The Worshipful Company of Water Conservators organised the 2023 City Water debate ‘Running Water’ at Bakers’ Hall on 21st March 2023. But in discussions afterwards, I realised that not all of the guests will have been familiar with the arcane details of the delivery of water services and I thought that it would be helpful if some of the background was explained in a little more detail ..and what a systems operator, ( referred to as an alternative delivery model ), does.
I do so by drawing on my career experiences in the water industry, the Board of the Environment Agency and as the founding Chairs of the NI Utility Regulator (which does the combined job of Ofwat and Ofgem in Northern Ireland and of Natural Resources Wales (which does the job of the Environment Agency, Natural England and the Forestry Commission, in Wales).
Because the whole topic of water services is so high profile, readers of this website might like to visit the House of Lords report (which came out the day following the Water Conservators debate ( ‘The affluent and the effluent: cleaning up failures in water and sewage regulation’) and the Government’s ‘New plan for cleaner and more plentiful water’.
This submission does not offer any opinions on the subjects, but merely seeks to help understanding of some complex issues. I suggest that if readers want a more definitive view of what is required, the relevant websites will provide that greater insight.
How did we get to where we are now?
1 Through the Water Act 1973, ten regional water authorities in England and Wales were established , based on river basins and catchments putting into practice the principles of integrated river basin management, especially concerning the planning of investments in wastewater treatment. Given the small size of many river basins in England and Wales, in practice the area covered by each of the regional water authorities typically contained more than one river basin. This is still the basis of the geographical location of the principal water companies, and right from the start, the importance of catchments was recognised. This concept has persisted to the present day.
2 From 1974-1989, the Annual Expenditure Plans were approved by DoE with the intervention of the Treasury. There was capital investment control and, post 1983, stringent external finance limits (EFLs) in response to the need to control the PSBR which were enforced strictly. From 1984, the water authorities were required to reduce borrowing to nil by 1987/88. The Plans embraced impact on charges. For example, under those circumstances it was impossible to make proactive investments or to invoke planning embargoes until a sewage treatment works was unequivocally statistically non-compliant. Thus, sewage treatment works performance and river quality declined in the 1980s and this became one of the drivers for privatisation, a fact almost forgotten.
3 The entry of the UK into the European Economic Community brought a whole series of new demands on water services, including the reduction of nitrate and pesticides in drinking water (threatened EC infraction proceedings), the Bathing Water Directive, the impending European legislation on sea outfalls of sewage, and so on. The UK was under pressure as the ‘dirty man of Europe’ The cost of these investments was unavoidable and amounted to many hundreds of millions of pounds, which could not be contained within the nil EFL limit. The RWAs were faced with demands for more investment, criticisms of poor performance, restrictions on finance, which was a major contributor to the push for privatisation.
4 After the 1987 election, the drive for the current model of privatisation culminated in flotation of the Water Companies as PLCs with Water Service subsidiaries in 1989. There were fears that the interests of shareholders and those of public health and environmental standards were incompatible. This was resolved partly by the creation of a mechanism which allowed the companies to claim for a review of prices in response to significant changes in statutory obligations. The drive for profit had to be balanced by tight and detailed regulation to ensure delivery of agreed outputs and compliance with standards. Hence, the legislation creating water companies also created the independent Drinking Water Inspectorate, the National Rivers Authority and an economic regulator, Ofwat, which would oversee investment, expenditure and charges of what would be monopoly water service providers. The NRA was also based on the concept of river basins.
5 The modus operandi of transition gives some illumination on the state of affairs and debates of today. The government took over the water service functions of the water authorities into ten state-owned water companies in September 1989 and shares were created and floated on the London Stock Exchange in December 1989 to a total value of £7.6 billion. There was also a Golden Share held in each by Government to give it some residual determination on the fate of the companies. The government assumed responsibility for the sector’s total debts amounting to £5 billion and granted the companies a further £1.5 billion — a so-called “green dowry” — of public funds. The Golden Share was lifted in 2000 paving the way for private investment.
6 The Water Service Companies (WSCs) were created as the direct successors of the water authorities with an Appointment (or Licence) under the legislation and it is this which connects through to the five-yearly Price Reviews and Asset Management Plans at which point the delivery of investment programmes, and efficiency improvements of what would be monopoly water service providers would be subject to detailed examination. The detailed letter of Appointment of Water Service Companies, and the terms of the Water Act 1973 set out duties, responsibility, accountability and mechanisms for dealing with new obligations., The Water Industry Act 1991 set out the current regulatory conditions for the industry.
7 Water companies’ directors have to follow the same rules as any another company. The Companies Act 2006 introduced a duty on directors to “have regard to [among other things] the impact of the company’s operations on the community and the environment”. The duty is found in section 172(1)(d) of the Act.
Role of the Environment Regulators
8 In 1995 the NRA was amalgamated with other environmental regulatory bodies to form the Environment Agency (EA), still based on river basins as per the original model of 1974. And, in 2006 Natural England (NE) was created from the amalgamation of English Nature, the Countryside Agency and Rural Development Service.
