UK to Abolish Ofwat, Give New Water Regulator Greater Powers
The review by Jon Cunliffe — a former Bank of England deputy governor — comes after mounting public anger over sewage spills and rising water bills turned the sector into a hot-button issue. Ofwat, which scrutinizes the performance of private water companies, has been blamed for setting rules that allowed those firms to pile up debt while paying high dividends and neglecting crumbling infrastructure.
Ofwat should be merged with the water functions of the Environment Agency, the Drinking Water Inspectorate and parts of Natural England to form a single integrated water regulator for England, Cunliffe said in a 464-page report published on Monday. The new regulator should have strong enforcement powers to both supervise water companies and ensure they work in the public interest.
'Water companies have been allowed to profit at the expense of British people when they should have been investing,' Environment Secretary Steve Reed told reporters on Monday, as he announced the abolition of Ofwat. 'A broken regulatory system let them get away with this.'
The report from Cunliffe's Independent Water Commission also recommended stricter oversight of water company ownership and governance.
'We also propose giving the regulator the power to block material changes in control of water companies – for example, where investors are not seen to be prioritizing the long-term interests of the company and its customers,' the report said.
Still, the review could be a boon for the industry, according to analysts at Barclays Plc. 'The sector is good value and this report, if adopted, should be seen as constructive for the sector as a whole,' the analysts wrote in a note.
UK water companies advanced following the review. Pennon Group Plc rose 1.3%, Severn Trent Plc gained 1.1% and United Utilities Group Plc climbed 1.2%.
The execution of Cunliffe's proposed reforms for the heavily indebted sector will depend on how enthusiastically they are implemented by the government.
On Sunday, the Department for Environment, Food and Rural Affairs announced that it will set up a new office to investigate consumer complaints against water companies. The proposed water ombudsman would have binding legal powers to resolve disputes, unlike the current 'voluntary' system.
The poster child for everything that's gone wrong with the industry is Thames Water Utilities Ltd., which last week raised the possibility of a state rescue after spending months in talks with creditors to shore up funds. Britain's biggest water and sewage company has come close to running out of money several times and last month KKR & Co. withdrew its bid to invest £4 billion ($5.4 billion) in the indebted firm.
Reed said he hoped that Thames creditors would reach an agreement, making state intervention unnecessary.
Renationalization of the sector isn't on the agenda, said Reed, adding that it would cost £100 billion ($135 billion) and deprive the National Health Service of essential funds.
Cunliffe, who previously oversaw the clean-up of Britain's banking system, spent nine months talking to everyone from water company chiefs to environmental campaigners about what's gone wrong with the current system. Cunliffe has called for greater scrutiny to ensure the industry attracts long-term investors happy with steady returns, as opposed to those wanting to make a quick profit before exiting.
'The Commission recognises that, in recent years, actual rates of return appear to have been out of line with levels of risk in the water sector,' Cunliffe said in his final report. 'There are legitimate questions about whether companies have, in some cases, issued dividends at the expense of their own financial resilience.'
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