Reforming the water sector

Different models of ownership could offer a better culture of responsible leadership, which is key to a thriving water sector. A variety of corporate ownership options should be on the table for the water sector. As well as the publicly and privately owned businesses, options include not-for-profit enterprises, Community Interest Companies (or similar), cooperatives and hybrid approaches. Regardless of the approach taken, other factors may also need to be considered, such as powers to vet potential owners of businesses, a power that Ofwat does not currently have. (Conclusion, Paragraph 7)

We urge the Independent Water Commission to analyse all potential water company ownership models to determine which models are most likely to lead to a thriving and responsible culture. The Commission should then outline the steps needed to encourage those models of ownership. It is not enough to simply look at the type of organisation and their performance: this analysis much consider the context in which they are operating, such as the effectiveness of the regulatory system. The Commission should consider the extent to which different models, within the appropriate regulatory setup, contain the right incentives to encourage the right behaviours, including sustainable and affordable investment. The Commission should also determine how regulators can better vet or veto potential owners of water companies to prevent bad actors from running critical national infrastructure. (Recommendation, Paragraph 8)

Given the wide array of performance issues across the sector, more responsible leadership is clearly needed for better stewardship of our natural water resources. Incremental steps have been taken to improve governance, increase consumer representation and influence bonus cultures in order to improve decision-making, but we are not satisfied that these measures are enough to change the overall culture of water companies and improve performance for customers. (Conclusion, Paragraph 12) 46

The Independent Water Commission should consider what other reforms are necessary to ensure that the right people are put into senior positions and the appropriate bonuses are paid to them. This should include greater oversight or approval from Ofwat before appointments are made and bonuses are paid; clearer statutory expectations on the criteria for bonuses, making sure that they are awarded only for exceptional performance; clearer reporting to show how the needs of the environment and customers have been prioritised; better connections between bonuses and the incentives under the regulatory system; and greater customer involvement in establishing what an appropriate bonus scheme looks like. (Recommendation, Paragraph 13)

Trust and accountability in the water sector is very low and water companies must improve transparency through open data and more collaboration with consumers. (Conclusion, Paragraph 16)

The Independent Water Commission should consider how the link between water companies, communities and citizen scientists could be strengthened and formalised to provide a broader picture of water quality in local regions. These proposals should consider how water companies can be democratised and made as open as possible, with a legal requirement for water companies to publish performance, environmental and financial data on a sufficiently regular basis to be of use to the public. (Recommendation, Paragraph 17) Financial management

Complex financial structures are not necessarily a problem, but they can obscure water company finances, enable bad practices, undermine transparency and worsen the public perception of water companies. Water companies increasingly look like financial institutions rather than businesses servicing monopolised critical infrastructure. These structures have undoubtedly been used, in some circumstances, to increase debt, given they are outside the investigatory remit of the regulator. Simplification and greater oversight are needed to ensure that these entities are used appropriately. (Conclusion, Paragraph 20)

The Independent Water Commission should determine how regulators can have better oversight over debt levels in regulated entities and other connected companies. Its proposals should actively require companies to simplify structures to allow for greater regulation and oversight of any company’s true financial situation. (Recommendation, Paragraph 21)

There has been serious economic mismanagement of companies, leading to unsustainable levels of debt and a high price for consumers. This situation must be resolved and a culture of relying on debt must never be allowed to 47 arise again. Since investment levels and revenues in the sector have clearly not been high enough, debt is likely going towards day-to-day expenditure as well as capital costs, which would be an irresponsible approach. A new understanding is needed about how bill revenues and debt are used. Companies and shareholders have demonstrated that stronger guardrails are needed to prevent the ratcheting up of debt to the point of financial instability while dividends continue to be paid. (Conclusion, Paragraph 25)

The Independent Water Commission should determine new measures to regulate the accumulation and management of debt in the water sector. These measures should allow the economic regulator to intervene when irresponsible debt management is taking place. Any new powers should be tempered by a realistic and consistent understanding of what sustainable debt levels look like. The Commission’s work should help government, water companies and citizens come to an understanding about the most appropriate uses of debt, such as primarily for major new projects, infrastructure and upgrades that could cause surges to customer bills. (Recommendation, Paragraph 26)

