Select committee: Industry and Regulators Committee
1st Report - The affluent and the effluent: cleaning up failures in water and sewage regulation
Published 22 March 2023
Industry and Regulators Committee The work of Ofwat Report on parliament.uk ↗
At a glance18 recommendations and 41 conclusions · Government response published 5 June 2023 (deadline 22 May 2023)
The government's response
Summary written by Accountability Index from the government's response. It is not the government's own words.
The Government points to its Plan for Water and Environmental Improvement Plan as addressing many of the Committee's recommendations, and responds to each recommendation in turn, with some positions stated and others referred to those plans.
- On the Strategic Policy Statement, the Government "does not intend to update the SPS", citing Ofwat's ongoing 2024 Price Review process (PR24).
- On a single social tariff, the response states "There are no plans to introduce a single social tariff".
- On wet wipes, the Government says it "will change the law to ban the sale of wet wipes containing plastic, subject to public consultation".
- On storm overflows, the Government says it has committed to review the Discharge Reduction Plan in 2027, so that companies "remain as ambitious as possible, while balancing the impact on bills".
What the committee recommended 59
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Sources
- 1st Report - The affluent and the effluent: cleaning up failures in water and sewage regulation ↗The committee's report, parliament.uk
- Government Response to the House or Lords Industry and Regulators Committee Report: The affluent and the effluent: cleaning up failures in water and sewage regulation. ↗The government's response, 5 June 2023, parliament.uk
Recommendations and conclusions 59
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1
Ofwat and the Environment Agency may have differing remits, but they regulate the same industry. Conclusion (the committee's words)Ofwat and the Environment Agency may have differing remits, but they regulate the same industry. Therefore, effective collaboration is key to ensuring each regulator is able to achieve its individual aims and support the overall goals of the industry, such as reducing water pollution. We welcome recent progress on closer co-operation between the regulators, particularly through the Regulators’ Alliance for Progressing Infrastructure Development (RAPID) in relation to future water supplies. However, there is still a clear lack of effective co-ordination on issues such as Environment Agency outputs not aligning with what Ofwat deems financeable, and ineffective information-sharing.
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2
Ofwat, the Environment Agency and the Drinking Water Inspectorate should set up RAPID-style structures, including... Conclusion (the committee's words)Ofwat, the Environment Agency and the Drinking Water Inspectorate should set up RAPID-style structures, including joint working and close partnership with industry, in areas of high priority, including improving water quality , upgrading the wastewater network and reducing water demand.
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3
It is crucial that Ofwat and the Environment Agency share relevant information effectively and efficiently... Conclusion (the committee's words)It is crucial that Ofwat and the Environment Agency share relevant information effectively and efficiently on matters of joint interest. Ofwat and the Environment Agency should formalise and publish how they plan to share information on water company performance.
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4
Effectively reducing water pollution and securing future supply will require the unified effort of a... Conclusion (the committee's words)Effectively reducing water pollution and securing future supply will require the unified effort of a range of sectors, government departments, and regulators. Each of these areas has a range of funding sources, bodies and policies that affect the water environment, yet these must be co-ordinated to deliver overall success for the environment. Political will to deliver for the environment will also be necessary.
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5
The Government should facilitate a co-ordinated approach to water pollution by publishing a National Water... Recommendation (the committee's words)The Government should facilitate a co-ordinated approach to water pollution by publishing a National Water Strategy that approaches water policies in a holistic way. The Strategy should set clear expectations in relation to the quality of the water environment and the resilience of water supplies, giving regulators clear benchmarks to work towards. The Strategy should also set out clearly how the Government intends to oversee the regulators’ delivery of these expectations .
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6
It is the view of many in the water sector that Ofwat’s objectives require it... Conclusion (the committee's words)It is the view of many in the water sector that Ofwat’s objectives require it to make trade-offs between prioritising consumer bills, investment, and the environment. It is the impression of some stakeholders that Ofwat has historically given more focus to a short-term desire to keep water bills low at the expense of long-term environmental and security of supply considerations.
