Regulation of the water industry Contents

3Water company performance

46.Our inquiry also covered the performance of water companies in areas such as customer satisfaction, financing and governance and environmental pollution. This chapter explores these concerns in turn.

Customer satisfaction

47.Overall, customers are satisfied with the service they receive from their water company; Defra stated that “93% of customers are satisfied with water companies’ services and 73% consider it good value for money”.131 Customers that are not satisfied should usually complain to their water company in the first instance.132 The company should respond to complaints within 10 working days.133 If the customer is still dissatisfied, they can contact the Consumer Council for Water (CCWater), a non-departmental public body funded through the licence fee that water companies pay Ofwat.134 If the complaint is still unresolved, customers can use the Water Redress Scheme (WATRS), the “independent adjudicator for disputes between customers and the water and sewerage companies or supplier of England and Wales”.135 Although CCWater has no formal powers, WATRS will provide “a final resolution that is binding upon water and sewage companies”.136 If the customer does not accept the adjudicator’s decision, they can pursue their claim through the courts.137 Some specific types of complaints fall under Ofwat’s remit instead, such as those concerning water and sewerage connections and anti-competitive behaviour.138

48.CCWater publishes an annual Complaints and Enquiries report, highlighting which companies it receives complaints about.139 Tony Smith, CEO of CCWater told us that there are “over 2 million complaints and unwanted contacts to the industry a year”.140 CCWater received 9,746 consumer complaints about water companies in 2017–18, an increase of 11% on the previous year.141 Tony Smith explained that “the growth area is billing problems” and that “over 50% of the cases to the industry and to us are around billing issues, particularly unexpectedly high bills”.142 CCWater secured £1.4 million of financial redress for consumers in 2017–18, which equates to around £144 per complaint handled, or £500 per complaint upheld.143

49.Tony Smith explained that “the complaints system works a lot better than it used to” and that complaints had “fallen by 65% over the last few years” because CCWater had “put pressure on the bad-performing companies” and Ofwat had changed “the regulatory system around complaints”.144 However, he had concerns about the complexity of the complaints procedure, stating that:

some of the companies take several stages to resolve a problem, so the customer is losing the heart to go through this process already, even by the time they have got to the end of the company’s process. They might have three stages themselves before it comes to [CCWater], so that is one of the things we need to rationalise so it is much slicker.145

Rachel Fletcher, Ofwat, concurred that “there are a number of hand-off points in [the process] and we see large dropout rates at each of those hand-off points”.146 Tony Smith and Rachel Fletcher both agreed that the complaints process could be streamlined.147 Tony Smith considered that customers should “get what they need at the first point, ideally”, and that companies themselves should resolve more cases.148 Rachel Fletcher also highlighted that:

In other sectors, once a customer’s complaint has not been resolved for a particular period of time with the company, the company then effectively ends up paying automatically for that complaint to go to the ombudsman for review. That does tend to focus minds somewhat. […] these are the kinds of things that we need to look at.149

50.Some water companies have unnecessarily convoluted processes for dealing with customer complaints, resulting in customers giving up before their complaint is properly resolved. Ofwat should review how the complaints process within water companies could be streamlined. This could include a mechanism whereby water companies either automatically pay complainants a fixed sum or escalate complaints to CCWater if the complaint is not resolved by the company within 15 days.

Financing and governance

51.In March 2018, The Rt Hon Michael Gove MP, Secretary of State for Environment, Food and Rural Affairs, attacked water companies for “playing the system for the benefit of wealthy managers and owners, at the expense of consumers and the environment”, and suggested that they had “shielded themselves from scrutiny, hidden behind complex financial structures, avoided paying taxes, have rewarded the already well-off, kept charges higher than they needed to be and allowed leaks, pollution and other failures to persist”.150 The Secretary of State added that “in cash terms, over £18.1 billion was paid out to shareholders of the nine large English regional water and sewerage companies between 2007 and 2016” and that “95% of the profit went in dividends to shareholders”. The remuneration packages of chief executives also attracted disapproval from the Secretary of State.151 CIWEM stated that “there has been criticism from a range of quarters concerning the performance of water companies as monopoly providers of an essential public service”, particularly “in the context of levels of executive pay, shareholder dividends, debt ratios, or the lack of transparency in relation to company ownership and tax contributions”.152 Dr Kate Bayliss and Professor David Hall stated that “debt, dividends and directors’ pay put upward pressure on prices as these are all financed by customer bills”.153 In addition, it can reduce investment.