There clearly have been examples of excessive dividends, particularly when poor performance or finances are taken into account, symptomatic of a culture of prioritising profit over duties to regulators and customers. However, dividends for other companies have been in line with regulatory expectations. Dividends are controversial, particularly when total shareholder returns and debt are taken into account. Part of the problem is the lack of clarity about whether dividends have truly been value for money, particularly since they eventually take more money out of a system than they put in. A system based more on higher bills and limited debt may be better. It is also not clear whether Ofwat’s historic expected dividend returns have been set at a sustainable level, although many investors now think they are too low. We must ensure that sufficient safeguards are in place to prevent egregious dividend payments, ensure that services for customers and the environment take priority and to properly link dividend levels to company performance. At the same time, investors need to see stable but modest long-term returns. (Conclusion, Paragraph 31)

The Independent Water Commission must determine whether equity investment has been value for money for customers. If it is advisable to continue with a totally privatised model, the Commission needs to create a comprehensive but stable regulatory environment for water companies and their investors to ensure that the sector is low risk and low reward. As part of its work looking at narrowing the variability of returns, the Commission should investigate whether there should be a clearer ‘floor’ and ‘ceiling’ for dividends to provide reassurance to all sides, one that takes into account all returns that investors receive. Between these thresholds, that regulatory system should encourage higher dividends for better performance, and 48 lower returns for poor performance. To ensure that customer service and environmental outcomes are prioritised, dividends should potentially be blocked entirely where companies have failed to deliver projects required by regulators and where there have serious infringements of licences, permits and performance targets, such as serious pollution events. To ensure that this works as intended, and to prevent the risk of unjustified dividends leaving a company, pre-approval for dividends by the regulator might be necessary. (Recommendation, Paragraph 32)

Special administration should be a last resort. However, it is unclear whether allowing a failing company to struggle on and accumulate progressively more debt is a better outcome than assuming temporary national control more quickly, with the associated costs that it could incur. (Conclusion, Paragraph 35)

The Independent Water Commission must provide recommendations on improving the special administration regime which, while it should still be a last resort, must ensure that the criteria for its deployment are sufficient for ensuring value for money for customers. (Recommendation, Paragraph 36) The price review process

Customers should be protected from paying more than is necessary for maintaining national water infrastructure, and the price review is an important part of doing this. Some evidence suggests that previous determinations have not been sufficient, at least for some companies, to keep up maintenance and stakeholders have suggested a number of reasonable ways to improve the system, such as better ways of calculating expenditure allowances and developing a system that allows determinations to be challenged. However the price review is unlikely to be the sole, or maybe even the main culprit for low overall levels of investment: an irresponsible culture has developed amongst all actors to keep bills low, and customers and the environment are now paying the price. Bills will need to rise, which will be challenging when trust is dropping; government, regulators and water companies will need to ensure that this results in a better deal for consumers. (Conclusion, Paragraph 41)

The Independent Water Commission must ensure that water bills and spending allowances are sustainable and appropriate for maintaining assets and delivering services. If the price review process is retained, the Commission must begin the process of reforming it to ensure that allowances are calculated fairly and openly, and to ensure the process does not impede reasonable challenges. The process should ensure that bill revenues are not lowered in real terms, unless under extreme circumstances. If done in conjunction with reform to the regulation of debt 49 and dividends, ensuring that more revenues can be invested into the sector, it may be possible to make the case for higher bills in return for better performance. More broadly, the Commission needs to get to the bottom of why a culture of unsustainably low bills was accepted by companies, regulators and government, and set out the reforms or principles needed to ensure that this does not happen again. The Commission will likely need to consider all the core planning processes that identify investment and make sure these are fit for purpose. (Recommendation, Paragraph 42)

The incentives that Ofwat puts in place for companies are too complicated, fail to match public expectations, and in many cases are not bringing about a culture of improvement. Despite public consultation, there are too many to provide a clear picture of company performance. There is scope for simplification and, given that the Government is in the process of reviewing national targets for water, there is an opportunity for better alignment and prioritisation. Simplification could clarify company performance and help rebuild trust, as would reconnecting public expectations and rewards achieved. Penalties are important but they also have the potential to create a negative feedback loop, encouraging further failure. These penalties should not be to the detriment of investment. (Conclusion, Paragraph 47)