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7
Ofwat faces the challenge of balancing the financial needs of customers during a cost-of-living crisis... Conclusion (the committee's words)Ofwat faces the challenge of balancing the financial needs of customers during a cost-of-living crisis with the urgent need for infrastructure and environmental investment. Given the distributional and intergenerational consequences of many of these decisions, it is crucial that Ofwat is given strong, clear guidance by the Government on how these trade-offs should be made.
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8
Ofwat needs clear guidance from the Government on how it should balance and prioritise its... Recommendation (the committee's words)Ofwat needs clear guidance from the Government on how it should balance and prioritise its objectives. The Government should do this through its Strategic Policy Statement (SPS). However, the 2022 SPS failed to give a sense of prioritisation, particularly in relation to the balance between the affordability of bills and infrastructure and environmental investment. We recognise the concern that more directive Statements could impact Ofwat’s independence, but it is critical that elected politicians take controversial decisions which will have financial and environmental consequences for many generations, rather than passing that responsibility to regulators. The Government has not yet shown the necessary political will to make these decisions on the most important issues facing the sector.
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9
Like the House of Commons Environmental Audit Committee, we welcome the greater emphasis the 2022... Conclusion (the committee's words)Like the House of Commons Environmental Audit Committee, we welcome the greater emphasis the 2022 SPS placed on protecting and enhancing the environment. However, some of the outcomes are vague and the language tends to call for Ofwat to “enable” and “encourage” actions from water companies and the water industry rather than require these actions.
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10
Ofwat’s performance against meeting the objectives of the SPS should also be subject to greater... Conclusion (the committee's words)Ofwat’s performance against meeting the objectives of the SPS should also be subject to greater Parliamentary scrutiny. We welcome the Environmental Audit Committee’s intention to carry out this scrutiny routinely.
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11
The Government should update the SPS to strengthen the language contained within it to ensure... Recommendation (the committee's words)The Government should update the SPS to strengthen the language contained within it to ensure that Ofwat requires companies to meet SPS priorities. It should also provide a clear steer to Ofwat on how to balance its priorities, particularly in relation to the need to ensure higher levels of infrastructure investment, and these lessons should be taken on board in future Statements.
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12
We welcome Ofwat’s recognition of the need for a significant increase in investment at the... Conclusion (the committee's words)We welcome Ofwat’s recognition of the need for a significant increase in investment at the next Price Review, given the challenges facing the sector. The Price Review process is appropriate for iterative improvements to underlying assets but investment in environmental improvements and increasing water supply has remained low, potentially due to the regulator’s focus on efficiency and the limited time horizon of the Price Review process. Given the likely shift in the sector towards large, long-term strategic infrastructure projects that are required to ensure future water supplies and resolve environmental issues, more of the sector’s investment will need to take place outside of the Price Review process in future.
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13
Strategic, nationally significant infrastructure projects should be delivered outside of the Price Review process. Conclusion (the committee's words)Strategic, nationally significant infrastructure projects should be delivered outside of the Price Review process. The special purpose vehicle approach used for the Thames Tideway project provides a useful alternative model for funding such projects, reducing capital costs and spreading them over a longer timeframe than the five-year Price Review. Ofwat’s Direct Procurement for Customers model provides an opportunity for larger projects to be carried across multiple Price Review periods and is a useful outlet, but the expansion of the Thames Tideway model is more desirable as this allows Ofwat to intervene more effectively through the licence that can be applied to the new investment.
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14
The Government should consider legislating to remove the scale and complexity test from the Water... Recommendation (the committee's words)The Government should consider legislating to remove the scale and complexity test from the Water Industry Act 1991 and the Specified Infrastructure Project Regulations, ensuring that special purpose vehicles can be used much more frequently to build large water infrastructure projects.
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15
The Government should designate the final National Policy Statement for Water Resources Infrastructure to ensure... Recommendation (the committee's words)The Government should designate the final National Policy Statement for Water Resources Infrastructure to ensure strategically significant water infrastructure projects are designated as nationally significant infrastructure projects and can progress through the planning process in a timely manner. The definition of nationally significant infrastructure projects should be amended to ensure strategic water resources schemes are not excluded, particularly those delivered through competitively appointed providers.
