There is increasing public and political interest in how utility companies are managed and regulated. Questions have been raised about the way some utilities have been run in recent decades. This Insight looks at what changes might be considered in the coming years, focusing on the water industry as an example.
Utilities were privatised in the past, but concerns have emerged
During the 1980s and 1990s, many utility companies were privatised, as were other state-owned companies. For example, the private sector now owns and operates the water industry in England and Wales. Consumers pay private companies to use water and sewerage services. Like other utilities, such as energy distribution, these companies maintain and develop their services within a regulatory framework set in legislation.
Normally, private companies compete by offering consumers goods and services for different prices. But in the water industry there is one network of pipes, which is operated by one company in each region of the country, so householders cannot change supplier. In industries like this where customers cannot choose a different supplier if they are dissatisfied, the Government has created a system of regulation that works to ensure a level of service and fair prices.
How are water companies regulated now?
Ofwat, the regulator, carries out a price review every five years that ends up applying to customers’ bills and the services they receive. The system of regulation has been criticised, particularly for being too generous to the water companies. A new control period starts in 2020 and was finalised on 16 December 2019. Ofwat’s final decision, which can still be appealed, has imposed price cuts and been described by the regulator as a “tough review.” The May Government criticised the industry and encouraged Ofwat to improve financial governance.
Some advocate alternative ownership
Public ownership of the water industry has attracted public support (PDF 760 KB) in recent years, and has been championed by the Labour Party. Public ownership would mean the public sector taking on the costs of running water services. The Government would own all the assets and would be able to directly control consumer prices. There are various ways to increase public ownership, with the costs of each model disputed.
Central Government could buy the water companies. The market value of companies suggests that this would cost £30 billion to £40 billion, without taking account of the debt that water companies have. But there are higher and lower estimates (PDF 668 KB), depending on whether the Government pays a ‘takeover premium’ to shareholders and what methods of valuation are used. The water industry argues that private ownership has led to high levels of investment and well-run companies, and that any level of nationalisation would impact a range of private owners and investors in the UK and abroad.
Other ownership models have also been put forward. For example, MPs debated mutual ownership in January 2019. A mutual company is typically owned by the customers or run for their benefit (which is the case in Wales). In other countries, local areas or authorities own water companies. This is the case in Paris, and the same model is already used to supply energy in Nottingham.
Transferring any industry from the public to the private sector would involve complex negotiations and legislation. It would also be a significant departure from the consensus that has governed public involvement in utilities over the past 30 years.
What are utility companies’ priorities for the future?
Crucially, whoever owns or regulates utility companies will need to decide how to run them. If utilities were nationalised, to what extent would ministers get involved in decision making? Would private and public sector management achieve the same efficiencies? In either sector, what investment is required in the long run, how should it be paid for, and what should happen to prices? And more generally, what role should public and political opinion have in privately owned utilities?
The May Government asked the National Infrastructure Commission to conduct a study of the regulation of the UK’s energy, telecoms and water industries. It reported in October 2019, finding that, while the current model has mostly achieved what was intended, there is a culture of short-termism. Its conclusions may impact the new Parliament. In particular, it recommended that the Government should lay “a long-term strategic vision for each of the regulated sectors” in the first year of any Parliament, and that it should encourage a strategic approach to investment, consider the impact of net zero and make changes to the regulatory process.
Whatever model emerges, the new Government and Parliament will need to decide how a wide range of services should be run and regulated. These decisions will impact the services and prices constituents see delivered in the long run.
- 2019 Price Review, Ofwat
- Strategic Investment and Public Confidence, National Infrastructure Commission
- Public ownership of industries and services, House of Commons Library
Insights for the new Parliament
This article is part of our series of Insights for the new Parliament. This series covers a range of topics that will take centre stage in UK and international politics in the new Parliament.