The Independent Water Commission’s proposals should ensure that the price review system is reshaped so that its system of incentives creates a culture of improvement. The price review should contain a comprehensive but straightforward set of performance metrics that matches public expectations and national targets for water. Targets should be stretching but realistic and never set basic expectations. Incentives to meet these targets should reward consistent improvement that is demonstrably attributable to the work of the company and only penalise regressions. (Recommendation, Paragraph 48) Regulatory environment

Environmental regulation and the delivery of a reliable and safe water must be the first priorities of water companies and regulators. Effective regulation, strongly prioritised towards environmental and customer targets, is needed to make these a core part of the culture amongst water companies; it will also need to cover all actors that have the potential to harm water resources. It is important for regulations to be comprehensive and predictable to close any gaps that can allow pollution, and to ensure a stable investing environment. This should not just be about protection, but also about encouraging water companies, as major landowners, to actively improve the environment. (Conclusion, Paragraph 52) 50

The Independent Water Commission should look at potential reforms of the regulatory frameworks and regulators that govern the water sector to ensure that environmental protection is effective and a priority for water companies. It is vital that the reforms the Commission proposes can accommodate and synchronise with wider reforms, such as those that aim to tackle all water pollution from a variety of sectors and products, and new targets for water quality under a new Environmental Improvement Plan. These reforms should also ensure that water companies are encouraged to invest in nature-based solutions that can provide a suite of co-benefits for the public. (Recommendation, Paragraph 53)

We support the Commission’s focus on creating a better regulatory framework, however a good framework is nothing without well-equipped regulators to act against bad actors and poor behaviours. Without clearer information and standards, it is difficult to have faith that monitoring and enforcement levels are sufficient, and we wonder if this has been a more pertinent problem than the frameworks themselves. The length of investigations and the sudden rise in inspections following injections of funding suggest that regulators have been underfunded in recent years and less able to monitor and catch problems, or enforce the rules sufficiently. Welcome efforts are being made to increase monitoring and inspections. We also believe that there is likely an imbalance between the data held by water companies and that held by regulators: a culture of openness is needed to ensure accountability. (Conclusion, Paragraph 58)

The Independent Water Commission should assess how effectively the regulators audit companies, monitor the water environment, and enforce breaches of licences and permits. It should consider whether regulators are leveraging enough fees from the sector to ensure robust, fair and quick monitoring and enforcement of environmental protections. To bring about greater trust in the regulatory system, the Commission should consider whether public standards for monitoring are needed, including a full understanding of asset conditions, a clear and agreed set of performance metrics, and an agreed rate of inspections. As part of this, the Commission’s proposals should ensure that data on water is as open as possible, with regulators gaining automatic access to data held by water companies that is core to their regulatory functions. The Commission should consider whether more investigations should be made into category 3 and 4 pollution incidents. An evaluation of the “self-reporting” system is needed, which may need to be significantly overhauled or replaced to rebuild trust. (Recommendation, Paragraph 59)

The current regulatory system does not encourage long-term thinking, as already acknowledged by the Commission. This affects both short-term resilience against asset failures and long-term water security. Improved finances may help, but part of the problem is, like in many other sectors, a 51 lack of coherent resilience standards for key aspects such as water supplies and asset health. Consideration of asset replacement rates is a start, but to focus solely on this would be a mistake: a much broader understanding of what resilience looks like is needed. (Conclusion, Paragraph 65)

The Independent Water Commission should determine how the price review and regulatory systems can encourage better resilience, both to protect customers from short-term shocks and ensure that water resources are safeguarded in the future. This should begin a process of creating a robust set of resilience standards for the industry, firmly embedded within the price review process or other central regulatory tools. (Recommendation, Paragraph 66) Relationship with consumers

Evidence suggests that some water companies are not sufficiently protecting or compensating their consumers before, during or after high impact incidents such as supply interruptions and sewer flooding. Regulatory steps are being taken to address most of these concerns, although it remains to be seen if these new measures will be effective. (Conclusion, Paragraph 71)

The Independent Water Commission should assess whether Ofwat’s new customer-focussed licence condition, and the new Guaranteed Standards of Service, are sufficient to improve protective services for consumers during and after high-impact events. The Commission and Defra must address the issues of local coordination with other key bodies and communication with consumers. The Commission should also consider whether statutory standards should be set to create a customer-first culture amongst water companies. These standards could explain how to handle serious incidents—for instance, clarifying how and where water bottles should be supplied, how emergency sanitation should be accessed and how local emergency plans should be developed—and how to ensure that customers are aware of their rights. (Recommendation, Paragraph 72)

