Aileen Armstrong, Senior Director, Company Performance and Price Controls at Ofwat, is warning that current concerns and headlines in the media about the UK water sector are not going to go away without real change and that the pressure is only going to intensify over the coming months.

In a speech to delegates at the Westminster Energy Environment and Transport Forum on Friday last week, she said:

“When everyone is talking about water and sewage it's vital that company CEOs are front and centre. Public accountability includes being seen and heard when the media is discussing the issues that matter to the public and for the environment.

“We all need to recognise that these concerns and headlines are not going to go away without real change. And I think the pressure is only going to intensify over the coming months.”

She introduced her speech - Next steps for regulation – challenges, opportunities and building on the PR24 draft methodology - by saying:

“I don't think we've ever seen such focused attention on the sector. The headlines tell the story (including) :

• outrage about leakage levels when hosepipe bans are introduced
• river water quality
• questions about how our future water needs will be met
• ongoing anger over sewage outflows
• the impact of investment plans on future bills

"No surprise to see anger about performance related bonuses"

“Against that backdrop, it's no surprise to see anger about performance related bonuses, ” she added. According to Armstrong, the headlines give a picture of what people expect from their water and wastewater services, together with reflecting a sense that “companies aren't always being run in the interests of their customers and the environment.”

“It's clear that companies' current performance isn't meeting those expectations …and clear that some companies' behaviours are undermining trust and confidence in the sector,” she told delegates.

She also referred to the lack of visibility of the sector – at least at a national level, saying “When everyone is talking about water and sewage it's vital that company CEOs are front and centre. Public accountability includes being seen and heard when the media is discussing the issues that matter to the public and for the environment.”

Four key areas with opportunities for transformational action

The director highlighted four key areas with opportunities for transformational action:

• improving companies' current delivery for their customers and the environment
• opportunities for transformation through open data
• really effective strategic long term planning
• innovating to rise to the affordability challenge

Explaining that halfway through AMP7 Ofwat is seeing a mixed picture on performance against companies' PR19 commitments, she warned that while some companies have performed well in the areas of common performance commitment levels at PR19, others are lagging behind.

Companies needed to step up – however, this “need not require significant investment” and “new technology may reduce ongoing costs”, while “better operational processes can lead to improved services.”

She went on to emphasise that the sector was not meeting the challenges set in key areas:

• Failure to grip environmental challenges - in its recent environmental performance report, the Environment Agency said the environmental performance of England's water and sewerage companies was the worst it had seen for years.
• No evidence of the sector being able to get on track to deliver essential improvements in water efficiency – and clear that a step change is needed.

More action needed to open up data sets to provide greater transparency and accountability on performance

She singled out open data as a second area of opportunity and called for more action to open up data sets to provide greater transparency and accountability on performance - which would also be a stimulus for innovation and collaboration.

Ofwat is starting of its review of industry progress in this area now - if the regulator finds little or no progress is being made, Ofwat will consider the formal tools it has to ensure the opportunity is seized, she warned.

On strategic planning, the third area of opportunity, she said that companies should be in the final stages of planning for two of the key challenges facing the sector :

i. how to deliver the water resources needed into the long term

ii. how to deliver the sustainable, resilient systems for drainage and wastewater needs into the future.

“We want companies to redouble their efforts to consider alternative options, and to really come up with best value, sustainable solutions” she added.

Referring to the draft Water Resources Management Plans to be published by the water companies and regional groups for consultation in the next couple of months, and the recently submitted draft drainage and wastewater management plans, she warned that Ofwat’s assessment of draft plans had identified that companies still “have some way to go.”

The regulator was looking to the companies to “demonstrate ambition in the improvements that they can make through existing expenditure” she said, and to “consider fully the costs and benefits of options such as nature-based solutions before deciding the answer is additional storage.”

The final opportunity she highlighted was fresh thinking on the affordability challenge, saying that “companies must ensure that affordability is front and centre of their thinking as they develop business plans for PR24.”

"A source of frustration that we need to intervene to push companies to do the right thing"

Turning to the areas where Ofwat needs to act, she began by saying:

“In some of these cases, it is a source of frustration that we need to intervene to push companies to do the right thing or to ensure that there is 'safety-net' protection for customers.”

Ofwat is concerned about remuneration committees' grip on executive pay in a sector that “clearly has a long way to go to meet the public's expectations,” she continued and the regulator had been clear that performance related executive pay must demonstrate a substantial link to stretching delivery for customers, including the environment.

However, she cautioned:

“Taken in the round, regrettably, we don't see this outcome has yet been achieved. A number of companies fall short of our expectation of good practice agreed at PR19. And in some cases, we have concerns about how environmental considerations have been taken into account.”

Given the scrutiny across the sector on environmental performance, Ofwat was “disappointed that greater restraint was not shown.” The regulator had also expected to see better explanations and justifications of why awards are being made, including one-off payments, and especially where performance overall was poor.

Ofwat now intends to take further steps to reinforce expectations in this area to ensure customers' interests are protected, she added.

A second area of focus she highlighted was the need for companies to ensure that they are financially resilient. In a long-term sector providing an essential service, it was vital that “companies have access to the financial resources necessary to deliver their obligations and their commitments to customers at all times.”

Some companies “slow to acknowledge that their financial position needed to be improved and unwilling to engage openly on the issues”

However, in some instances when Ofwat had raised concerns, companies had been “slow to acknowledge that their financial position needed to be improved and unwilling to engage openly on the issues.”

Ofwat had also seen recent cases of companies “stepping back from public commitments to improve financial resilience.” She told her audience that the experiences had indicated that “backstop financial protections across the sector need to be improved, ” referring to Ofwat’s recent consultation on changes to the regulatory ring fence which would enable the regulator “to step in and protect customers where necessary.”

Referring to the regulator’s current investigation into how all the wastewater companies in England and Wales are managing their wastewater treatment works, she also flagged up Ofwat’s enforcement powers as a key part of the regulatory toolkit.

Essential companies take every opportunity to demonstrate behaviours that the public expect

Commenting that Ofwat had always regulated the sector with a focus on the long term, enabling investment to be made when needed, “but with payment for that investment shared with the future customers who will also benefit from it.”

She concluded by telling delegates:

“The long term delivery strategies that companies will produce for PR24 will not only drive better planning and evidence to help identify the key actions that need to be taken by companies in the next few years. They'll also help us to hold companies to account in consecutive review periods for the money they have received from customers. ….

“we intend to make greater use of measures to help track delivery and keep companies on the hook to deliver their programmes of investment….

“And it’s essential that companies take every opportunity to turnaround performance, be accountable, and demonstrate the behaviours that the public expect. There is much still to do.”