11th July 2024 was certainly a post-privatisation first for the water industry. On the same day we had announcements of BOTH a humungous Ofwat draft determination AND a slew of eye-catching industry reforms from an eager incoming Secretary of State. Predictably this sent Feargal Sharkey into near apoplexy on Good Morning Britain.

But an incoming Labour government and the water industry in bad odour (excuse the pun) with both the public and politicians does also evoke youthful memories for some of us. We have kind of been here before. Steve Reed summoning water bosses and announcing new measures during his first week in office, very much channels New Labour and John Prescott’s much vaunted 1997 “Water Summit”.

Back then it was anger following the 1995 drought, with Yorkshire Water on the naughty step for having to tanker in supplies to parts of Yorkshire. The industry and regulatory response in 1997 holds some lessons, which I’ll return to later. Suffice to say, we can expect an incoming government with a large majority to want to put down a clear marker and show that it is responding to public and press concerns about industry performance. There is a narrow window now for it to influence the final stages of PR24.

This time around there are three big issues high up in the public and political consciousness: sewage and polluted rivers; Thames Water’s travails; and chunky bill increases during a cost of living crisis.

Taken together these present a real challenge to the much-tweaked regime of economic regulation. That may be no bad thing, as climate change and demographic change starts to bite. There is a case for looking hard at how to improve what regulation delivers, and in particular at the join between economic and environmental regulation. But it’s also important not to throw the baby out with the bath water. Despite the furore over sewer overflows or Thames Water, we shouldn’t lose sight of what the post-privatisation regime has achieved in terms of investment and improvement (yes, despite the headlines).

So let’s take each of those big challenges in turn and look at the regulatory scorecard as it stands following Ofwat’s draft determination (DD).

On sewage pollution Ofwat and the Environment Agency (EA) are playing safe, by including £10 billion in the DD to address sewer overflows. Ofwat also seems broadly favourable to catchment and nature-based approaches, which are likely to be key to delivering better all-round solutions in the long term. But Ofwat and the EA’s hands are tied to a degree by the political focus on sewer overflows which are only a small part of

the bigger problem of polluted rivers. There is still a risk that we will end up with bad value for customers – for example by spending huge sums to target numbers of spills reported on a spreadsheet rather than ecological value.

Ofwat might do well to look back on how it responded to public anger around leakage in 1997, demonstrating real grip and leadership by introducing a strong regime of leakage targets, with a strong methodological underpinning. Ofwat should be thinking creatively here about how it can shape a balanced, evidence-based long-term response. Climate change and development pressures will continue to challenge the sewerage infrastructure and we need to get best value by intelligently combining hard assets, softer engineering and contributions from other actors in catchments.

Here it’s great to see the introduction of statutory Drainage and Wastewater Management Plans – something which I and others were arguing for three price reviews ago. Ofwat should think about how this mechanism can be harnessed to drive best practice and deliver value for money in an era of cost constraints.

On Thames Water – no doubt the game of financial chicken behind closed doors has some way still to run. For now, it seems right for Ofwat to leave Thames’ investors with a window to sort future financing out among themselves, in the light of the DD. Thames too should look back to 1997 and how Yorkshire Water turned themselves around from public enemy number one into one of the sector’s leading lights. Under strong leadership they really did face up to their performance issues, in a way that successive incarnations of Thames’ leadership have signally failed to do.

It’s also sensible for Ofwat to visibly treat Thames as a outlier under “special measures” through what it calls a turnaround oversight regime, with an independent monitor. This recalls earlier Ofwat practice developed under Bill Emery’s leadership, using independent reporters and special measures style reporting to turn performance and data reporting problems around. Thames has extensive form here.

This is not Ofwat taking over running of the company - but ensuring that the executive and Board face up to the operational and delivery issues that need to be addressed. Under present circumstances these are as critical as – and indeed properly inter-related with - the questions around future financial resilience.

Finally, turning to bill increases, Ofwat has obviously worked hard to strike a balance and limit the risk of ‘never waste a good crisis’ type thinking. But the fact remains that bills are going to go up and it won’t delight customers. The industry has forfeited a lot of public trust and goodwill. As we move to final determinations and beyond, Ofwat needs to play a clear but nuanced role in shaping discussions about how to scope investment programmes that deliver best long-term value. New Defra ministers have had hardly any time to influence the price review and are likely to want to see this explored.

Here Ofwat needs to work out the details of how it can turn the understandable political desire to demonstrably get a better deal for the public from the sector into workable

proposals that still deliver good long term incentives for investment and innovation in the sector.

A visible and joined up reset of how Ofwat and the EA hold the companies to account would help. This should include a clear role for the 'new' Customer Panels, perhaps new thinking about the role of CCWater and scope to align with the new government’s wider devolution agenda. At top level this needs clear public presentation and communication, but also underpinned by a sound intellectual framework under the regulatory bonnet.

For its part it would be nice, too, to see the new government playing a rounded role in communicating around the broader societal challenges of cleaning up our water environment.

This article was first published in Utility Week 24 July 2024.