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16
It is likely bills will have to increase to pay for some of the necessary... Conclusion (the committee's words)It is likely bills will have to increase to pay for some of the necessary investment in water infrastructure. It is therefore essential that appropriate support is given to those customers who need it. Current support schemes vary between water companies with no common baseline. This amounts to a postcode lottery for consumers in need.
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17
The Government should legislate to introduce a single social tariff in time for its inclusion... Recommendation (the committee's words)The Government should legislate to introduce a single social tariff in time for its inclusion in the next Price Review. This should provide a baseline of support for customers regardless of who supplies their water. As this would require some customers to subsidise other customers, the Government should take decisions on the level of support having consulted with regulators, companies and consumer groups.
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18
The single social tariff should include a no-detriment clause to ensure that no customer is... Conclusion (the committee's words)The single social tariff should include a no-detriment clause to ensure that no customer is worse off as a result of the introduction of the new arrangements. Water companies should continue to offer additional support where customers are struggling to pay their bills even with the single social tariff in place.
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19
The current Water Industry National Environment Programme (WINEP), an investment programme through which the Environment... Conclusion (the committee's words)The current Water Industry National Environment Programme (WINEP), an investment programme through which the Environment Agency specifies works required by water companies to meet environmental goals, is prescriptive about work water companies should undertake. Many stakeholders told us a move to outcomes-based regulation, where how an outcome is met is not prescribed, would give water companies greater opportunity to design innovative solutions to problems facing the sector. These solutions may be more cost-effective and environmentally friendly than traditional ones. We therefore welcome that the Government, Ofwat and the Environment Agency are planning to move towards outcomes-based regulation in the next iteration of the WINEP.
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20
The Government , Ofwat and the Environment Agency should ensure that the next iteration of... Conclusion (the committee's words)The Government , Ofwat and the Environment Agency should ensure that the next iteration of the Water Industry National Environment Programme has a greater focus on the outcomes to be achieved. This will give responsible companies more leeway to use nature-based and catchment-based solutions.
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21
To the extent that prescriptive regulatory requirements are the result of retained EU law, the... Recommendation (the committee's words)To the extent that prescriptive regulatory requirements are the result of retained EU law, the Government should examine whether the relevant provisions can be amended to enable an outcomes-based framework in time for the next Price Review.
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22
The prevalence of combined sewers in England, which combine surface water with foul water, results... Conclusion (the committee's words)The prevalence of combined sewers in England, which combine surface water with foul water, results in polluted water being released to the environment via storm overflows. Although the Government will need to look at the possibility of separating sewers, significant progress could be made by reducing pressures on the existing network. We therefore welcome the Government’s intention to enact Schedule 3 of the Flood and Water Management Act 2010. This will ensure developers in England are not able to connect to existing sewer networks without designing appropriate sustainable drainage systems, and will place England in line with Wales, where most construction work is required to have sustainable drainage systems that comply with national standards.
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23
Wet wipes pose a serious risk to the proper operation of the sewage system by... Conclusion (the committee's words)Wet wipes pose a serious risk to the proper operation of the sewage system by contributing to “fatbergs”—build ups of fat that cause blockages and thus storm overflow use. Consumers must be properly educated about the problems of wet wipes by the water industry. We therefore welcome Water UK’s national campaign on the issue. However, policy intervention may also be needed.
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24
We recommend the Government considers banning the sale of wet wipes that are not rapidly... Recommendation (the committee's words)We recommend the Government considers banning the sale of wet wipes that are not rapidly biodegradable.
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25
While regulators and companies in the sector may be more comfortable with traditional, infrastructure-heavy solutions... Conclusion (the committee's words)While regulators and companies in the sector may be more comfortable with traditional, infrastructure-heavy solutions to water pollution, and some will undoubtedly be needed, it is clear that there is also a place for innovative approaches, including nature-based solutions and catchment approaches. These can be a cost-effective, environmentally friendly way of reducing water pollution.
