Water industry regulation overhaul recommended in Cunliffe review

Led by Sir Jon Cunliffe, former deputy governor of the Bank of England, the Commission was tasked by the UK and Welsh governments with making recommendations on how the water sector regulatory framework could deliver eight desired outcomes, from giving clear strategic direction to water companies and supporting their financial resilience, to helping attract investment into the industry, improving public trust in the regulatory regime and achieving better environmental, customer, economic and financial outcomes.

In total, the Commission has put forward 88 recommendations for reform further to its interim report published in June, including a complete overhaul of the current system of regulation. The government said it will fast track five of the recommendations, including establishing a “a new, single, powerful regulator” for water and wastewater in England. It said it will consult on further reforms stemming from the Commission’s report this autumn with a view to introducing a new Water Reform Bill into the UK parliament.

Gordon McCreath of Pinsent Masons, who specialises in water sector projects and regulation, said: “There is a great deal to welcome in the Commission’s report. For example: a new regulator with team members across all relevant sectors, not just the water industry; a planning process that reflects that cross-sector approach; emphasis on the importance of central government direction to regulators, including on priorities and trade-offs between environment and growth; and a recognition of the need for resourcing the new regulator with experts outside the public sector pay scale, across a balance of disciplines, including environment, engineering and finance.”

“As ever, as the Commission acknowledges, the difficult bit will be putting this into practice. Regional planning bodies in particular raise a lot of questions around governance, the need to minimise their politicisation and the potential for a new layer of planning to delay much-needed new infrastructure. Contrast that to the emphasis of the rest of the report on the need for planning and regulatory streamlining. The Commission proposes that these bodies can be established quickly, but it is difficult to think how they can be effective and the detail around their powers made clear without some form of statutory underpinning,” McCreath added.

“It is also fair to say that some of the proposals, while eminently sensible, look expensive and/or politically difficult, particularly around the call for transparency around the tasks ahead and the increased costs for everyone that will come with that. However, the fact is that is what is required. As the report acknowledges and as we have been arguing consistently, the main challenge for the government is to move the debate on, to ‘broaden the narrative’, ‘acknowledge the responsibility of other sectors [apart from water companies] for environmental outcomes’ and focus on delivering the new infrastructure solutions required,” he said.

In its final report, the Commission said a new “integrated regulator” for water and wastewater should be established in England, combining the functions of existing regulators Ofwat and the Drinking Water Inspectorate, as well as the water functions of the Environment Agency and Natural England. It said that under the current system of regulation, “no single body has a whole view of the state of infrastructure” and that this means there are “gaps in the oversight of asset health and monitoring water industry delivery”. It further noted that there is a perception from outside of the sector that the regulatory model is “lacking transparency and accountability”.

Under the new system of regulation it has proposed, the new regulator would have powers of inspection and audit, to impose price controls, and of enforcement, but it would be stripped of responsibility for water systems planning.

Instead, responsibility for planning would rest with eight regionalised planning bodies which would be responsible for “planning, funding, setting water body objectives, and monitoring delivery of plans”. A national body sitting within the Department for Environment, Food and Rural Affairs (Defra) would sit above the regional authorities to “ensure that regional plans add up to national targets, are of the appropriate standard, and are interoperable”.

“Moving forward, the systems planner should be in control of deciding, within the framework of national law and government strategy, where interventions are needed,” the Commission said.

“Systems planners would set objectives, and who should deliver them, by carrying out apportionment of those objectives to different sectors, in line with the national water strategy and the polluter pays principle. System planners would commission delivery bodies (such as water companies, catchment groups, local authorities and other actors) to develop and present options to meet those objectives, from which it would select the options which represent the best value for money, including wider benefits, to meet those objectives,” it added.

The wide-ranging report also contained a raft of recommendations in relation to water and wastewater infrastructure delivery, with the Commission acknowledging that there is a perception that projects are not delivered quickly enough.

Infrastructure and planning expert Robbie Owen of Pinsent Masons said: “The Commission’s recommendations in relation to infrastructure delivery are thoughtful and considered. They demonstrate a good understanding of many of the current issues with consenting the programme of water supply infrastructure projects known as SROs. This includes over reliance on section 35 directions, which should hopefully encourage government to look again at ‘nationally significant infrastructure projects’ (NSIP) thresholds following responses to its consultation on National Planning Policy Framework reforms last autumn.”

“It is noticeable that not only does the Commission rightly recommend a review and update of the wastewater national policy statement (NPS) but that the water resources infrastructure NPS, updated only earlier this month, should be further reviewed and updated. There is a definite emphasis on how strategically significant projects are better reflected in the NPSs in order to speed them up and the recommendation that ‘critical national priority’ status should be considered is very welcome,” Owen added.

One of the issues that contributes to slow delivery is that “water companies often do not have early sight of new planning applications for housing and other developments and are not currently statutory consultees for planning applications”, the Commission said. It has proposed that the role of water companies in the planning process in England “be strengthened to ensure they have sufficient sight and influence over upcoming developments”.

It said the government should also consider whether the rights of water companies in England to object to mains supply connection requests should also be strengthened, to address capacity constraints.

“Allowing companies to object based on insufficient capacity would ensure that the planning system was required to involve all parties at an earlier stage so that any required infrastructure can be planned and delivered in a timely way,” it said.

The Commission also recommended changes to the Regulators’ Alliance for Progressing Infrastructure Development (RAPID) regime, which is designed to help water companies obtain the necessary regulatory and planning approvals for new infrastructure projects. The Commission said, however, that the scope of RAPID should be expanded” to include wastewater projects and strategically important projects that do not meet current size and complexity thresholds across England and Wales” and that processes should be “streamlined” and made less duplicative so that they better align with the development consent order (DCO) regime applicable to large infrastructure projects.

Owen said: “The recommendation to expand the RAPID framework to increase its coverage and effectiveness but considered alongside the existing planning framework, particularly to align with key development consent order (DCO) stages and to avoid duplication with the DCO regime, is a welcome endorsement of what many water companies and others have been saying to RAPID and to the Planning Inspectorate over the last couple of years at least.”

The Commission also said that greater standardisation could be facilitated in relation to water infrastructure projects, to help water companies deliver projects more efficiently. In this regard, it said “core infrastructure elements such as pumping stations” could be standardised by design and that there could also be off-site manufacturing of such components to make it easier for them to be transported and deployed where needed.

The Commission further recommended that the government and the new National Infrastructure and Service Transformation Authority (NISTA) should also consider creating a sector-wide infrastructure delivery company to deliver programmes of large infrastructure projects in the water and wastewater sectors.

“This could be useful for complex projects that are infrequently delivered in a water company region – for example reservoirs or desalinisation plants – and would avoid the need for duplication of expertise between companies,” the Commission said. “It would also allow for shared information around lessons learnt, best practice and training needs.”

Owen said that the Commission’s recommendation that legal challenges against very large critical infrastructure projects should be minimised implies that the government should consider going beyond the limited judicial review reforms contained in the Planning and Infrastructure Bill.

Owen said: “What is notable in relation to the Commission’s infrastructure delivery recommendations, and indeed the final report as a whole, is the absence of any real consideration of – and any recommendations relating to – the role of Defra. This seems like a major omission.”

“The other tension perhaps is how the recommendations in relation to infrastructure delivery sit with the potentially delaying effect of the Commission’s recommendations for improved water systems planning and a new regional planning process, and how the latter will connect to and facilitate rather than hinder infrastructure project consenting and delivery,” he added.