The potential collapse of Thames Water, sinking under £14bn of debt, is just the latest evidence that the regulatory regimes that oversee large parts of the British economy are failing.
It comes on the heels of Ofgem, the gas and electricity regulator, failing to notice that companies supplying power to consumers were undercapitalised and vulnerable to global price volatility. The rail regulator, Office of Rail Regulation (ORR), has failed to protect the users of northern rail services or of commuter services around London from the incompetence of franchise operators. Ofcom, once the most respected regulator, has failed to prevent egregious telecom double-digit price increases – one of the worst recent examples of corporate exploitation which has helped to push up the cost of living.
Consumers or taxpayers or both will have to pay the cost of these failures. Ofwat’s failure to control financial engineering has left a number of other water companies in serious debt. Ofgem’s inability to ensure that the companies it was regulating could cope with volatile prices will add billions to retail bills.
In the 1980s heyday of privatisation, regulators were presented as the key protectors of consumer interest in areas where private companies were taking on the ownership of natural monopolies. Over the past decade that role has been diminished. The ideological approach of successive governments has been that the private sector can be trusted to manage itself, and that undue regulatory interference would deter much-needed investment.
Many companies in the water, energy and other utility sectors are competent, are fully aware of their social and environmental responsibilities and do not exploit their consumers or use financial engineering to benefit their shareholders. But a minority do not operate in the public interest, and that is where strong and clear regulation is essential.
Energy and water supply businesses need investment, and unless they are all to be taken back into public ownership, private investors such as pension funds will need a return. But with a protected market position, returns should be set at an appropriate and limited level. For many institutional investors, relatively secure, if modest, returns are perfectly adequate. Utilities should not be in the business of short-term profit maximisation, and their pay and bonus structures should reward the delivery of promised service provision.
Ownership structures should not only benefit shareholders. There is much to be said for the development of utility businesses that follow the model of Welsh Water – Dŵr Cymru – a company limited by guarantee with no shareholders, and whose returns are therefore used to improve service provision for the benefits of its consumers.
Retail bills should be set to cover operating costs, including the costs of maintaining and upgrading infrastructure and protecting the environment. Long-term investment has been neglected under government pressure to keep bills down. This is a dangerously false economy leading to neglect and decay, and in the case of the water industry to the continued dumping of untreated sewage.
If we want good-quality water, reliable trains and secure energy supplies, we will have to pay for them. Good regulators have a responsibility to make the choices clear, and to ensure that all the companies engaged in the provision of basic services meet the standards expected.
The regulatory system is essential and it needs to be rebuilt. In each case, the remit of the regulator must be set and accompanied by sufficient powers to ensure compliance. The revolving door between the regulators and the companies they are employed to control must be closed.
A reformed model would allow regulators to be independent, and their remit would include a guarantee of independence from the day-to-day temptation for ministers to interfere in detailed decision making. In turn, they would give expert advice to government about how key objectives could be met and their leadership would be politically impartial.
The neglect of the past decade is coming back to haunt the regulators. With the prospect of a sustained period of high interest rates, more problems are likely in companies whose activities are so essential to daily life that they cannot be allowed to collapse. The problems at Thames Water came as a surprise to some observers, including it seems ministers, but to those who have followed the water sector closely, it was no surprise at all. Thames Water will not be the last victim of regulatory failure.
• This article was amended on 5 July 2023 to give Dŵr Cymru as the correct name for Welsh Water, rather than “Glas Cymru” as an earlier version said.
• Nick Butler is a visiting professor at King’s College London, a former group vice-president for strategy and policy development at BP, and a former adviser to Gordon Brown
