides a ‘leakage allowance’ to water companies that barely changed across the five years of 2009-14 in the last price review. The staggering total of 3.24 billion litres PER DAY is allowed to leak out of our pipes without the water companies having to lift a finger.

Things are no better in America as a report by the Center for Neighborhood Technology in 2013 showed 2.1 trillion gallons of water wasted annually as a result of leaking, crumbling infrastructure – that’s around 9.5 trillion in litres, enough to put Manhattan under 298 feet of water.

Ofwat is currently working out how much to let the water companies in the UK increase their prices by over the next five years from 2015 as part of its regular price review – last year prices increased by 3.5% so well above the rate of inflation and average salary increases.

Rather disturbingly, despite the price review occurring every five years, the Ofwat senior management team failed to budget for its cost and as a result the Treasury handed them a budget of £29.375million of taxpayers money, of which at least £6.45million will be paid to private financial firm PricewaterhouseCoopers as it was deemed Ofwat did not have the expertise and resources to conduct the price review internally.

Furthermore, the Chairman of the Board at Ofwat claimed £16,651 of taxpayer’s money towards the costs of a flat in London, as detailed in the 2013-14 annual report, without authorisation from HM Treasury. He did subsequently repay the money received for the flat but it leaves a pretty nasty taste in the mouth – much like the water out the taps.

The wonderful irony with Ofwat is that their webpage on ‘transparency and data’ leads you to a completely blank page. How much more transparent could you get? http://www.ofwat.gov.uk/aboutofwat/transparency/

 

NB: Duncan from waterstink.com has kindly provided some updated information for this blog.  Namely that Ofwat is actually funded by a direct levy on water companies (who have been lobbying to reduce this levy) although the whole funding issue is rather opaque.

Ofwat as the economic regulator does not get involved in fines related to environmental matters – although this line can be blurred.

Finally, Ofwat’s current price settlement means a real terms cut in water prices (only the second time this has happened since privatisation) although the last time it happened water companies cut costs by scaling back R&D and innovation and operational costs such as maintenance.

Thanks to Duncan – you can read his blogs at waterstink.com