The Great Water Rip-Off Has Been Obvious for Decades

Good heavens. Lots of heat and noise in the news this week about our useless, predatory, leaking, sewage-spewing water companies. Apparently a damning report has just found out that the water companies have been ripping us off for decades and that the supposed regulator, Ofwat, has been worse than useless.

But hold on a minute. In my 2008 book SQUANDERED: How Gordon Brown is wasting over one trillion pounds of our money I had a chapter titled ‘Regulators without Regulation‘. In this chapter I exposed the water industry for its shameless profiteering and extortion and Ofwat for its mind-boggling utter uselessness. That was 17 years ago.

I wrote:

The case of Thames Water gives some idea of the billions that could be made in a short time by grabbing a UK utility company. In 2000 Thames Water was bought by the German company RWE for £6.8 billion (£4.3 billion cash plus taking on debt of £2.5 billion). In 2006, after having siphoned off over £1 billion in dividends, RWE sold Thames Water to a consortium led by an Australian bank for £8 billion (£4.8 billion cash plus £3.2 billion debt). Thus, RWE made more than £2.2 billion from its relatively brief six-year ownership of the water company. …

Ofwat is responsible for setting the prices that water companies can charge us and claims, “The price limits we set companies are based on demanding efficiency assumptions.” However, this seems to be contradicted by the staggering level of profits made by the water companies. In 2004-5 the industry made profits of 29% (£2.195 billion on a turnover of £7.520 billion). In 2005-6 this rose to 31% (£2.577 billion on a turnover of £8.228 billion). Some of the foreign water companies regularly make profits of 30-40% on their UK operations, while exactly the same companies are only permitted to make profits of 5-10% on their operations in other countries, especially in their home territories. This would seem to suggest that Ofwat’s price controls are not quite as rigorous as those in other European countries. …

Ofwat also claims that it actively controls how much water companies lose through leakage: “We monitor the level of water that leaks from each company’s network and take action where the leakage is unsatisfactory.” About a quarter of the water that is purified for our use is lost due to leakage – 894 million litres a day – equivalent to each household having another three full baths a day or flushing the toilet unnecessarily 30 times every day. Thames Water loses a third of its supplies through leakage. For six years Thames Water failed to meet Ofwat’s extremely modest targets for reducing its levels of leakage and Ofwat did nothing – no enforcement orders and no fines. Finally, embarrassed by the 2006 drought, subsequent hosepipe bans and public outrage at the level of leakage, Ofwat started to talk tough: “We view as very serious Thames Water’s significant failure to achieve its leakage target.” At first, Ofwat threatened Thames with a fine that could go as high as £66 million. However, Thames managed to avoid any fine by promising to increase its spending on repairing leaks by an extra £150 million over five years. At the new rate of pipe replacement agreed between Thames and Ofwat, it would now take about 128 years to fix London’s leaking pipes. Ofwat’s boss seemed pleased with his firm action: “This will directly address the issue of London leakage and achieve more secure supplies.” This £30 million a year extra investment represented just 2% of Thames’s turnover. At the same time, Thames Water was allowed to raise its prices by 21% and a month later it announced it was going to improve profits even more by sacking a quarter of its 6,000 employees, which would give annual savings of about £45 million. One could have suspected that giving the boot to one in four of its staff might actually slow down the rate at which Thames Water could repair its leaking pipes. However, Ofwat does not seem to have noticed this possibility. Anyway, Thames Water’s owners, RWE, hardly seemed to care – in that year the chairman earned £6.3 million in salary and bonuses and he could wash his hands of Thames and its leaky pipes as he was selling off the company for over £2 billion more than he paid for it. When asked about why RWE had been allowed to extract so much money from Thames while doing so little to run the company properly, the Ofwat spokesman seemed to feel that Ofwat was not responsible, perhaps forgetting Ofwat’s duty to pressure water companies to invest some of their massive profits to reduce leakage: “We don’t have any control over their dividends because we don’t manage the companies. The companies’ profits are a matter for them.” …

In spite of there being so many regulators, they seldom seem to be hauled in front of Parliamentary committees to explain what they have been doing with our money. Unfortunately for Ofwat, their performance was so utterly dismal that even the normally supine National Audit Office (NAO) could not help wondering what on earth, if anything, the water regulator had been up to for the previous 18 or so years. Following an unusually critical NAO report, Ofwat bosses had to appear before the Public Accounts Committee (PAC) in mid-2007 to justify their existence. They did not seem to impress the PAC. When asked why they had not acted against Thames Water earlier, Ofwat’s chairman replied, “We have contemplated an enforcement order in every year since Thames first started failing.” This prompted the response from the PAC, “We are not interested in contemplation; we are interested in action.”

Since privatisation Britain’s water companies have played us for fools. They have borrowed billions which they have used to pay a fortune to their management and shareholders while bleating that they didn’t have any money to upgrade our water infrastructure. And the executives at the worse-than-pointless Ofwat have let them get away with this while also pocketing handsome salaries for doing less than nothing. But given that I warned readers about the complete disaster in our water sector 17 years ago, I’m somewhat surprised to see that our rulers and mainstream media only seem to have discovered this now.

David Craig is the author of There is No Climate Crisis, available as an e-book or paperback from Amazon.