The Government has not yet set out a timetable for developing a single and comprehensive social tariff to prevent protect low-income households from bill increases, despite the widespread view that it will be necessary in the context of much higher bills. This is a necessary step that allows the regulatory system to significantly increase investment, while shielding the most vulnerable. Despite record numbers of people being offered financial support, we are also not clear what progress is being made towards sector targets to eradicate water poverty. (Conclusion, Paragraph 74) 52

The Independent Water Commission’s proposals should contain provisions for establishing a single social tariff, or other protections for low-income households, to protect customers from the worst impacts of anticipated bill increases. The Commission’s proposals should also establish how effectively water poverty is being tackled and whether more effective tools are needed to monitor progress. (Recommendation, Paragraph 75) 53

Select committees do not often focus directly on the leadership, behaviour and performance of individual private companies. The water sector, however, is a highly regulated monopoly provider of services essential to public health. Residents have no choice over their water provider yet rely on them entirely for their lives and livelihoods and have little power to hold their leaders to account in cases of failure. Throughout the course of our inquiry into ‘Reforming the water sector’, we have already deemed it necessary to scrutinise the most significant water companies in England and Wales to hold them to account. To report specifically on South East Water, however, indicates the gravity of the situation facing the residents and businesses in the communities it serves. Given the extremely negative and dangerous impact that SEW has had on over 300,000 people since 2020, we feel compelled to apply public accountability to the leadership of a company that otherwise appears shielded from the consequences of its incompetence. (Conclusion, Paragraph 9) Failures at South East Water

South East Water did not have the right processes in place to identify and mitigate risks at Pembury Works, despite previous warnings from the DWI. That the company had “normalised” critical risks and was “flying blind” in the lead up to the crisis is a fundamental failure for a water company responsible for a critical natural resource. In a perverse sense, Mr Hinton was right in saying that the events were “unforeseeable”; but only because the company had actively chosen to not put in the essential monitoring processes that would have enabled action before the outages began. As a result, the company failed to properly monitor threats such as ineffective coagulant dosing systems. A failure to have the right jar test processes meant that manageable problems escalated unnecessarily, undermining routine coagulant treatments, eventually and unnecessarily turning off the taps for businesses, essential services and tens of thousands of customers. (Conclusion, Paragraph 16) 39

Maintenance issues at Pembury contributed to the Tunbridge Wells incident in 2025, but it is South East Water’s self-identified lack of proactive and “instinctive” maintenance across its network that is most concerning. One of the most fundamental and basic responsibilities of a water company is to plan for and have the staff and resources available to maintain assets. Yet SEW did not see this a priority, even in some of its most vulnerable areas, contributing to a series of major water outages between 2020 and 2023. (Conclusion, Paragraph 20)

As regulators told South East Water repeatedly and jointly for over four years, the company needed to invest in new infrastructure to be properly resilient to potential shocks. In particular, single points of failure, supply shortfalls and regional connectivity should have been improved, but the company failed to take action on these well-known long-standing issues for many years. Spending allowances in previous price reviews may have made trade-off decisions more challenging, but ultimately, these decisions are primarily the responsibility of the company, which should have seen the role that poor infrastructure played in events since at least 2018. Worse still, through successive price reviews, SEW has either not attempted or did not succeed in making the necessary investment case. This also suggests that, as the long-term stewards of the business, shareholders also must share a portion of the responsibility for these failures. (Conclusion, Paragraph 25)

Despite South East Water’s assertions to the contrary, periods of peak demand and extreme weather can and should be broadly predicted and prepared for. Ofwat and the Drinking Water Inspectorate have shown that the company failed to model upcoming peaks and troughs and take the necessary steps in preceding weeks and months to boost resilience and reduce the risk of a crisis. Its leadership’s approach to incident response planning is pitiful; there are signs that incident response plans either do not exist or are of poor quality, receiving little or no stress-testing to improve them. The recent experience of its customers, as well as an overreliance on external support, are testament to this lack of planning. This has had real-world consequences for tens of thousands of customers, many of them vulnerable. (Conclusion, Paragraph 30)

