Does water's 'Great Stink' moment pass the sniff test?

0:00Hey man, you hungry? Let's order delivery. Yeah, I was thinking Italian burgers. Oh

0:06Paul Kelso:Game night just got tense two bros on different sides of the fence Burgers or pasta tonight Why can't we have food without the fire? With wonder you can combine 20 restaurants in one delivery so no one has to settle use code mealtime for 50 % off your first wonder order terms apply See wonder.com slash new customer Coming up on The Daily with Menial Patterson. Drowning in debt and with bills on the rise, the water industry is ripe for reform. Will the 88 recommendations published today do anything to sort out the mess? Okay, last meeting wrapped. It's too late to cook. Should I order poke or a burger?

0:50Paul Kelso:At war with myself, feeling choosy. Burger or tuna, what a doozy. If only I could have one of every bite. Why can't we have food without the fire? With Wonder, you can combine 20 restaurants in one delivery, so you never have to choose. Use code MEALTIME for 50 % off your first Wonder order. Terms apply. See wonder.com slash new customer. You'd think that the one thing this country could get right would be its water supply. I mean, the stuff does fall from the skies, and plenty of it. So why are bills through the roof, and why is sewage in practically every river in the country? Well, a review set up shortly after Labour entered government has just reported back and announcing its recommendations.

1:36Paul Kelso:Inquiry Chairman Sir John Cunliffe deployed a colourful historical comparison. Now, I have more than once thought of the Great Stink when leading the Independent Commission on Water over the last nine months. While today we enjoy safe water and clean sanitation to a level that would have been unimaginable 165 years ago, there are many parallels. A system under huge pressure from economic and population growth, years of discussion and competing plans as the problem grew, a government that did not give clear direction, a level of pollution in our waterways that the public would not tolerate, and a point at which it became apparent to all that a fundamental reset was needed.

2:17Paul Kelso:The great stink of the 19th century made parts of London almost uninhabitable. The hot weather cooked the sewage filling the Thames. The great stink of the 21st century might prove to be the reaction of consumers if this isn't the point at which our water is sorted out. Our business correspondent is Paul Kelso. He was down at the launch of the recommendations earlier today. I mean, Paul, first things first, what is it that is so wrong with our water industry, at least when it comes to England and Wales? The water industry is entirely privately owned, has been for nearly 40 years now, and public anger has grown to a tidal wave levels in recent years as a combination of high returns for shareholders, pay for executives, has gone alongside a rising tide, literally, of sewage in rivers.

3:10We have a Victorian sewage system that combines water and sewage when it rains a lot, when it overflows. Some of that sewage goes into our waterways. But for years, the water companies, if they knew about it, they couldn't tell us how much. It was an unknown scandal. Activists have measured it. They've gone out themselves and put monitors. We now know hundreds of thousands of times annually. Sewage goes into our rivers. The combination of those two things in the last few years, particularly since Covid, certainly if people went mild swimming before Covid, forgive me, they certainly didn't podcast about it.

3:43A combination of that public focus, public anger, where the public goes, the politicians follow, has led us to this point where this government has said, enough, we're going to review the system at the very least.

3:56Paul Kelso:Yeah, I'd go so far as to say it's more than that, that every time these companies have been quizzed as to why bills are going through the roof, every time these companies have been quizzed as to why sewage is going into our rivers time and time again, they kind of smile, nod, move on. It's as if they haven't been able to deal with these issues, despite the fact they have known about them as much as any of the rest of us. They have known about them. The line from the water industry has been throughout this process. It is again today on publication. Yeah, the system's broken. We know it. Why is it broken?

4:26Because we haven't been given the money we need to invest in the infrastructure.

4:30Paul Kelso:What's coming out of my bank account every month then? That's your water bill. But to be fair, in real terms, your water bill actually hasn't moved much over the last 20 years. The political focus for more than a decade and off what's the regulators focus was on keeping consumer bills down. And they really didn't rise in real terms until quite recently through the cross living crisis. We never talked about water bills. Now they are going up because there is an acknowledgement that the price of keeping bills down was not investing in the future and sorting out this. I mean, we are not going to replace our Victorian system, but there are things you can do to mitigate.

5:09And that is now a public priority.

5:11Paul Kelso:But we have been here before. You and I have literally sat in this studio and talked about this topic. There is nothing in the recommendations that, frankly, I have not heard before. So why are we talking about this as if it's a massive moment, this great stink moment that Sir John Cunliffe was talking about? It is a reset. He's been given as much latitude as possible, Well, bar perhaps the most fundamental thing that many campaigners want, which is nationalisation, the Secretary of State, Steve Reid, ruled that out of the terms of reference. So John wasn't able to look at that. But within those boundaries, it's pretty radical.

5:43You know, getting rid of a regulator is dull stuff, but it's big and it's complicated and expensive. It can take years. And there is a danger. It looks like we've got the sins of the companies, as we might characterise them, on the one hand. And who's paying the price? Well, it's the sheriff. We've got the wrong sheriff. We need to change the regulator. You know, the big picture is here, the fundamental structure of a privatised water system. I think the only fully privatised top to bottom system in the world is going to remain.