9 The EA webpages state that it is responsible for enforcing laws that protect the environment. Its aim is to use our enforcement powers efficiently and effectively to secure compliance. This contributes to our work to create better places for people and wildlife, and support sustainable development. It does so for controlling discharges to rivers by issuing permits defining acceptable conditions and exercising powers to control other sources of contamination such as contributions from agriculture. It monitors and has powers to take criminal action and impose sanctions for failure to comply with legislation. It has exercising regulatory functions on water resources.
10 The purpose of NE is to help conserve, enhance and manage the natural environment for the benefit of present and future generations, thereby contributing to sustainable development.
11 The overall management of catchments and basins, including what is needed in terms of improvements in water company discharges and in farming and industrial practices is defined in River Basin Management Plans. These derive from UK commitments to the Water Framework Directive and headline statistics have demonstrated a need for swift improvement funding.
12 Catchments are crucial to the delivery of the new Government Plan for Water. They are defined as an area of land through which water from any form of precipitation (such as rain, melting snow or ice) drains into a body of water (such as a river, lake or reservoir, or even into underground water supplies – ‘groundwater’). It could be a very large area, such as an estuary and any associated coastal waters. Or it could be relatively small – for example, the catchment of a tributary river.
13 The Environment Agency’s list of catchments is useful. The Natural Resources Wales approach to catchments, as engines of integrated natural resources management, embracing land and water management, is also very interesting.
14 These environment regulators define the environment targets which must be met by water companies in the plans produced by the companies to be approved by Ofwat. So, there are complex interfaces between the regulators and companies.
The role of Ofwat
15 This is taken from the website of Ofwat (known formally as The Water Services Regulation Authority). Because competition is limited, there is a risk that water companies will not deliver the services their customers want. They may also charge higher prices to increase their profits. This is why they need to be regulated. And it is why Ofwat was created when the water and sewerage sectors were privatised in 1989.
16 One of the ways it regulates is to set the price, investment and service package that customers receive. This includes controlling prices companies can charge their customers. When it does this, it has a duty to balance consumers’ interests with the need to ensure the sectors are also able to finance the delivery of water and sewerage services. It also needs to ensure sure they are able to meet their other legal obligations, including their environmental and social duties.
17 It currently carries out a review of these price limits every five years. The current period is 2020-2025. These are Ofwat Price limit periods in the water sector are sometimes known as Asset Management Plan (AMP) periods. The current period (2020-25) is commonly known as AMP 7 because it is the seventh price review period since privatisation of the water industry in 1989. AMP periods are five years in duration and begin on 1 April in the years ending in 0 or 5.
18 These are produced by Price Reviews in which the methodology is developed through consultation, the process is agreed and then Water companies have to submit plans on that basis. The final plan is then determined in sufficient time for implementation .so for example the process in place at the moment is that in December 2022 the process for what is known as PR24 was announced for publication as AMP8 in November 2024. But there is flow through from one AMP to the next and preparation in advance in capital programmes.
19 Changes can occur through a review and modification of Appointments or elaboration of the Price Determination process.
20 The Companies produce Strategic Direction Statements. These were first developed as part of the of the 2009 price review process to provide a 25- year context for the companies’ five-year business plans. Water companies also have to produce a series of other relevant plans such as those dealing with water resources management, leakage, drainage, and so on. For example, as from May 2022, a methodology set out the overarching process for designing, developing, and delivering the water industry national environment programme (WINEP) for England. It has been developed jointly by the EA , Defra and Ofwat with the support of others through the WINEP taskforce.
The role of systems operators
21 This has been cited as a possible model for change.
Reference has been made to the role of systems operators in energy and some information is given here. It is a matter of debate as to how the concepts which work in an extended network would apply to local management like that of a sewage treatment works and its catchment sewers. There would still be a need for economic and environmental regulators.
22 Systems operators often act as the front liners whose primary job is to ensure the reliable delivery of electricity service to consumers and businesses. They are responsible for overseeing and managing the power grid and controlling electricity flow through transmission lines. Other duties and responsibilities of systems operators include monitoring and operating current converters, observing circuit breakers and voltage transformers, and anticipating the changing needs for power due to weather. They are also responsible for communicating with key stakeholders such as power plant operators to route energy to consumers.
23 An example is SONI the Electricity Transmission System Operator for Northern Ireland. It states that it brings electricity to every part of Northern Ireland and plan ahead for future growth. From its control centre in Belfast, it matches supply and demand for power every second of every day by using the transmission system.
24 The transmission system, or grid, brings power from where it is generated to where it is needed and also powers NIE Networks’ distribution system, which in turn, supplies electricity to homes, farms and businesses.
25 SONI is independent from NIE Networks. Since 2014, SONI has been responsible for planning for the future of the grid, while NIE Networks is responsible for maintenance, repairs and construction of the grid. It is regulated by The Utility Regulator (UR).
26 This also gives an opportunity to provide an insight into the plans by the Government to introduce a system operator for energy in Britain.
Dr Peter Matthews Past Master of the Worshipful Company of Water Conservators
10 th April 2023