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Future of water regulator Ofwat to be reviewed

The water regulator Ofwat will be reviewed to ensure it is fit for future challenges of climate change and population growth, the government announced today.

The process will examine how the industry regulator works, whether it offers good value for money and if it is delivering what the government and customers expect.

The economic regulator was set up 20 years ago, at the time the water industry was privatised, to ensure customers receive good services at a fair price. The independent body can take action against companies that fail to deliver this.

Environment secretary Caroline Spelman said it is now time to review that function.

“Ofwat has been successful in holding down household bills while water companies invest in their infrastructure. But we need to make sure the regulator is in good shape to help the industry prepare for a changing climate and a growing population, at the same time as keeping bills affordable.

“It’s important to reassure water companies and bill payers that Ofwat provides good value for money by carrying out its duties without unnecessary red tape.”

The Department for the Environment Food and Rural Affairs has engaged David Gray to act as lead reviewer. Gray carried out the Department for Transport’s recent review of airport regulation. He is currently a non-executive director of the Civil Aviation Authority and a member of the Council of Management of the Regulatory Policy Institute.

Chair of the ICE water panel David Nickols said the review was welcome. “As ICE’s recent state of the nation report stated, the world we are living in now is very different to that when Ofwat was first set up and the regulatory framework must be reformed to reflect today’s environmental and societal challenges.

“The current investment plans do not do enough to address long-term needs, especially climate change issues including reducing carbon emissions and driving down demand. ICE fears that without significant change in the regulatory regime to drive appropriate long-term investment in sustainable infrastructure, our long-term water security could be severely jeopardised.”

The review team will call for evidence to give customers, water companies and their investors a chance to influence the review. The process will be completed early next year.

Defra is also due to publish a Water White Paper early next summer which will set out policies for the future of water management.

Readers' comments (8)

  • Hopefully OFWAT will now be managed by practicing engineers experienced in Water Industry design, supply, installation/construction and operational works who will be far better able to "manage" the Water Companies and provide better value for money for customers through reduced water and sewerage bills - and particularly by avoiding unnecessary passed on "climate change" costs escalation, and by quickly overcoming the majority of the still existing leakage losses and inadequate supply cross linkages.

    References to holding down prices in the past is at best disingenuous if not totally misleading. Anyone can beat an unjustifiably high budget!

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  • Barry Walton

    Probably and fortunately, Peter Wilson's hopes will not be satisfied. The economic regulator does not need to be populated by engineers to protect customers. There may be a case for ensuring that the operators are more technical than hitherto and switched onto long term resource development coupled with engineering to support the hoped-for reduced percapita demand without a reduction in quality of service to an increasing number of customers. As to high budgets, we may have short memories. They came from low budgets, long term neglect and deteriorating quality - thanks to a bunch of engineers.
    B Walton (F)

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  • Am I the only one that sees the irony in the demand that the regulatordrives 'reduced water and sewerage bills' while calling for the 'majority of still existing leakage losses and inadequate supply cross linkages' to be resolved.
    Resolution of leakage in a small, densely populated country with (often elderly) water infrastructure embended in a web of other services and development below a roads system often being used to its limits is easy to demand, difficult to deliver quickly - the added constraint of tying the financial hands of Ofwat / the water companies behind their collective backs is hardly going to help.
    Having worked in / with Ofwat (as a consultant engineer 'experienced in water industry design') alongside many others of similar background, I wonder if the main fault of successive governments, Ofwat DGs and the water industry itself, has been the difficulty in getting that message across to the general public and -apparently - other engineers!
    In the 13years I worked in the UK water industry huge, huge strides were made to improve the standards of the industry. It has been expensive, but my (obviously biased!) view would be that it was for the large part well worth it.

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  • In reply to the above, I would simply say:

    The privatised Water Industry inherited a mess, but a typical "nationalised" mess inadequately funded by governments within an ever decaying UK plc, and without any integrated National Infrastructure Plan. The engineers involved were not responsible for this state of affairs and often performed miracles considering the environment they had to work in.

