WATER UK Colourful opinions...
A government review of Ofwat is highlighting the sharply divergent views about the future of economic regulation, writes Barrie Clarke of Water UK
he ex-energy regulator appointed by Defra to chair its review of Ofwat may soon be reflecting over port and pudding that the submissions he has received from industry players have not been influenced by his name or background. To judge from the views of Ofwat, CCWater and the industry, the (David) Gray Review will be anything but grey.
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They all agree that the present service is a success. They all (kind of) accept that each has played a part. They all aver that new challenges must lead to new ways of doing things. But there the consensus stops. In setting out what should happen next, they show their true and vivid colours. The Government wants views on how Ofwat can “continue to operate a robust, predictable, independent and cost effective regulatory regime”. This is instructive. The job is to maintain the success of the existing regime, as the industry has always pointed out. It follows that the review team must examine the threats and challenges.
How uncertain are they? How disruptive? In light of its assessment, it must judge how radical or invasive should be the surgery it prescribes. In business, as in medicine, prophylaxis provokes strong views if the patient is in good health.
The joint industry submission (1) looks in detail at the current framework. It supports the principle of independent economic regulation and welcomes Ofwat’s recent commitment to a ‘cultural change’. But it shines a forensic beam on Ofwat’s increase of the regulatory burden; its inconsistency in both requiring, and not allowing, companies to take responsibility for engaging consumers; and its giving higher priority to its own market reform agenda than its duty to support the industry with investors.
Sustainability
The industry says, “the challenges of sustainability can be met within the existing regime, subject to the economic regulator improving incentive structures”. It wants a “strong independent voice for consumers”, while Ofwat lobbies for abolition of the Consumer Council for Water. In its defence, CCWater (2), which is also being reviewed, denies the economic regulator can be an effective steward of both the customer’s interest and the industry’s viability; an independent customer counterweight is needed.
Such a body is also required to ensure the future legitimacy of the service, as trust is increasingly under threat. CCWater says Ofwat’s failure to use its (CCWater’s) research is evidence of the regulator’s poor management of important relationships.
Ofwat’s submission (3) uses the framework that has served it well recently. A commitment to modern regulation and action on three kinds of sustainability follow a description of the challenges. So far, so familiar: the tone is measured, the arguments explained. But it is also obvious that Ofwat is not simply responding to the brief but also promoting its own ideas.
This is no doubt a calculated risk (its officials must know that the coalition disapproves of public bodies lobbying), and it might have got away with it, had it concentrated, as requested, on reforms needed to “continue to operate etc”. In fact, however, its submission is based on proposals and assumptions that arguably it has no business to be making and, more important, are irrelevant to the subject of the review.
Ofwat argues for a “more modern regulatory approach,” based on two main changes. The first is moving to a “risk-based approach” to align regulatory pressure more closely with level of risk.
This is seen by everyone as a natural next step in a mature, successful industry. It would allow good operators more space, bear down on harder on laggards, and reduce the costly complexity that has mushroomed from one price control to the next.
Distraction
The second change is to create “a set of (modular) licenses focused on the individual components of water and sewerage service delivery”. This is not seen by everyone or, as far as I can tell, anyone else as a natural next step, but as a distraction. It would increase rather than cut complexity, but it is promoted by Ofwat as a necessary next step in its own agenda for market reform or breaking up the integrated service and creating markets at every stage of the value chain.
Ofwat’s attempt to link these two proposals as of equal importance in a “more modern regulatory approach” is risible. They are connected only in the regulator’s view of the future. And the assumptions on which the second is based – that people will better accept and pay for a service they have chosen, and markets are the only way to reveal the value of water – are beyond both the review brief and Ofwat’s influence. They are also unproven. First, a recent survey (4) of best national brands showed only one ‘Big Six’ energy supplier in the top 100, at 64 (not much perceived value of choice here). Second, methods of valuing eco-system services, such as those supplied by water, are becoming better understood and recognised all the time (5). nnn
bclarke@water.org.uk
1) Water UK’s submission to Defra, October 2010 2) Ofwat’s response to Defra, October 2010 3) Review of the Economic Regulator, CCWater, Ocober 2010 4) Nunwood Consulting, September 2010
5) See, for example, The Economics of Ecosystems and Biodiversity (TEEB), Ecological & Economic Foundation, Earthscan October 2010
December 2010 Water & Wastewater Treatment 33
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