Both the Drinking Water Inspectorate and South East Water acknowledge the weaknesses of the escalation processes around the Pembury incident. This meant that operational staff were not given sufficient support to diagnose problems early and that key stakeholders were informed too late, inhibiting preparations and in breach of regulations. We are concerned that the CEO was too involved at the Pembury Works, a potential distraction from his overall crisis command. Either this is a further problem with escalation processes, or a choice by Mr Hinton to go against his company’s own procedures. In either scenario, SEW appears unable to determine when and where its leadership team can provide maximum value. In the case of 40 Tunbridge Wells, this ultimately impaired the CEO’s ability to communicate to customers and may have played a role in the poor crisis response. (Conclusion, Paragraph 35)

Given the huge number of supply interruptions that South East Water has failed to manage over the years, it is remarkable that the company still struggles with the supply of bottled water during outages, has failed to learn and apply lessons and relies on the goodwill of communities. Problems discussed elsewhere in this report could arguably take significant time and resources to resolve, but knowing where to set up bottled water stations and having enough bottles to go around is a fundamental and basic responsibility. That the company is only now considering more local ways of delivering water bottles speaks to its disregard for the consumers relying on it for a life-sustaining provision. (Conclusion, Paragraph 41)

Similarly to the provision of alternative water supplies, South East Water now has years of experience in communicating during supply interruptions. It is incomprehensible that SEW still lacks a crisis communications strategy or a well-developed communications team given the company’s propensity for water outages. This put communication teams in a difficult position. Basic communications errors, like giving incorrect and inconsistent information about bottled water stations, using the wrong postcodes, poorly chosen language and a lack of empathy with customers, should not need external consultants to resolve. Vague answers to our questions to the company have not outlined what will happen to embed lessons, prevent future disconnections with operations, and ensure that a new communications “playbook” will be kept up to date and stress-tested. This does not give us confidence in the leadership’s ability to learn from its previous mistakes and address the problems we have identified. (Conclusion, Paragraph 46)

For a company with such regular issues with outages, South East Water’s approach to supporting vulnerable customers gives the impression of a business caught completely by surprise. We accept that it is challenging to continuously update the Priority Services Register: people will not always inform you of vulnerabilities, transient or permanent. However, the fact that there were fundamental problems with deliveries for those that were on the PSR is indicative of a problematic approach, one that fails to record and consider the needs of customers. Moreover, vulnerable sites such as care homes were also let down, which should have been easily identifiable, had proper business continuity plans been in place. Again, the specific needs of these sites should not have been a surprise: the company’s history of outages should have given it a wealth of experience in where needs are greatest. (Conclusion, Paragraph 51) 41 A culture of failure

The Tunbridge Wells incident and Ofwat investigations reveal that South East Water’s leadership has repeatedly proved itself incapable of implementing the lessons learnt from previous incidents, even simple ones such as having a communication strategy for when resolution timeframes are unclear. While the company was clearly trying to learn from its previous mistakes, it caused more problems in doing so, indicative of an inability to understand and resolve core problems. This is not through lack of warnings or proposed solutions, but an inability to adapt swiftly to mitigate future risks. Despite claims that they are otherwise a “good company”, this has manifested in a shocking performance, failing to deliver the basic function of a water company: delivering water. No other metrics of success can offset this fundamental shortcoming. (Conclusion, Paragraph 56)

Since at least 2020, South East Water clearly has had, and continues to demonstrate, an inability to establish the root causes of its supply resilience problems. There are likely many facets to this, including a failure to monitor the key asset indicators, and a tendency to blame external factors, as highlighted elsewhere in this report. The company leadership seems to be divorced from the real-world situations, either due to a lack of feedback data and processes, or a willingness to ignore problems. There also appears to be a fundamental inability to properly analyse the data it does have, most recently demonstrated by its first misleading analysis of the Tunbridge Wells outages in November-December 2025. This misunderstanding appears to have happened throughout the organisation, including at the very top. While the company now does accept it has a problem with its problem- solving processes, vague conclusions after the event also suggest that the current leadership have still failed to conduct and accept a proper analysis. (Conclusion, Paragraph 63)