    Privatised industries have, effectively, no remit to serve the national interest and commercially they seek to get the best deal that they can out of Ofwat and too often they simply operate by negotiating on a starter fat budget basis to get what they want. To be fair, however, the 5 year periods now negotiated should have been extended years ago to facilitate more cost effective longer term investments and commitments from others.

    Having been brought in on many UK Water Industry Projects in the last 20 odd years I know much money is still being wasted and probably because management of even these companies as well as the regulator has been increasingly been taken over by non-engineers who wouldn't practically recognise value for money or money wasted.

    Remember an engineer is someone who can design, build, or operate something for ten shillings that anyone else can do for a pound.

    Great improvements have been provided since privatisation, but starting from a low base makes that relatively easy. The increasing problems for consultants is that the current system provides no premium payment for excellence, but effectively only for the cheapest bums on seats. There is no commercial driving force for improvement and more efficient and more cost-effective designs. There is a similar problem for contractors as we are increasingly back to building consultants' designs in cost leadership competitive tenders with any remaining Design and Build work based on a common conceptual design defeating the whole object of this Contract strategy. Hopefully the trend for contractors buying consultants will provide a true basis of a one shop integrated design and build capability which in turn should drive down capital works and ongoing operational works costs via bespoke competitive efficient design and easier and cheaper build works, with increased margins, designed expressly for a particular site and Client requirement. Its called Industrial Marketing - McKinsey's Economic Value to the Customer!

    I could accept the comments regarding the difficulties in overcoming leaks and other old infrastructure works problems if I could see any sign of an integrated National Plan, assisted by if not led by Ofwat, designed to provide provisions within all future integrated Water Industry Works needs for access, common services, flexibility of operations and supply crossovers including a National Water Grid, future extensions, water re-use etc. As it is we are often only sowing the seeds of similar difficulties for future generations.

    It is unacceptable for the public to have to pay increased charges when after 20 odd years there are still massive losses through leakage, where expensively high quality treated effluent is still dumped into rivers or the sea and then requiring even more expensive re-treatment, where the bulk of such used expensively treated water does not require that level of treatment, and where areas of the country get flooded at the same time as other areas have the threat or even actual drought orders.

    All the above requires extensive full time senior level management inputs from commercially experienced hands-on design, construction, and operational engineers within Ofwat - not non-engineers!

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  • yes - and about time too!
    Ofwat has a ridiculous and unrealistic obsession with artificial competition via insets/common carriage. They are also obsessed with commodifying water - that's why we are called 'customers' and not the 'community'.
    We need to integrate the way the water cycle is managed not further fragment it. We also need to refranchise communities to take a more active role in how our water services are delivered in England - ccWater is not representative. Maybe the Big Society will help this but if this is just a means to save money then it will be useless.

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  • I wholeheartedly agree with Mike Honeyman’s comment that the main problem has been the difficulty in getting the message about Ofwat’s activities across to the public at large. The call for a Review and the comment by Peter Wilson both suggest ignorance of the regulatory process.

    Each year the water companies invest around £4.2Bn or around £25Bn in a five yearly review period. Companies report to the regulator annually and on a five yearly basis. Comparative analysis is one of the approaches then utilised by the regulator to provide a nationally coherent outcome for each company.

    Many factors go into the companies budget estimates including, future demand and levels of service, the type and scale of works required, the predicted costs of works and the cost of capital, i.e. the cost of borrowing to finance the investment.

    To ensure all key issues are adequately considered, Ofwat employs either directly or on a contract basis, economists, accountants, scientists and engineers amongst others. The volume of work for companies (and the regulator) is not inconsiderable furthermore; the approach is continually evolving to meet changing circumstances. After twenty years it may well be time stop, draw breath and say, are we really going about this the best way?

    The Environment secretary, Caroline Spelman, acknowledges that Ofwat has been successful in holding down household bills while water companies invest in their infrastructure. She comments on the need to ensure the regulator is in good shape to help the industry prepare for climate change and growing population. However, Ofwat’s website confirms that the regulator has been actively raising the profile of these issues so there is no obvious cause for concern here.

    The Terms of Reference for the review of Ofwat appear to question the regulators past actions and suggest a wish to reign in the scope of Ofwat’s activity. The Environment secretary’s comment, “It’s important to reassure water companies and bill payers that Ofwat provides good value for money by carrying out its duties without unnecessary red tape” may give a clue as to who and what is driving the review.

