Frontier Economics Europe, a part of our international network, has released a series of papers on the Independent Water Commission’s Final Report on its review of the UK water sector (‘the Cunliffe review’). These papers share some insightful thoughts and questions on how the Commission’s recommend changes could be implemented and evolve over time.
Amongst an extensive range of findings, the Commission concluded that:
- Water sector regulation had lost public trust, and should now be overseen by a single new water regulator for England that incorporates the functions of economic regulation, drinking water regulation and environmental regulation – to ensure a ‘whole firm view’ of water company performance and compliance
- Ofwat (which was the economic regulator of the water sector in England and Wales prior to the Commission’s review) had relied too heavily on a ‘desk-based’, data-driven, econometric approach to assess performance and determine revenue allowances, and had not taken sufficient account of company-specific conditions and challenges
- Ofwat had not provided sufficient oversight of water companies’ delivery of infrastructure, management of their finances, or the health of the sector’s infrastructure, and that a more ‘supervisory’ regulatory approach is required
- Ofwat’s incentive landscape was overly complicated, “such that overall incentives and risks companies face are no longer clear to the companies, investors, the water regulators, or customers”
- The regulator needs to ensure water infrastructure requirements are adequately and reliably funded over time, and that water companies can attract the finance they need to fund investment.
The Commission also concluded that government and regulator pressure to keep bills low played an important role in underinvestment over 2009 to 2024, and that such a focus over other objectives had long-term consequences that need to be transparently considered.
The Commission’s Final Report provides some valuable lessons for Australia – particularly as economic regulators here have often looked to Ofwat for learnings and inspiration.
We will soon be sharing a report that discusses potential lessons from the Cunliffe review for the Australian water industry. Reach out to our team if you’d like an advanced copy of the analysis.