South East Water’s leadership team has demonstrated a clear preference for blaming factors outside of their control for performance issues, and in some cases, they continue to do so, despite clear evidence to the contrary. A lack of data-analysis skills might be partially to blame, but it is also clear that a culture of obfuscating responsibility has also taken hold, seriously inhibiting their ability to analyse problems and learn lessons. The company’s investigations, as well as that of the Drinking Water Inspectorate, have identified potential issues with a lack of challenge or groupthink within the company: that “family feel” may be closer to a “clique” than a benefit. We have serious doubts that the addition of two more executives will tackle this pervasive problem. (Conclusion, Paragraph 68)

South East Water has failed to engage with key stakeholders outside the company to help it learn from its mistakes. It is unwilling to properly listen to its customers, who have repeatedly complained of addressable failures 42 and yet continue to suffer them. The company’s leadership has taken a defensive approach with regulators to the point of trying to obstruct their reports and in so doing mislead credit agencies, demonstrating at best a lack of transparency, and at worst an attempt to actively deceive external stakeholders. This is yet another cultural problem that must be addressed to allow South East Water to account for its own actions. (Conclusion, Paragraph 72) Conclusions and next steps

Continued leadership failure is grounds for leadership change. Time and again, since 2020, South East Water’s leadership has failed in its fundamental task of supplying water to its customers. That is around six years of poor performance, sometimes with multiple incidents within the same year. Most problematic from a leadership perspective are the failures identified in the company’s monitoring and managing of risks and the incident response. These are largely procedural matters, entirely within the company’s control and have hardly improved from incident to incident. There are some signals that action is now being taken, but it is too little, too late. Even as of April 2026, that same leadership continues to cite mitigating factors that should have been known and properly prepared for. This is the same leadership that failed to give an accurate account of the Pembury incident to our Committee in January, an issue that we will continue to deliberate on. (Conclusion, Paragraph 76)

These failures are symptomatic of significant cultural problems that cannot be readily explained by issues with the wider regulatory framework: this includes South East Water’s failure to engage with external stakeholders, inclination for groupthink, inability to analyse problems, incapability to implement basic changes and a propensity to shirk responsibility. This culture, which permeates through all the company’s key decision- making processes, needs to change, and culture starts from the top. As such, we have no confidence that the executive team at South East Water is capable of this challenge, nor any confidence in the team itself. (Conclusion, Paragraph 77)

Repeating the same actions and expecting different results is not a well- regarded tactic for resolving problems. Yet the non-executives of South East Water have time and time again chosen to back a leadership that is clearly not capable of improving outcomes for customers. Their only response to the Tunbridge Wells incident is to author an unhelpful report and appoint more people to the SEW Executive to provide the constructive challenge that they themselves should be providing. On top of this, they were also the decision-maker behind an attempted and unjustifiable injunction which, we believe, is the worst example of the company’s defensive, 43 antagonistic and deceptive attitude towards external stakeholders. The only possible conclusion to draw from this evidence is that the SEW Board, potentially influenced by the “family feel” that they identify alongside the executive, is incapable of holding the executive team to account. As those ultimately represented by the Board, shareholders also must demonstrate a willingness to restore resilience and trust. A new leadership team, more investment and special measures will be necessary to affect meaningful change. (Conclusion, Paragraph 81) 44

Many water companies are struggling to turn around their performance without stronger intervention. Thames Water has demonstrated that Ofwat’s turnaround regime is imposed too late and has limited capacity to tackle vicious cycles of penalty and failure. The IWC’s report contains useful recommendations to facilitate the turnaround of companies, including a supervisory regulator that would intervene sooner, alongside a stronger Turnaround Oversight Regime that would review allowances and give the regulator powers of direction over company owners. These proposals may be controversial for shareholders but are broadly palatable to the public if a privatised sector is going to deliver for customers and the environment. The IWC’s proposal to include regulatory forbearance in turnaround regimes is, however, objectionable. It would be loathed by campaign groups and customers, would be unfair to other companies that abide by the rules and is contrary to the ‘polluter pays’ principle. A well-regulated system would never need such a measure. (Conclusion, Paragraph 16)

Given the longstanding and compounding issues that some water companies are facing in the sector, a future supervisory water regulator must have the powers to intervene sooner when companies are beginning to demonstrate a lack of financial resilience or persistent performance issues that are not improving rapidly enough. The suggestion of an improved turnaround regime that can be implemented quickly and resolve fundamental funding concerns is welcome. It must not, however, exempt companies from environmental and customer protections. Instead, the new regulatory system must intervene far sooner to avoid companies beginning a vicious cycle of penalties and chronic underperformance. (Recommendation, Paragraph 17) 20 Insolvency, Special Administration and the future of Thames Water