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26
We recommend nature-based solutions and catchment approaches form a larger part of the next iteration... Recommendation (the committee's words)We recommend nature-based solutions and catchment approaches form a larger part of the next iteration of the Price Review and the Water Industry National Environment Programme (WINEP).
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27
A huge level of investment—that the Government has estimated will cost £56 billion over 25... Conclusion (the committee's words)A huge level of investment—that the Government has estimated will cost £56 billion over 25 years—is required so that storm overflows are only used in times of exceptional weather. Given that water companies are responsible for maintaining their own sewage networks, they must bear a significant degree of responsibility for the necessary investment costs. However, we recognise that the scale of investment needed is vast, and for the private sector to meet this challenge there will need to be stable, long-term funding arrangements that provide certainty for investors.
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28
The Government should set out how it envisages the investment needed to prevent pollution will... Recommendation (the committee's words)The Government should set out how it envisages the investment needed to prevent pollution will be funded through a National Water Strategy. Water companies should take the lead in meeting the majority of costs.
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29
Pollution caused by the routine use of storm overflows is environmentally damaging and the public... Conclusion (the committee's words)Pollution caused by the routine use of storm overflows is environmentally damaging and the public is right to demand better. However, we recognise that there are other causes of water pollution which must also be tackled.
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30
A National Water Strategy should include consideration of how funding should be balanced across causes... Conclusion (the committee's words)A National Water Strategy should include consideration of how funding should be balanced across causes of water pollution, to maximise environmental protection and minimise costs.
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31
The levels of storm overflow overuse by some companies are unacceptable. Conclusion (the committee's words)The levels of storm overflow overuse by some companies are unacceptable. We welcome that monitors will be present on all storm overflows by the end of 2023 and that the Government has increased the Environment Agency’s funding for monitoring. However, it appears that the Agency’s monitoring and enforcement has in the past been seriously compromised by cuts to its grant, leading to an over-reliance on self-monitoring by water companies. It is crucial that the Environment Agency is provided with adequate funding to carry out inspections. Failure to do this would risk returning the regulator to a position where it must rely on water companies to police their own behaviour.
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32
We recommend the Government ensures adequate funding is available to the Environment Agency to inspect... Recommendation (the committee's words)We recommend the Government ensures adequate funding is available to the Environment Agency to inspect and enforce environmental offences by water companies.
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33
Water companies should commit to providing public, open data in a useable form on the... Conclusion (the committee's words)Water companies should commit to providing public, open data in a useable form on the environmental performance of their sewerage network and sewage works. Customers should be able to see how water companies are affecting their areas in real or near-real time, and regulators should have access to this information in order to ensure that water companies are fulfilling their duties. It is welcome the Environment Act 2021 amended the Water Industry Act 1991 to require companies to provide open data, but no detail about how such plans will be implemented have yet been outlined.
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34
The Government, Ofwat, and the Environment Agency should publicly outline their plans to ensure open... Conclusion (the committee's words)The Government, Ofwat, and the Environment Agency should publicly outline their plans to ensure open data on environmental performance is provided by companies as a matter of priority.
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35
We welcome the Government’s Storm Overflows Discharge Reduction Plan and its expectation that water companies... Conclusion (the committee's words)We welcome the Government’s Storm Overflows Discharge Reduction Plan and its expectation that water companies reduce their use of storm overflows to their original intended use—during exceptional periods of rainfall. However, we recognise that there are concerns over whether the targets in the Plan are sufficiently ambitious, especially in terms of its 2050 goal for reducing storm overflow use. We also recognise that tackling storm overflow overuse will require a joined-up approach across government and regulators, which the plan currently lacks.
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36
We recommend that the Government’s commitment to a mandatory review of the Storm Overflows Discharge... Recommendation (the committee's words)We recommend that the Government’s commitment to a mandatory review of the Storm Overflows Discharge Reduction Plan in 2027 is used as an opportunity to set stretching targets to reduce storm overflow overuse. We would welcome Defra’s research budget being used to examine how these more stretching targets could be met. In the meantime, Ofwat must ensure that significant incentives are in place to encourage companies to meet the targets in the Plan ahead of prescribed dates. We also recommend that a National Water Strategy should include a co-ordinated approach to reducing and preventing water pollution.