    In both 1999 and 2004 I led an external team of experienced of engineers (Mike Honeyman included) charged with assessing the cost basis of company investment plans and providing Ofwat with adjustment factors where the figures were seen to be excessive. It is worth noting that questions were also raised where costs appeared to be too low or when elements of design making up the total cost did not appear appropriate.

    On the issue of water charges, Peter Wilson should be remembered that the Retail Prices Index used to measure inflation has risen by more than 80% since 1989. Neither the companies nor the customers are wholly satisfied with the Periodic Review outcomes and this in my eyes indicates a measure of success by Ofwat in managing water charges. The extensive literature to be found on the Ofwat website or in their library may answer some of Peter Wilsons wider concerns, however it should be born in mind that Ofwat is the economic regulator and he may instead have a bone to pick with the Environment Agency.

    Ian Aikman (30+ years experience in the water industry)

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  • Oh dear, people can't see outside the bureaucratic box they've been operating in! As such all such defensive responses continue to avoid the core problems and failings - we,ve always done it this way!

    The reality is that normal engineering and national investment principles have not been applied on a National Plan scale to the Water Industry and many other of the regulated industries - railway transport, energy, telecommunications particularly broadband etc. etc.

    No one has looked at the overall scheme of things in these particularly industries on a long term basis seeking better and cheaper ways to provide these key overall system infrastructure services - a core engineering skill and service previously provided by Brindley with his alternative canal transport system, Arkwright and others with Textlie manufacture and Water Mills, Bazalgatte with London's sewerage system, the Stephenson's with new transport systems by steam engine and rail, Watt with improved power and applications from the higher pressure and double acting steam engines, Faraday and others on alternative energy/power systems etc. etc.

    Examples of lack of adequate UK engineering and infrastructure development include:

    Beeching's destruction of the railways which connected into every small town and even many villages - the basis of a far better and cheaper freight and commuter traffic systems and far less road congestion, pollution, and CO2 generation, now lost to us;

    Abandonment of our leadership in Nuclear Power Generation - the basis of renewable, and would have been cheaper power and major engineering exports with no need for the scandalously massive national expenditure on grossly inefficient wind farms - again now lost to us;

    Lack of any progression and early development, after STD phones, towards information highways and ultimately fibre optic networks serving all areas of the country - still a major problem;

    Similarly, for the Water Industry. Look at how many Water and Wastewater Treatment Plants, new housing developments, and industrial and commercial developments within and even outside of exsting built up areas have been provided within the last 30 years, and even more in the prior 30 year period, where no consideration was ever given to whole water cycle systems, the national networking of water supply, the quality of water treatment geared to actual water usage and demands, and water re-use to minimise feed water collection and supply problems and the additional cyclic costs of re-treatment of dumped treated effluent.

    Others were doing this , and I have been involved overseas in many schemes over the last 40 years with water re-use, separate supply of water for agricultural and toilet flushing, collection and use of rainwater, and installation of pipework systems which are accessible for maintenance or repair/replacement.

    Where were the engineers in government, regulatory bodies and elsewhere in allowing this gross deficiency in our infrastructure works systems. Ever wonder why professional engineers are slipping further down the organisation charts within major organisations and infrastructure works organisations, and are not held in too high a regard, relative to other professions, by the general public?

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  • Peter Wilson wants engineering and investment principles applied on a National Plan scale. This sounds like the very makings of bureaucracy, having said which, Ofwat does work to just such a scale. However it avoids the stifling consequences of bureaucracy by leaving design and investment decisions to the individual companies. As for engineers slipping further down the organisation charts, it is worth noting that the last Chief Engineer and Director of Costs and Performance at Ofwat, Dr W Emery, was a civil engineer with a particular commercial experience in the field of public health. Dr Emery is currently the Chief Executive of the Office of Rail Regulation. For my part, I have worked on irrigation, water supply and wastewater projects from the USA to Europe to South East Asia and have generally found engineers to well regarded. We can always do better but not in a state of backward looking ignorance.

    Ian Aikman

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