UK companies ‘created perfect conditions for renationalisation’, says Ofwat boss

Rachel Fletcher’s intervention comes a day after the regulator was accused by MPs of favouring companies over consumers.

Water companies in the UK have “created the perfect conditions for renationalisation” as a result of their actions, according to Rachel Fletcher, chief executive of regulator Ofwat.

An increased public interest has created growing expectations among consumers which unless addressed, will struggle to give investors the predictability they desire, Fletcher told Moody’s UK water and regulated networks conference on Wednesday.

“Some companies have focused more on taking money out of the business than delivering for customers,” she added, stating that the current political threat faced by companies is “not a passing phenomenon”, nor has it been “whipped up by politicians”.

Fletcher criticised leakage rates across the sector, which in 2017 accounted for 22 percent of all water produced. She also pointed the finger at high gearing levels in the sector, believing investors have benefitted from higher returns while consumers have not.

Her comments come a day after the House of Commons’ Environment, Food and Rural Affairs Committee said Ofwat had failed to strike a balance between consumer interests and making water companies a financially viable investment, with results “skewed in favour of the latter”, while expressing scepticism over the regulator’s new pricing proposals.

“Ofwat should have firmly tackled the imbalances in the financial models of some water companies much earlier, and we were not satisfied with its explanations as to why it had not done so,” the 11-person cross-party committee added.

Fletcher acknowledged there were signs company behaviour is improving, noting fewer supply and flooding issues, steps taken by some to deleverage and proposals made to return more to customers. She said these were “positive developments but more is needed” and the industry needed to stop waiting to be challenged by the regulator.

Dangerous alternatives’

The comments come weeks after Labour reiterated its aim to renationalise the industry, while water bosses met with environment secretary Michael Gove in the summer to discuss leakage issues and poor performance.

“Politicians are meddling from both the left and the right and I think that’s terrible,” John Penrose, Conservative MP for Weston-super-Mare, told the Moody’s conference. “The political debate has gone toxic and is proposing really dangerous alternatives.”

The pair were joined by Jonathan Brearley, executive director at electricity regulator Ofgem, also in the midst of a pricing review set to bring the lowest cost-of-equity range ever proposed to the sector. Brearley said the framework had been designed on principles of keeping the sector low risk but doing right by consumers.

The proposals have been criticised by National Grid for failing to “offer adequate returns”, although Brearley said if they were to “go out of kilter for shareholders or consumers” they would be adjusted. Higher returns will only be allowed through greater innovation, he warned.