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37
It appears that for some time, regulatory deterrents such as penalties and fines have been... Conclusion (the committee's words)It appears that for some time, regulatory deterrents such as penalties and fines have been insufficient to ensure an acceptable level of performance by water companies, particularly in relation to the environment, where performance is at its lowest ever levels. We welcome that some recent fines and penalties have been at a more appropriate level but remain concerned that they may not be a sufficient deterrent. The length of enforcement processes can result in those in penalties being applied long after those responsible have left the company.
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38
Recent Government proposals to increase substantially the limit on the Variable Monetary Penalties that can... Conclusion (the committee's words)Recent Government proposals to increase substantially the limit on the Variable Monetary Penalties that can be directly imposed by the Environment Agency on companies could help to provide strong enforcement in a more reasonable timeframe. However, it is concerning that the Environment Agency has not used these powers often in the past, a situation possibly brought about by the Agency’s shortage of resources for enforcement.
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39
While civil penalties can help to bring about enforcement more quickly, it is important that... Conclusion (the committee's words)While civil penalties can help to bring about enforcement more quickly, it is important that regulators prosecute criminal behaviour. It is alarming that the Environment Agency is prosecuting less due to resource constraints.
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40
The Government should deliver on its proposals to increase the limit on Variable Monetary Penalties... Recommendation (the committee's words)The Government should deliver on its proposals to increase the limit on Variable Monetary Penalties for serious offences committed by water companies. The Government should ensure the Environment Agency has adequate funding to use its new powers effectively and prosecute criminal behaviour in the sector.
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41
There is a need for greater individual accountability for executives and directors of companies that... Recommendation (the committee's words)There is a need for greater individual accountability for executives and directors of companies that are responsible for serious and deliberate pollution incidents, including criminal prosecution where appropriate. The Government should give Ofwat powers to prevent directors of companies that are responsible for serious pollution incidents from continuing to work in the sector.
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42
Ofwat’s special administration powers allow it to change the ownership of water companies that are... Conclusion (the committee's words)Ofwat’s special administration powers allow it to change the ownership of water companies that are falling short in meeting their responsibilities. This a powerful tool that has the potential to be used more widely where companies have been found not to have been meeting their obligations.
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43
Ofwat should consider whether to be more proactive in using these powers to change the... Conclusion (the committee's words)Ofwat should consider whether to be more proactive in using these powers to change the management of continued poor performers in the sector.
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44
It is clear that in the past, a number of water companies have been overly... Conclusion (the committee's words)It is clear that in the past, a number of water companies have been overly focused on maximising financial returns, including by increasing debt levels, at the expense of operational performance and protecting the environment. We welcome that some companies have exercised more restraint in recent years, in part due to tougher regulatory settlements as well as wider economic conditions.
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45
While financial structures are usually a matter for company boards, water companies’ monopoly role in... Conclusion (the committee's words)While financial structures are usually a matter for company boards, water companies’ monopoly role in providing an essential service means that a higher standard should be demanded, especially in a sector of such importance to households and the environment. We support Ofwat’s increased interest in the financial structures of water companies and wholly support its proposals to amend licenses to ensure that dividends are linked to performance and companies are financially resilient.
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46
Water company executives should not be able to receive substantial bonuses while their companies have... Conclusion (the committee's words)Water company executives should not be able to receive substantial bonuses while their companies have missed performance targets and polluted the water environment, potentially in breach of their permits.
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47
We support Ofwat’s increased interest in executive pay, including its expectation that companies set out... Recommendation (the committee's words)We support Ofwat’s increased interest in executive pay, including its expectation that companies set out their proposed policies for performance-related executive pay during the next Price Review period. These proposals should ensure performance-related pay is much more closely linked to performance, particularly in relation to the environment. Ofwat should set out further provisions to ban bonuses at companies who have been found to have caused serious pollution incidents as part of the conditions of water company licences.
