5 reasons why regulation won’t solve the sewage crisis - and 5 actions that would help

England’s best beaches suffered from 8,500 hours of sewage dumping last year, new figures show. People are rightly angry about this ongoing crisis and politicians are competing to show they’re taking the issue seriously.

But what’s the solution? Can new government legislation and better regulation make the private water companies stop dumping disgusting sewage? Can Ofwat and the Environment Agency force them to treat our rivers and seas with respect?

This sounds nice, but there are a number of reasons why it hasn’t worked, and doesn’t seem likely to.

We’ve been trying regulation for 34 years, since privatisation in 1989, and it has failed. That’s why we’re in this mess. 

Research looking at the role of regulation in water networks confirms “private equity investors have found innovative financial mechanisms for increasing investor returns that are unrelated to productive activity…The regulatory toolbox, governed by a narrative of competition, has consistently been biased towards investors…the regulator is caught in an impossible bind in meeting the contradictory and contested interests of investors, end users and the state”. Not very encouraging.

Regulation has failed for five important reasons:

1. Privatised water companies are at no risk of ever losing their monopolies, there is no competition. In fact as it stands, we have to give them an absurd 25 years notice if we want to take back our water.
2. Ofwat, the regulator, is hopelessly captured - there’s a revolving door between people working at the water companies and people working in Ofwat. This makes it very unlikely that it will do a good job of holding the water companies to account.
3. The Environment Agency is hopelessly underfunded. Its funding has been cut by 50% over the past decade so it’s very difficult for it to hold water companies to account. Staff are not being allowed to do the job of protecting our environment.
4. The fines water companies have to pay are too small to have any impact. Water companies see them as the cost of doing business and go ahead and pollute.
5. The water companies are set up to prioritise making a profit for their shareholders. This means they are incentivised to invest as little as possible in the infrastructure. They walk away with £1.6 billion in dividends for shareholders every year on average (and £2 million for CEO salaries). Instead of having water companies with a public mission and public accountability, these companies have to deliver for their shareholders first, and the rest of us second. Given that stopping sewage requires serious investment, why would we be pouring all this money down the drain? Publicly owned Scottish Water has spent £72 more per household per year (35% more) than the privatised English water companies. If England had invested at this rate, an extra £28 billion would have gone into the infrastructure to tackle problems like leaks and sewage.

If you were starting from scratch, there’s no way you would start with the privatised system we have in England, geared towards shareholders with our rivers and seas coming as an afterthought. It’s simply not a sensible way to deliver what we need.

But let’s assume that you DID want to regulate to solve all of these problems (rather than just copying Scotland and taking water into public ownership).

How could you use regulation to deal with some of the worst effects of privatisation? 

What would you do?

1. Scrap the clause in water company licences that says they can't be sacked without 25 years notice. The licences should be changed to expire after one year so that we can democratically decide whether to take each service back in house as a new public operation.
2. Stop the revolving door between water regulators and private water companies. It shouldn’t be allowed for people to switch jobs, working at a private water company then working at Ofwat regulating that water company, or vice versa. For example, Cathryn Ross, who was previously the CEO at Ofwat, would not be allowed to hold her current position as Director of Strategy and Regulatory Affairs at Thames Water.
3. Fund the Environment Agency properly Reverse the cuts by restoring funding  to pre-2010 levels and enable staff to do their job of protecting the environment.
4. Freeze water company dividends at zero until the public agrees that the companies have completed the necessary investments in infrastructure to stop sewage in our environment.
5. When water companies release sewage into our rivers and seas, ask them to hand over shares, instead of just cash. This creates a way for us to gradually increase the public ownership stake in water companies. The more they fail, the more we will be able to take control in the public interest.

If these steps could be taken, suddenly the water business wouldn’t look like such an attractive investment opportunity for shareholders. It would look a lot more like a public service, run for public benefit.

Ultimately though, regulation can’t deliver the kind of results that public ownership will. It’s patching things up instead of fixing the fundamental problem. 

Private water companies simply don’t see themselves as providing a vital public service. In fact, in 2012, Yorkshire Water and United Utilities went to the European Court of Justice to claim that England’s water monopolies were private businesses, not “public authorities”, and should not have to disclose how much sewage they were releasing. United Utilities is still arguing it should not be held liable for sewage.

These companies have the wrong incentives. They’re working for their shareholders, not for people or the environment. 

We can do better. We need publicly owned water companies with a duty to work with communities to clean up and protect our rivers and seas. We need these companies to have governance structures and mechanisms that help us to hold them accountable. We can copy other countries - like Scotland and France - who are doing better already. 

Privatisation of water was always an unpopular, nonsensical policy. It’s time to take back our water.