52.Ofwat explained to us that it had “set out proposals to confront the behaviours that undermine public trust” and consulted on financial engineering, dividend policies and linking executive bonuses to delivering for customers.154 In July 2018, Ofwat published its proposals to “put the sector back in balance”.155 Rachel Fletcher explained to us that the proposals would mean “companies must share any benefits that they get from having high levels of debt in their structure” and that Ofwat was “pushing the companies to have much more financially resilient structures”.156 However, she clarified that “the financing arrangements and exactly what balance of debt and equity they want to have is a decision individual companies should be making”.157 Defra told us that it “supports the proposals of the economic regulator, Ofwat” and stated that “water companies are responding positively to this challenge with a range of measures”.158

53.Some witnesses to our inquiry highlighted Ofwat’s role in creating the problem. For example, Wessex Water Services Ltd considered that “responsibility lies with both the particular investors and former regulators who allowed companies to be highly geared to the benefit of shareholders, rather than customers”, however it acknowledged that Ofwat “recognises the issue and is working hard to correct the excesses of the past”.159 When we asked Rachel Fletcher why Ofwat had not tackled this problem before, she responded that:

For about five years now, Ofwat has really been pushing on the agenda to make sure that companies are acting as you would expect from a monopoly provider of an essential service. We have put in […] a very low rate of return in the current price review. We have been pushing as well to improve the governance of the companies.160

54.Between July and August 2018, Ofwat consulted on proposals to review and update the board leadership, transparency and governance principles that it expects water companies to apply.161 These principles cover requirements such as reporting on company performance, having independent members on company boards and a Chair independent of investors and management.162 Rachel Fletcher explained that Ofwat’s principles were voluntary, and that “even with a voluntary set of principles in place we have seen improvements in corporate governance”.163 Nevertheless, she considered that “it is time now that those companies should be bound to those principles through the licence” because:

our powers to impose new licence conditions on water companies are constrained. If a water company does not agree with our proposals, our only recourse is to refer the matter to the Competition and Markets Authority. We feel that that slows things down, it hampers our ability to drive through important changes and, ultimately, were there to be a legislative opportunity, that is the kind of new power that we would really welcome.164

55.The financing arrangements of some water companies fall below the standards that we expect from providers of an essential public service. High levels of executive pay, shareholder dividends and debt ratios risk reducing public trust in the water industry. We welcome the Secretary of State’s focus on this issue and consider that water companies should instead invest more in their businesses. 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.

56.In the absence of real competition in the sector, Ofwat must strike a difficult balance between consumer interests and making it financially worthwhile for water companies to satisfy their investors. That balance has been skewed in favour of the latter. The regulator’s proposals to “balance the sector” are now heading in the right direction but we are sceptical about whether they go far enough. Ofwat should review the changes implemented by water companies on financial engineering, dividend policies and linking executive bonuses to delivering for customers and publish a written update to us by April 2019.

57.After Ofwat has published the results of its consultation on governance principles, the Government should give Ofwat powers to bind water companies to the principles through licence conditions.

Penalties for pollution

58.Another area where water companies’ performance was criticised was pollution of the natural environment. The Environment Agency recently published The Water and Sewerage Companies’ Environmental Performance Report, which found that “although there has been a gradual improving trend in environmental performance over recent years, the industry is not doing enough to reduce serious pollution incidents and comply with permits”.165 The report notes that in 2017, there had been “a rise in the most serious pollution incidents” and “previous reductions in serious (Category 1 and 2) incidents have also plateaued continuing at around one incident per week”.166 The Environment Agency (EA) has issued “almost 25,000 permits and licences” to water companies which “set out the necessary conditions for water companies to meet their environmental obligations”.167 Compliance, which includes “monitoring of systems and the environment, inspections and audits”, was considered by the EA to be “generally good”.168 Non-compliance can lead to penalties such as fines.

