16/12/09
Ofwat said its final determinations were a good balance. Not everyone agreed. Whoever is proved right, change is in the air.
Oh well in 5 years time we could be walking round a zoo
With the sun shining down over me and you...
And there'll be sun sun sun
All over our bodies, and fun fun fun etc
The optimism and timeframe, if not the weather, in one of 2008's medium-sized hits (think Beach Boys with a nod to They Might Be Giants) catches industry hopes as well as those of musicians Noah and the Whale (1). The flood of comment that greeted Ofwat's final determinations concentrated, inevitably, on questions of balance.
Just two hours after the stock exchange announcement, chief executive Regina Finn was opening her City briefing with the claim that criticism of the draft determinations from both consumer and business groups showed the balance was about right. Nonetheless, after wide consultation, she had made changes and expected the results to find even greater favour (I imagined the last bit, but it's a fair bet).
Everyone knows the headline. A little bit less for customers meaning, apparently, a little bit more for companies and investors. Despite Ofwat's claims, most people, fellow regulators included, had come to see the draft proposals as unrealistic. Yet Ms Finn was probably content with initial responses to the final version.
Green steps forward
Green government bodies were back on side. The Environment Agency "hailed" Ofwat’s decision as "a good deal for water customers and the environment". Natural England found things doubly "welcome" in the first lines of its press release, effusing about "a real step forward". Non-government greens were less impressed. WWF, gruffly neutral, was, as ever, long on graphic urgency, "(it is) essential that we don't see a decline in investment in water efficiency initiatives desperately needed to end damaging abstraction by the industry".
With consumers, we must wait and see. Media interest all but died as the following day’s papers hit recycling. A shallow well of outrage quickly exhausted? The Consumer Council for Water (CCW) thought otherwise.
CCW is not shy about claiming success. The drafts were a great outcome: "We have negotiated hard and as a result this price-setting process, our first one, is over £1bn or more than £40 a customer, better than the last time" (2). They awarded the finals 7/10 (no doubt to Ms Finn’s great relief): "...this deal is still more than £50 a household better than in 2004" (3). The £10 difference is odd given that price limits were raised, but never mind. The question is: does CCW think the balance about right? It does not.
Someone should explain
CCW's problem is that the regulator had no need to raise prices to take account of activities put back into company plans (in sewer flooding, supply-demand balance etc). It seems that no rise at all would be acceptable as confirmed by the claim (above) that PR09 is £1bn "better" than PR04. Someone should explain that good, better and best in water services sometimes relate to things other than price.
Investment markets found some early cheer in the final determinations. Listed shares rose, but the mood was measured. The famous Lex Column – City and business views of its customary frankness range from "respected" to unprintable – was not optimistic about prospects for bonds or shares (4).
Tough settlement
Companies have made few comments, understandably considering the complexity and importance of these matters. Water UK said there were still doubts about the balance. In what remains a tough settlement, one continuing worry is the scope allowed for events to affect financeability and derail business plans. Another is how far Ofwat has considered the rights of future customers and environmental needs relative to those of today's hard-pressed consumers.
Where now? Price regulation depends on reconciling divergent interests. Final decisions can never satisfy all. But there is a consensus that the process is due for change. A regime that delivered £85 billion investment in twenty years, transformed the environment, and held prices at levels competitive with any in the advanced world, still works but is weighed down by complexity. Unfortunately, time and greater understanding seem to have brought more mistrust than, as hoped, mutual respect and collaboration.
Several reviews are being prepared, including by Ofwat and the industry. They could do worse than ask two questions proposed recently by Water UK: how to link a public sector ethos with private incentives; and how to ensure that sustainability is the direction of all activity. If we make progress with these, the next price review, in five years time, might be a sunnier proposition.
Notes
1) 5 Years Time, Noah and the Whale, 2007
2) Draft Forward Work Programme 2010-11 to 2012-13, CCW, November 2009
3) Press release, CCW, 26 November 2009
4) Lex, Financial Times, 27 November 2009
A version of this article, by Barrie Clarke, appeared in Water & Wastewater Treatment magazine, December 2009.