6:15Paul Kelso:OK, so let's start with that, which you just mentioned, getting rid of the regulator, getting rid of off-what. And now we will have to wait, what, two, three, four years for another regulator to get settled? Possibly a couple of years. Off-what is the economic regulator of water companies in England and Wales. So the companies don't like OffWalk because it holds them to account. It says it restricts them too tightly on how they can raise money, says they can't get a big enough return. It won't let them invest the billions they want to invest. And that's in part because every billion that a water company invests, it makes a return on.

6:47Campaigners hate OffWalk because it says it's not holding them tightly enough to account. So it is loathed on all sides. They can only impose the regulations and rules they're given. and many of these things people have wanted to do of what simply doesn't have the power to do, but they're being swept away and what is going to replace them is the economic regulation, which of what did, it will continue to have. That's the bills that the companies can charge us and how much they can invest, but it will also take in the water-facing responsibilities of the Environment Agency, Natural England, and the drinking water inspector.

7:21And the fact there are four regulators there perhaps explains part of the problem, right?

7:25Paul Kelso:Okay, so what are they going to do about spiralling bills? Because bills are starting to shoot up in this particular area. Sir John told me today, asked him that question, he said people should expect them to go up because this investment required is massive. There's 100 odd billion in this cycle alone, plenty more to future proof us against climate change and population growth and to meet higher standards that we have. And someone's got to pay for it and it's going to come from customers. And one of the reasons is, as we said, it's a privatised system. And what does privatisation need? It needs private capital investors.

7:58And they are not going to put money in unless there's a return.

8:00Paul Kelso:We all have less money in our pockets these days. And for those at the bottom end, things are really difficult. Those sorts of rises in costs. Again, I mean, are they affordable? Was there nothing in today that targets those at the bottom end of a society? So John has recommended what's called in the jargon a national social tariff. What it means is cheaper rates for low-income households. At the moment, if you are a Yorkshire Water customer who is struggling, they might give you X off your bill. But if you're a Thames customer, it'll be Y. There's no uniform amount. I've picked those at random, so don't hold us to precise those.

8:39But the point is, he wants a national system that brings bills down.

8:43Paul Kelso:And of course, smart meters, we know that they are going to be playing a role in all of our provision of energy and energy supplies these days, similarly with water. Yeah, one of the practical implications of this report, he says, metering should be compulsory. It's about 60 % of households in England and Wales. Only 13 % of them are smart meters. And if you've got a smart meter, you will pay for what you use. So the report is out there now. People have had enough time to digest it. I mean, where are the campaign groups coming down? Positive, negative? Negative from the most vocal water quality campaign is people like River Action, Fergal Sharkey, who has been a huge force for driving the demands for change and getting this review off the ground.

9:26I mean, he wrote it off before he'd even read it, and he's written it off again today because...

9:29Paul Kelso:He's calling for the Environment Secretary's head. Yes, and because he disagrees with the fundamental premise. He thinks nationalisation is the answer. It should be in public ownership where the water industry was until 36 years ago. Why was it ruled out? Why did Steve Reid not allow, you know, Sir John Cunliffe, former deputy governor of the Bank of England, of all things, why wouldn't he let him look at it? Because it is seen as too expensive and too disruptive. There is a difference. We've seen rail companies coming back into national ownership. That's because the franchises are on contracts.

10:02The policy now, as they expire, they come back under public ownership. The issue with water is these licenses do not operate the same way. There are loads of different ownership structures. just since there are privately held investment groups that own other water companies. And if you're not going to buy them, you've got to seize them. And if you are seizing assets and you're a government in a country that wants to attract outside investment to help build the future, seizing assets is not a way to attract in private money.

10:32Paul Kelso:So 88 recommendations from this. How many of them has the government said that it's going to take forward? Have we heard from the government? We have heard that they are going to accept, they're going to not just accept, but fast track five of these. At the moment, I can only tell you one of them. Which is? The abolition of Ofwat, five to two. We wait to hear from the Environment Secretary who will set out further. Some bonuses have already been clawed back from company bosses. Not asking for sympathy, but they can say they have clawed back bonuses. and there aren't many industries where a government will take your money away once you've already been paid it and now we get this path to better regulation.

11:15And I think by having Sir John Cumberland, a man who ran the deputy governor of the Bank of England, and he referenced this, he was there in the financial crisis, he referenced several times the way in which financial regulation had to change and how there are lessons there for water. And the crucial thing here, this is a man who knows so much about financial engineering as he does, in fact, more than he does about the engineering of the water system because that's what this has become. This has become a game of high finance at one end of these water companies when what people really want to see is less unmentionables in the river.

11:46See, I don't know.