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48
Some witnesses told us the introduction of private equity ownership to the water sector has... Conclusion (the committee's words)Some witnesses told us the introduction of private equity ownership to the water sector has been a driver in some companies focusing on financial performance rather than service delivery and securing resilience. This has led some privately owned companies to take on debt and introduce complex financial structures in order to pay out large returns, even where performance has been unacceptable. Requiring water companies to disclose information to the same standard as publicly listed companies has the potential to improve their governance and increase scrutiny of their financial arrangements.
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49
Ofwat should ensure that water companies are subject to the same level of transparency as... Conclusion (the committee's words)Ofwat should ensure that water companies are subject to the same level of transparency as publicly listed companies, in order to improve transparency through the regular reporting cycle.
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50
The Regulators’ Alliance for Progressing Infrastructure Development’s plans to increase the levels of water transfer... Conclusion (the committee's words)The Regulators’ Alliance for Progressing Infrastructure Development’s plans to increase the levels of water transfer between regions are set to be very important in using existing water resources more effectively. The regulators should continue to ensure that companies work co-operatively in this area.
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51
Under present plans, the UK will not have built a single new major reservoir between... Conclusion (the committee's words)Under present plans, the UK will not have built a single new major reservoir between 1991 and 2029. The Government, regulators, and companies must work together to deliver more reservoirs to meet the UK’s future water needs. Failure to do so will result in a less resilient, secure water supply that risks leaving households without water during extreme weather conditions that are becoming more frequent due to climate change. We welcome the Government’s intention to address the planning issues impeding reservoir development in the National Policy Statement for Water Resources Infrastructure.
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52
The Government should set out plans to accelerate the planning process for reservoirs , including... Recommendation (the committee's words)The Government should set out plans to accelerate the planning process for reservoirs , including by designating, and if necessary amending, its National Policy Statement for Water Resources Infrastructure as a matter of priority .
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53
Reducing water demand is crucial to ensuring sufficient water supplies. Conclusion (the committee's words)Reducing water demand is crucial to ensuring sufficient water supplies. The UK has one of the highest water usage figures per capita in Europe and while the Government has set an ambitious target to reduce consumption, clearer detail is needed on how it, regulators and companies plan to address this issue. The Regulator’s Alliance for Progressing Infrastructure Development (RAPID) has proved to be a successful model for co-operation, and given the need for co-operation to reduce consumption, a similar alliance could be used to focus on this area.
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54
The Government should set out in a National Water Strategy how it envisions meeting its... Recommendation (the committee's words)The Government should set out in a National Water Strategy how it envisions meeting its targets for reducing water demand. This should involve setting out new policies and setting clear expectations for regulators and companies.
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55
Ofwat, the Environment Agency and water companies should work closely together, as they do with... Conclusion (the committee's words)Ofwat, the Environment Agency and water companies should work closely together, as they do with RAPID, in order to set out schemes and proposals to reduce water demand.
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56
Metering helps to inform consumers about their water usage by providing greater visibility of the... Conclusion (the committee's words)Metering helps to inform consumers about their water usage by providing greater visibility of the amount of water used and the costs this is placing on the consumer. Metering has also been shown to reduce water consumption and could make a valuable contribution to managing future water supplies.
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57
The Government should make water metering compulsory for all households and businesses where it is... Recommendation (the committee's words)The Government should make water metering compulsory for all households and businesses where it is possible to do so. In introducing compulsory metering, the sector should clearly communicate the benefits of metering to customers. Given the low levels of trust in water companies, the Government should proactively set out its view that the public should reduce its water consumption, both in the national interest and in order to reduce consumer bills.
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58
Water companies must play their part in reducing future water demand by minimising the amount... Conclusion (the committee's words)Water companies must play their part in reducing future water demand by minimising the amount of clean water wasted through leakages. Companies will find it far easier to make the case that their customers should reduce their water consumption if they can show that they have already taken similar action.
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59
Ofwat must continue to set stretching targets on reducing leakage and incentivise companies to exceed... Conclusion (the committee's words)Ofwat must continue to set stretching targets on reducing leakage and incentivise companies to exceed these targets. Ofwat should ensure the necessary investment to reduce leakage is provided for through the Price Review process.