Utility Week

14 | 20TH - 26TH APRIL 2018 | UTILITY WEEK Policy & Regulation Analysis O ver the past few months, the water sector has witnessed something akin to a tennis match between environ- ment secretary Michael Gove and Ofwat chairman Jonson Cox, as they bat back and forth suggestions on how to get the water sector to clean up its act. The latest instalment in this rather slow match is a letter from Cox to Gove, sent on 10 April, which sets out the regulator's agenda to improve corporate behaviours. This includes: • Reform company licences to make it even clearer that companies must put custom- ers at the heart of everything they do; • Look to companies to share with custom- ers any financial benefits they make from taking on additional gearing; • Set tighter standards to make sure com- panies are financially resilient in the long term; • Step up demands on transparency around dividends and profits, including a clear expectation that companies meet their obligations to customers before making dividend payments; and, • Address concerns around executive pay, including an expectation that water com- pany boards explain executive bonuses by reference to exceptional delivery for customers. Echoing Gove's words from the Water UK City Conference in March, Cox's letter indi- cates: "Some water companies appear to be focused too much on financial engineering at the expense of public service. "Alongside this, we've seen significant service failures, most recently following last month's cold snap and quick thaw, which led to tens of thousands of customers being le without water. All of these things have damaged trust in water. Ofwat has been pushing water companies to up their game for some time; but we need to go further, faster." He adds: "That is why we have set out an agenda of reform to bring the water sector back in balance, including getting back to a proper sense of public service provided under private ownership. "We expect the water sector to own the challenge by taking the lead in engaging with customers and the wider public about how it can redefine its role and rebuild trust. Companies who wish to be leaders in the sector will step up, voluntarily accept the need for change and put customers' inter- ests at the heart of everything they do, as an essential step in rebuilding trust." Taking action Water companies claim they have been doing just that. Aer being labelled by Gove, last month, as one of four companies that "make particu- larly keen use of financial engi- neering", Anglian Water announced plans to embark on a transpar- ency overhaul. A spokesperson for the firm tells Utility Week: "Ofwat has said companies who wish to be leaders in the sec- tor will step up and put customers interests at the heart of everything they do. Anglian Water has already committed to do that. We were the first to act following Gove's com- Ofwat's reform agenda Ofwat has responded to environment secretary Michael Gove's call for the amelioration of the water sector with its plans for how the sector will be reformed. Katey Pigden investigates. PLANNED ACTIVITY FROM OFWAT OVER THE NEXT SIX MONTHS TO IMPROVE ITS REGULATORY REGIME "Companies who wish to be leaders in the sector will step up, voluntarily accept the need for change and put customers' interests at the heart of everything they do" April • Consult on new proposals for PR19 to require companies to share financing outper- formance from higher gearing • Set out our expectations for PR19 business plans around the transparency of policies on dividends and executive performance pay, and around the approach boards should take when making dividend payments and award- ing executive performance-related pay • Publish additional clarification on how we expect companies to demonstrate financial resilience in their PR19 business plans • When consulting on proposals relating to recent changes of control, we will highlight sector-wide issues we have identified and seek views on how we might address them. This will include our goal of bringing all com- panies' regulatory ring-fencing arrangements up to the standard of industry leaders May • Formally launch our engagement with water companies on proposed new licence conditions as set out in our letter to the secretary of state, including a common principles-based licence condition for companies to put customers at the heart of everything they do • Industry engagement on potential changes to update and strengthen our board leadership, transparency and governance principles June • Consult on changes to our board leadership, transparency and governance principles • Publish the conclusions to our review of company approaches to dealing with the operational challenges presented by the recent freeze and thaw September • Finalise changes to our board leadership, transparency and governance principles • Publish proposals on licence changes to implement changes to our policy approach, including on board leadership, transparency and governance principles, ring-fencing and any principles-based licence conditions

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