Environment Secretary Michael Gove has said that the private water sector model delivers the best outcomes for customers and environment at the best value price – but only when underpinned by strong regulation and companies working harder in the public interest, not just in the interest of shareholders.

In a letter to Sir Brian Bender Chairman of Water UK, the organisation that represents all the UK water companies, Michael Gove said:

“While Ofwat’s initial assessment indicates that some companies are stepping up to this challenge, this is by no means the case for all. I am disappointed to see that the plans submitted by Thames Water, Southern Water and Affinity Water have been assessed as requiring ‘significant scrutiny’, not least as these operate in the most water-stressed regions.”

The Environment Secretary “fully expects” the revised plans to be more ambitious in delivering for customers and the environment, and said he would continue to offer Ofwat his full support in holding companies to account.

He congratulated South West Water, Severn Trent and United Utilities for receiving a ‘fast track’ initial assessment for their draft business plans, describing it as “a notable achievement” - between them they supply nearly a third of all customers.

However, he emphasised that the water companies enjoy a “particularly privileged commercial advantage” adding:

“Bcecause we have no substitute for water, and because these companies operate a natural monopoly – most of us cannot take our business elsewhere.”

"Coming to the use by some companies of sophisticated financial engineering, I share Ofwat’s view that all companies will need to ensure that incentives for owners (from dividend policies) and for executive teams deliver the best outcomes for customers. On the issue of gearing, I am disappointed to see that Thames Water and Yorkshire Water have not yet accepted Ofwat’s default mechanism to share financial benefits of high gearing."

Environmental outcomes

Commenting on their environment responsibilities, Gove said the onus is on water companies to look after the needs of the natural world as well as customers.

He went on to say he looked forward to hearing more about the role of the sector in planting trees, and that water companies could be a key partner in helping the government to achieve its ambitions of planting 11 million trees by 2022, and an additional one million in urban areas.

He told Sir Brian:

“ I want to see the industry go even further in developing catchment management plans, improving long-term water resources planning, and investing in new water supply infrastructure to make the network more resilient to extremes of weather and demand.”

On leakage he expects companies with the highest leakage rates, such as Thames, and those who have not committed to a 15% reduction, namely South East, to be aiming to go even further.

“It is a promising sign that a number of companies plan to reduce leakage by 50% by 2050.” he said.

Commenting when the plans were published yesterday, Anne Dacey, Deputy Director at the Environment Agency said:

“Water companies will need to make big improvements if they are to achieve the commitments set out in their business plans. The Environment Agency expects to see a significant reduction in pollution incidents, investment to increase resilience to drought and flooding, and a commitment to enhance the environment. We welcome Ofwat’s announcement today which supports these principles.”

Resource management

According to the Environment Secretary, the water companies have a key role to play in climate change adaptation and should go further to address pressures on water resources.

He also wants them to prioritise flood reduction and drought mitigation, and also reduce demand, particularly by showing more ambition in reducing per capita consumption. In spring this year Defra will launch a call for evidence and a consultation into the different policies and levers available to bring down water use. This will deliver a recommended per capita consumption target in litres per person per day.

They also need to continue to act on the leaks which see daily losses of three billion litres of water, over a fifth of total supply.

More investment needed in shared infrastructure

Referring to Ofwat’s plans to promote water transfers and other shared infrastructure through a special purpose unit, the Minister said:

“Together with investment in new water supply infrastructure and demand management schemes, this will be critical in securing longer-term resilience. I expect water companies to take a genuinely regional approach to producing plans that transcend company boundaries and identify optimum solutions.”

Financial resilience

He concluded by saying that given the significant investment needed to improve longer term resilience and environmental and operational performance, it is vital that the sector continues to attract low cost finance.

“I am confident that Ofwat will meet its duty to ensure that efficiently-financed companies can continue to finance their regulated functions.”