Utility Week

18 | 14TH - 20TH FEBRUARY 2020 | UTILITY WEEK Policy & Regulation Interview S ir Ian Byatt was the rst Director Gen- eral of Water – the precursor to Ofwat – from 1989 and subsequently the rst chair of the Water Industry Commission for Scotland from 2005. Last year he published A Regulator's Sign-o : Changing the Taps in Britain, telling the story of sector regulation. The industry has gone through turbu- lent times and su… ered reputational blows, but Sir John believes Ofwat under the direc- tion of Rachel Fletcher and Jonson Cox will whip the industry into shape a‹ er years of "dithering" with light regulation. Light touch versus right touch With the toughest ever price review coming into e… ect in a matter of months, Sir John thinks the impact will be positive – thanks to the rmer hand shown by Ofwat. "In a competitive market, the customer matters – in a monopoly market you've got to help the customer. You can help in terms of what I call right-touch regulation. People o‹ en talk about light-touch regulation – well that's a lovely political phrase right there with small actions taken, thinking people won't really notice while being assured everything is under control. That's balls! Right-touch regulation means you regulate only when you need to. And, when you do regulate, you do it properly – no nonsense, no messing about. Ofwat has been dithering around with what you might call light-touch regulation. It's ine… ective." He says too many years of unproductive rule led to investors acting not in customers' interests and struggling to tackle the pollution incidents that cast a shadow over the sector. "I'm pleased to see con rmed action a‹ er years of dithering. Prices have been reduced substantially because pro ts had been unnecessarily high, and dividends were roaring away. Now the companies must work harder to make their pro ts and to concen- trate more on e™ ciency." He recalls private equity rms, not subject to the regulation of a UK plc, entered the sec- tor a‹ er the "so‹ " price review of 2004, and some company boards reŸ ected the interests of investors rather than customers. "There's a big question mark over these private equity rms which were encouraged to come in. Ofwat is talking about improving governance, making sure boards are prop- erly constituted with a su™ cient number of independent non-executive members, not just a mass of investors. That's important because a water company is a utility which all households in the country enjoy and it's a monopoly. It's got to be properly regulated and the regulation involves getting the prices right and getting the governance right." Taking a stand Sir John feels the current leadership is strong and speaks of his admiration for Cox and Fletcher for turning around the sector. "It takes a great deal of courage because you've got to face up to the City. The City frightens people because they claim to know everything, but they don't," he says. He believes tighter regulation leading to smaller returns is positive for the sector and will not be a deterrent to investors. "Where can you put money where you know you will get a steady return? In a well- regulated utility! People want their pensions in a secure place and the utility sector can provide that." He also praises the regulator's move to include direct procurement in the price review as a means to enable large-scale projects to be completed. "There must be proper competition to nd solutions to problems – there should be an option of the most e… ective solutions and turn it over to the market to nd the best solution. Ofwat is talking about it in terms of direct procurement, which is a perfectly possible thing to use in the utility sector generally." Customer engagement Despite greater customer engagement while writing business plans than ever before, Sir John doesn't feel the direction of CCWater has been wholly positive and questions its separation from the regulatory o™ ce. "I'm disappointed with what has hap- pened because the customer service com- mittee used to be part of Ofwat. We acted together and they were privy to the details of the price review. Now they have been taken away from the regulator as CCWater, I think they have lost their way. "They don't have the legal powers to question the price review and are in a di… er- ent position now to when they were inside the regulatory o™ ce with the regulatory legal experts. It was a big mistake to take the cus- tomer committee away from the regulator." A di erent look at climate change Another aspect that has changed for the reg- ulator has been its evolving role – from the purely economic to the environment taking a far more prevalent position. Against the gloom and doom about the state of the environment, Sir John paints a picture of the gains made in recent decades, such as cleaner beaches and rivers, although he says "the Environment Agency has been a big disappointment because they failed to pick up Thames and Southern's pollution incidents". He is unconcerned about the impacts of climate change and supports the assertion of the Intergovernmental Panel on Climate Change (IPCC), which said climate change is not causing more extreme weather events. "Yes, there has been more Ÿ ooding, but we have to ask why. There has been more building on Ÿ ood plains and not enough dredging of rivers," he explains. With cleaner air, improved rivers and beaches, Sir John sees the positive changes to the environment – some in part thanks to regulation. His perspective from years in the sector gave him a unique viewpoint from which to write a history of the UK water sector. His book is a documentation of privatisa- tion, with copies of speeches and essays he presented during that time. "I thought regulation was a very interest- ing experiment to move the utilities away from government control – which I had seen from the Treasury and didn't think worked well – to a better system. It was important that this got properly documented." Ruth Williams, water correspondent, Utility Week Byatt: what Ofwat gets right Sir Ian Byatt, the original governor of the water sector, tells Ruth Williams about the best moves Ofwat made in the recent price review and why we shouldn't be too gloomy about climate change.

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