59.WWF-UK considered that “the current system of enforcement of water company pollution incidents–particularly for sewer flows–is not fit for purpose”.169 It expressed concerns that there was a reliance on self-reporting and a lack of follow-up to pollution incidents.170 By contrast, CIWEM noted that “current penalties and enforcement mechanisms are driving improvements, although there are clearly still issues with unsatisfactory intermittent discharges and pollution incidents occurring”.171 Similarly, the EA believed that “the increase in fines and wider range of enforcement options available are an incentive for water companies to reduce the number of serious pollution incidents and non-compliance with permits”.172

60.In March 2017, Thames Water was fined £20 million for sewage pollution that occurred over 2012–2014.173 The high-profile nature of this case attracted much attention in our inquiry. Blueprint for Water, a coalition of environmental groups, stated that “although record breaking, the fine to Thames Water was equivalent to just ten days’ worth of the company’s operating profits”.174 Changes in Sentencing Guidelines have enabled “record fines for the sector”, with “more than £21million […] issued as a result of 16 successful prosecutions by the Environment Agency”.175 Sir James, CEO of the EA, told us that “it is good that the sentencing guidelines have been increased, so the principle now is that the fine should be proportionate to the turnover of the company. […] in Thames’ case, £20 million is 1% of their turnover”.176

61.The continued failure of water companies to prevent serious pollution incidents may have been exacerbated by previous penalties being merely seen as operational costs. We are pleased that fines for pollution incidents have increased and consider that the threat of fines of up to 1 per cent of company turnover should apply sufficient pressure on water companies to reduce pollution.

62.We recommend that the Government reviews whether the Environment Agency has the necessary powers and resources to enforce a drastic reduction in sewage overflows into our rivers.

131 Department for Environment, Food and Rural Affairs (RWI0018) para 8

134 Department for Environment, Food and Rural Affairs (RWI0018) para 12

135 Water Redress Scheme, About us, accessed September 2018

136 Q 222; Water Redress Scheme, How we work, accessed September 2018

137 Water Redress Scheme, How we work, accessed September 2018

138 Ofwat, Complaints and disputes we can help with, accessed September 2018; Ofwat, Alternative dispute resolution routes, accessed September 2018

139 Consumer Council for Water, 2017–18 Complaints and Enquiries Report, June 2018

140 Q 219; “Unwanted contacts” includes when customers have reported a service issue or had to chase their water company for action to be taken

141 Consumer Council for Water, 2017–18 Complaints and Enquiries Report, June 2018, p 3

142 Q 219

143 Consumer Council for Water, 2017–18 Complaints and Enquiries Report, June 2018, p 3

144 Q 219

145 Q 220

146 Q 218

147 Qq 218–219

148 Qq 219–220

149 Q 225–226

150 Department for Environment, Food and Rural Affairs, A water industry that works for everyone, March 2018

151 Department for Environment, Food and Rural Affairs, A water industry that works for everyone, March 2018

152 Chartered Institution of Water and Environmental Management (RWI0021) para 25

153 Dr Kate Bayliss, SOAS, University of London and University of Leeds and Professor David Hall, PSIRU, University of Greenwich (RWI0028) para 13

154 Ofwat (RWI0016) para 9

156 Q 196

157 Q 231

158 Department for Environment, Food and Rural Affairs (RWI0018) para 5

159 Wessex Water Services Ltd (RWI0024) para 11

160 Q 196

163 Q 197

164 Qq 197–198

167 Environment Agency (RWI0005) para 4

168 Environment Agency (RWI0005) para 4

169 WWF-UK (RWI0035) para 4

170 WWF-UK (RWI0035) para 4.1–4.2

171 Chartered Institution of Water and Environmental Management (RWI0021) para 68

172 Environment Agency (RWI0005) para 20

173 Blueprint for Water (RWI0020) para 4.3.1

174 Blueprint for Water (RWI0020) para 4.3.1

176 Q 247 [Sir James Bevan]

Published: 9 October 2018