Leading article: Private water companies must do more to deliver

The privatisation of utilities proceeded from the principle that market competition would offer an improvement on state monopoly. It would help keep prices down and encourage better service – at least, this is how it was sold to consumers. For governments the expectation was that commercial companies would, by their very nature, run leaner, more efficient operations and so be able to invest more to update old infrastructure.

In many respects, privatisation has succeeded, with the telecommunications sector leading the way. When British Telecom was lambasted earlier this week for being the worst home phone supplier, this was not the national disaster it might have been when it held the monopoly. Those who judge BT's service inadequate have little difficulty finding a replacement – and the competition gives BT an incentive to improve.

Compared with telecoms, the privatisation of the energy utilities has produced more mixed results. Recent price rises for oil and gas on the international market have precipitated sharp rises in the price of domestic energy; the benefits of "switching" have been mitigated, and the hassle factor has also to be considered. On balance, though, we must also consider how prices might have risen, had the sector not been deregulated – and whether the level of investment would have been anything like the same.

Were a vote held for least popular utility privatisation, however, the winner would surely be water. This is partly because a clean water supply is widely seen as a natural right, so sharp price rises naturally raise customers' hackles. It may also be because the competition element is limited to tendering for the contract. Customers cannot pick and choose their supplier. The only way to reduce the bill is to have a meter fitted and economise – but this will reduce costs only for lighter users. And while good husbandry of water, as an increasingly precious resource, is to be encouraged, the steepness of recent price rises, combined with poor service, has produced many unhappy customers.

Without the chance to "switch", their only recourse is to the regulator. Severn Trent is the latest water company found to have fallen disgracefully short of the standard required. Ofwat proposed yesterday to fine it almost £36m – around 3 per cent of turnover – not only for poor customer service, but for deliberately providing false information, which allowed it to raise prices unjustifiably. The company also faces further fines in the criminal courts. So far, Severn Trent has responded with an offer to reduce bills by £2.40 per home for the next two years – a concession customers could be forgiven for finding inadequate. It is also pleading that its current management had nothing to do with the misrepresentation, for which previous – ousted – managers were responsible. Swingeing though the company may feel the financial penalties are – especially if they are augmented by fines in the criminal court – it is hard not to believe that even tougher measures are needed when a company deliberately misleads in this way. For the customer – who has no choice of supplier – it is immaterial who was in charge at the time.

Ofwat has generally shown itself a doughty regulator. In February it imposed a similarly large fine on Southern Water for distorting its true performance, and last year it fined Thames Water £12m for "inadequate" reporting and poor service, while stipulating that it had to comply with requirements on leakages. Yet if three major water companies have been caught massaging their figures and failing to meet service standards in less than a year, more exacting oversight is surely required – at the time, not just after the fact.

(The Independent, 09/04/2008)