Ultimate Controller undertakings protect regulated entities from poor or unscrupulous behaviour by the company owners, usually shareholders. This will likely underpin any future powers to block ownership transfers if the government accepts this IWC proposal. However, when a company is at risk of insolvency, creditors—who are not subject to the same due diligence checks as shareholders—may suddenly find themselves in a position of significant control, as is now the case with Thames Water. Yet Ofwat’s interpretation of the Ultimate Controller has left Thames Water’s economic owners free from these undertakings because its shareholders have “abandoned” the company. This is a highly undesirable situation for a regulated water company and a critical resource. (Conclusion, Paragraph 22)

Those who are truly in control of a water company should be subject to appropriate checks and oversight. Future regulation must recognise the control that creditors can exert over a company facing insolvency and ensure that Ultimate Controller safeguards apply to them when they become, or are likely to become, economic owners in practice. Regulators or the company should be required to carry out appropriate due diligence checks on the suitability of all prospective owners and controllers of water companies, whether they are shareholders or creditors, to inform any future powers to block changes in control. (Recommendation, Paragraph 23)

We have serious concerns about the suitability of the London & Valley Water (L&VW) consortium as owners of a critical resource and about the conduct of the negotiation process. Their lack of transparency and the group’s insistence on the suspension of regulatory requirements raises concerns that they may not be the low-risk, low-return investors required. To delay a Special Administration Regime (SAR), these same creditors have offered high-interest loans to the very company they intend to purchase. Aside from the ethics of the loans themselves, we have no confidence that a satisfactory deal can be reached, in part due to their unchecked influence over the bidding process. (Conclusion, Paragraph 27)

Thames Water is at the end of the road. The company’s performance and the behaviour of its creditors are unacceptable. Their investment strategies are based on extracting value through debt rather than ensuring long-term success. Any forbearance on their duties to customers or the environment would set a dangerous precedent for rewarding failure: if this must feature in any ownership bid under current circumstances, then the circumstances must change. (Conclusion, Paragraph 28) 21

We recommend that the government reject the proposals from the London & Valley Water consortium and explore all potential alternative options, including the Special Administration Regime or fresh legislation, to draw a line under this debacle and restore stability to the sector by putting Thames Water on a sound footing for new owners. The government should use all powers at its disposal to ensure that, in the long run, water company pensions and taxpayers’ money are protected. If emergency legislation is required for Thames Water, it should be limited in scope so this does not become a precedent for widescale government intervention. (Recommendation, Paragraph 29)

It is important that the Special Administration Regime (SAR)—and the potential loss to investors that it entails—is a credible threat on both performance and insolvency grounds to encourage sustainable company management and provide companies and investors with clarity and certainty. However, performance grounds are so vague that insolvency appears to be the only credible avenue for triggering a SAR. This allows highly distressed companies to operate in unacceptable conditions, with atrocious outcomes for customers, the environment, and the stability of the wider industry. Although automatic triggers under performance grounds might be excessive, clearer thresholds and processes are needed, particularly given the clear fundamental failures at Thames Water. Furthermore, even the insolvency grounds for starting a SAR were not designed to prevent the drawn-out process we have seen with Thames Water, and this also must change. (Conclusion, Paragraph 39)

To ensure that the Special Administration Regime is a credible threat, the grounds on which it can be applied need to be clearer, particularly on performance grounds. There should not be automatic “triggers” for a SAR, outside of insolvency, as it should remain a matter of last resort that will require some judgement. However, government and regulators should feel empowered to take timely action with the SAR when companies repeatedly fail to meet basic standards and fail to improve outcomes after an attempted turnaround oversight process. (Recommendation, Paragraph 40)

We also recommend that an insolvency SAR should be triggered earlier if key provisions of a more robust Turnaround Oversight Regime are not adhered to, such as a direction to inject new equity, particularly if this results in shareholders abandoning a company. These changes should be made as part of wider reforms to the water sector: we caution against a rushed reform of SAR legislation solely to address the Thames Water case. (Recommendation, Paragraph 41) 22