The House of Commons Environment, Food and Rural Affairs Committee has expressed "real concerns"  to Ofwat that its enforcement powers place it in a situation whereby "enforcing regulations and issuing fines against consistently failing entities" will place a further financial burden on the companies and increase the risk of corporate failure.

Photo: Sir Robert Goodwill House of Commons EFRA Committee Chair

Building on the Committee’s two hearings on Thames Water’s finances, the EFRA Chair, Sir Robert Goodwill, has today written to Ofwat Chief Executive David Black to respond to the publication of its Forward Programme 2024-2025. 

Sir Robert said that while the Committee’s discussions in recent months had largely related to the difficulties facing Thames Water, the issues raised in the course of the hearings were “highly pertinent” to the sector at large.

The Committee had found that for many years certain companies tasked with meeting their obligations had failed to do so, demonstrating “a model of management that is both undesirable and avoidable”, the letter says.

Sir Robert said that the Committee acknowledged the huge challenges faced by the water industry – however, the challenges had been “known about and neglected for many years by those tasked with addressing them.”

He went on to commend recent steps taken by both the Government and Ofwat to tackle some of “the most egregious examples of mismanagement in the sector”, including introducing powers to challenge dividend payments to investors where water companies are underperforming on environmental targets, and to fine firms up to 10% of their turnover for providing poor customer service.

The Committee was also supportive of proposals to block bonus payments to executives of firms that commit criminal acts of water pollution and to take responsibility for monitoring the pollution from the businesses themselves. In addition, the Committee noted with approval primary and secondary legislation introduced by the Government to provide more options for special administrators to restructure companies who are unable to pay their debts.

Concern that Ofwat enforcement powers could place further financial burden on water companies and increase risk of corporate failure

However, the letter goes on to warn:

“During our public hearings, however, we noted with concern the challenging position that Ofwat finds itself in relation to implementing and enforcing these measures. We have real concerns that Ofwat’s enforcement powers place it in a situation whereby enforcing regulations and issuing fines against consistently failing entities will place a further financial burden on these entities and increase the risk of corporate failure.”

Sir Robert points out that in the case of Thames Water, shareholders of the parent company have made it clear that future infrastructure funding is “contingent on Ofwat taking a positive view of its proposed bill rises and taking a lighter touch on its regulatory enforcement measures.”

Sir Robert warns:

“We are concerned, therefore, that it may not be in your organisation’s interest to use the full extent of its powers given the impact that the failure of a major business would have on the stability of the sector and the public purse. Challenging dividend payments to Kemble Water, the parent company of Thames Water which itself generates no income, has the potential to undermine its business and require Government action through a special administrative vehicle (SAV).

“Any forward programme must clearly set out how Ofwat will balance its need to regulate with protecting the financial viability of the water companies.”

The Committee also wants Ofwat to detail ambitions to conclude investigations in a more timely manner, with “many investigations into malpractice in the sector taking several years to complete which itself undermines public trust in the sector and regulator.”

Referring to the fact that in recent months the Committee had paid particular attention to the financial resilience of the water sector in the face of growing debt and rising interest rates, Sir Robert says:

“We have raised concerns about the corporate structures that have facilitated this increased debt while allowing environmental, service and maintenance performance to drop far below acceptable levels. It is unacceptable that certain actors in the sector have been able to take on large amounts of debt while failing to act as custodians for the infrastructure they have inherited. This is yet more concerning as we look ahead to a period that will require huge amounts of capital investment in new infrastructure; infrastructure that was neglected in favour of profit and dividends to shareholders.”

He points out that the Committee appreciates that much of the corporate structure and processes underpinning financial decision-making “fall outside the regulatory oversight of Ofwat, despite its central role in regulating the fee-charging and revenue-generating entities within those structures.”

However, he goes on to say:

“We feel it is imperative that you, along with this Committee and others involved in regulating the sector, continue to press Government to ensure that the burden of risk falls on the shareholders of those companies in the case of corporate failure. Furthermore, steps should be taken wherever possible to increase the transparency of corporate structures that have shielded the ultimate owners of our public utilities from scrutiny.”

The letter concludes by expressing the Committee’s concern that an increase in bills will produce a “justifiable perception of unfairness from consumers” who are being asked to shoulder the burden of improvements by companies who have “consistently and publicly failed on delivering their core obligations.”

“Increased bills to fund investment and regulatory leniency should only be preceded by a demonstration of a willingness to invest and a change in corporate culture that places public good at the heart of decision making”, the letter ends.