Penrose Report recommendations: where next for the water sector?

The Penrose Report recommends sweeping deregulatory changes. This article discusses how these might impact the water and wastewater sectors

23 February 2021

The Penrose Report 'Power to the People: Stronger Consumer Choice and Competition So Markets Work For People, Not The Other Way Around' recommends substantial changes to the ongoing regulation of the water and wastewater sectors which, if taken forward, will significantly push forward the pro-markets and competition agenda already being pursued by Ofwat.

The Report recognises that at the heart of economically regulated sectors in the UK is a network monopoly. This means that regulators need upfront powers to protect consumers and given that the regulated sectors make up over 13 per cent of private sector investment, these sectors really matter for post-Brexit (and post-COVID) economic success.

The Report recognises that some regulators have made progress towards increasing competition. While the water and wastewater sectors do not get much of a call out in the Report, clearly Ofwat has been pushing this agenda for some time. The opening of business retail to competition, developer services markets, the separation of price controls (with particular effect in bioresources markets), the introduction of Direct Procurement for Customers ('DPC') and, of course, Ofwat’s ‘Review of incumbent company support for effective markets’ that seeks to push regulated water companies to show where and how they are actively supporting markets all demonstrate Ofwat’s commitment to this agenda.

In addition to these actions already taken by Ofwat the Report provides the following further recommendations:

  • requiring Ofwat to publish and execute a multi-year project plan, to turn as much of their sector into a ‘normal’ pro-consumer, high-standards competitive market as possible, including a multi-year plan to formally hand over more to the Competition and Markets Authority (CMA). This would leave Ofwat with progressively less to regulate and would enable it to focus solely on the network monopoly elements of the sector
  • Ofwat to be subject to the newly-strengthened Brexit Dividend better regulation target (i.e. one-in-two-out for any new regulation)
  • To amend Ofwat’s duties to ensure a strong, clear ‘competition for the benefit of consumers first, regulation only as a last resort’ primary legal duty (which would significantly strengthen Ofwat’s current ‘consumer objective’ primary statutory duty).

Alongside these primary recommendations, the Report recommends:

  • independent auctioning of contracts to build and upgrade network monopoly infrastructure. This seems to take the DPC concept and significantly extend it. It will involve some radical rethinking of network development and possibly asset management more generally
  • Ofwat should have a duty to erode the power and strength of their network monopolies by making pro-competitive interventions, for example by encouraging more data sharing or reducing barriers to new entrants wherever it is possible and proportionate to do so (as it has already taken steps towards, for example in relation to water resources markets and bioresources). Depending on how this is implemented, it could come into conflict with the duty to ensure that companies can finance their functions and with other aspects of the consumer objective such as ensuring low prices by being able to secure low cost capital funding by introducing more market risk.

Finally, it is proposed that Ofwat:

  • will be required to publish annual workload figures and, where network economic regulation forms less than half of its activity ,it will need to consider whether its regulatory duties should be transferred to the CMA’s new Network and Data Monopolies Unit
  • regulatory powers should be updated to allow for partial transfers of powers (and scope) to the CMA as each step of sector ‘normalisation’ plans unfold over time
  • any consumer groups with ‘supercomplaint’ powers in the sector should be able to trigger a request to Ministers to transfer the economic regulatory duties to the CMA. Half the regulated firms in the sector (by revenue) should similarly be able to band together to make such a request to Ministers.

These reforms, if put into action, will see Ofwat (and the other sector regulators) come under increasing pressure to justify their positions and to substantially push a competition and markets agenda and approach to problem solving in the water and wastewater sectors. 

We have been closely involved in work relating to water sector policy for some years including the reforms in the Water Act 2014 and more recent reforms related to PR19. This means that we have a deep understanding of how these changes would, if brought into maximum effect, have a considerable impact on the water and wastewater sectors.

If you would like to discuss any of the issues raised in this note, please do get in touch with Noel Beale or your usual Burges Salmon LLP contact.

Key contact

Noel Beale

Noel Beale Director, Competition – Regulation

  • Competition
  • Transport
  • Water

Subscribe to news and insight

Burges Salmon careers

We work hard to make sure Burges Salmon is a great place to work.
Find out more