11:47Paul Kelso:Does that not sound like Paul Kelso staking his reputation on this being the moment that we actually see concrete changes to the water industry in England and Wales? Is that where you are? Well, we're definitely going to see change in the shape of the people who are responsible. but this is going to depend you know the the overarching the number one key point above is this industry needs clear consistent long-term strategic thinking and messaging from government and if at the first turn they get start to get nervous about bills going up and change the focus of off what you know and because cunliffe's key point here is if you have that stable position That's not only good for the people planning where we need a reservoir, where we need to ameliorate sewage outflows, but it's also good for investors.

12:36You can say, yeah, this looks like a place I can stick my money for 25 years because I'm a pension fund and I'm going to get a low risk, stable, low return that's fair to everyone. Now, wouldn't that be nice? Now, is it going to be delivered? Call me back in 25 years now.

12:52Paul Kelso:We'll see you then. Thanks, Paul. Well, let's keep the focus on the consumers and how their lot might, emphasis on might, improve as a result of these recommendations. Mike Keel is Chief Executive of the Consumer Council for Water. Mike, just explain what the council does. I mean, you were involved with this inquiry, weren't you? CCW stands for the Consumer Council for Water, and we are the statutory consumer body for water and sewage services across England and Wales. And what that means in practice is that we deal with the escalated complaints that can't get resolved between water companies and their customers.

13:28So when they reach an impasse, people come to us and then we help them get those complaints resolved. We do lots of research to understand what people think about the issues of the day. And that's really vital because that allows us to know where to look in terms of challenging companies and challenging regulators to change their policies to make things better for water consumers. We are on the side of the consumer. We have been engaged in talking to the Water Commission team. We put evidence to the commission in their call for evidence. And we've had discussions ongoing with the team that are doing the work at the Water Commission.

14:01So that's been our involvement in Sir John Cunliffe's report.

14:05Paul Kelso:OK, Mike. So in the view of the CCW then, how much of a step forward is what we've heard today? Well, today what you saw was an absolute mountain of recommendations. I mean, that's 465 pages of recommendations. And it is clear that there are big problems in the water sector and they need a lot of solutions and lots have been put forward. So there's a lot of reform, particularly to the regulators. You see there's a more local approach being taken with basically the reintroduction of regional water authorities that existed prior to privatisation. There are also some interesting recommendations about giving the new regulator powers to look at companies' finances beyond the regulated business.

14:47So this is where companies are holding companies and it all gets a bit murky about how those finances work. And I find that very interesting because that's one of the factors that really irritates customers, this kind of murkiness around company finances. There are a bunch of stuff that we put forward that we've actually seen coming through in the review. There's a recommendation to take forward the single social tariff. So that is a single low bill arrangement for people who are struggling with affordability issues. We're seeing better incentives being proposed on customer service. I mean, it's ridiculous that there is no financial incentive on reducing complaints.

15:21I mean, that doesn't make sense in an environment where complaints that we've been receiving have been going up. And then finally, there's a proposal to expand our remit to legally become the ombudsman for water. So there's lots to like about it, but the devil's in the detail.

15:36Paul Kelso:Where does it perhaps then fall down in your mind? Because as you rightly said, You know, these companies have not been performing well for a very long time. But the point I suppose I'm making is these companies could have performed better. They could have chosen to perform better and they did not. And whilst the ownership of these companies remains the same, I'm wondering how much will really change. At the moment, companies have been entrusted with more customers' money than ever before. We're seeing the highest bills than ever before. We need to not take our eye out of the ball to make sure that companies deliver on their promises.

16:08We can't afford to have a hesitation for a couple of years while these reforms are implemented. The other aspect as well is that companies could look at this and say, well, clearly the blame is being placed on regulators. Companies have had plenty of freedom and sometimes they've not exercised that freedom in clever ways at all. When you look at Thames Water, they chose to take on that debt. They chose to take a risky structure that is actually putting risk on customers and customer service.

16:39Paul Kelso:And now they're paying a price for that. But given the fact the government has already said that we are taking the summer to look at these recommendations and work out exactly what we are going to do. I mean, why should I have any confidence that in the gap between you and I talking right now and that regulator being set up, the water companies don't just continue to do exactly what they have done up until this point, pollute with impunity and continue to cream the profits off the top? Well, you're quite right. Why should you have confidence? Seeing is believing. I mean, in terms of if you need extra help, if you're a vulnerable customer, you might need some extra help.

17:11Or if you're struggling financially, you might need some extra help. So noticing a difference can come in all different shapes and sizes, or even a company just taking the time to explain to you where your money goes, how your money is being spent, what is being invested in your area. And also, you're seeing is believing when it comes to things like bonuses. You know, we saw last week stories about Southern Water's chief executive getting a£700 ,000 long-term incentive plan, which I know a lot of people quite rightly would question. And this morning I heard Sir John Cumliffe talking about this, that it makes customers angry when performance and reward, performance and pay don't seem to match up.

17:51And that needs to be sorted. And that's, I think, where companies really need to read the room, listen to what their customers are saying on this, and respond because there's another way you can build trust, sensible remuneration. Essentially, don't take the mickey out of your captured customers.