Recommendations & Conclusions
30 items
2
Conclusion
42nd Report - Water sector regulation
Accepted
Over many years, the Environment Agency and Ofwat have failed to ensure water companies maintain vital infrastructure. Ofwat and the Environment Agency (EA) have not done enough to ensure companies actively manage their infrastructure. At the current rate of replacement, it would take companies 700 years to replace the entire …
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Over many years, the Environment Agency and Ofwat have failed to ensure water companies maintain vital infrastructure. Ofwat and the Environment Agency (EA) have not done enough to ensure companies actively manage their infrastructure. At the current rate of replacement, it would take companies 700 years to replace the entire water mains network. This is far below the rate Ofwat views as sustainable and below what the water companies have been funded to do. Ofwat does not understand how to fund maintenance effectively. There are no common standards to assess the condition of infrastructure, and Ofwat’s current measures, such as sewer collapses and leakage, are backwards-looking and only measure failure. Ofwat has been looking at asset health since 2017, and work to get the right information will still take “two to three years”. This information could be collected much quicker and then acted on, ready to inform key decisions by the next price review. The Drinking Water 3 Inspectorate (DWI) inspects water supply assets, but no regulator inspects wastewater assets, nor do they have the engineering expertise to oversee company work. Failure to maintain assets has led to environmental pollution. Prevention is better than cure, but the regulators are not actively taking a preventative approach. They should do much more. recommendation Ofwat and the Environment Agency, working with the sector, should develop survey standards and collate information to assess the health of infrastructure in good time for companies to use the results to inform business plans which are likely to be submitted in autumn 2028 and implemented shortly thereafter, and a programme of inspection to ensure infrastructure projects funded in PR25 are completed to satisfaction and deliver value for money.
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Government response AI summary
The government agreed, committing to publishing a White Paper this autumn, Ofwat developing a new asset condition assessment methodology by 2027, and the Environment Agency increasing staff. Both regulators are also developing a Delivery and Monitoring Framework for water industry investment, to be ready in …
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HM Treasury
3
Conclusion
42nd Report - Water sector regulation
Deferred
Defra and the Environment Agency have been far too slow in planning for the future and this now hinders economic growth. Recommendations this Committee made to Defra five years ago around accelerating the pace of investment have not been acted on, which has proved to be shortsighted. Water companies now …
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Defra and the Environment Agency have been far too slow in planning for the future and this now hinders economic growth. Recommendations this Committee made to Defra five years ago around accelerating the pace of investment have not been acted on, which has proved to be shortsighted. Water companies now need to build 10 new reservoirs, when none have been built in the last 30 years. Meanwhile, supply shortages and failure to increase wastewater treatment capacity are already having a negative impact on housing and business development. The EA has slowed development plans for new homes in key areas including Cambridge and Oxford due to concerns about capacity in water and wastewater systems. Neither Defra nor the EA could tell us how many proposed new homes have been delayed or denied planning permission due to concerns about water or wastewater. We are aware of one major commercial investment in the east of the country whose planning permission was turned down due to insufficient water supplies. Current approaches to finding solutions, such as Defra’s new minister-led taskforce and cross-regulator work to support infrastructure development, are focussed on large infrastructure projects. But housing plans may change more quickly than current planning cycles, or the price review funding cycle, currently allow. recommendation a. The Environment Agency should write to the Committee, alongside the Treasury Minute response to this report, setting out how it will work with water companies to ensure planning solutions are prioritised prior to planning applications, to limit delays to development brought about by objections. 4 b. By the end of 2025, the Environment Agency must be in a position to publish a list of all housing and commercial developments, including a list of the number of homes, that it is delaying or blocking. It should update this list every month. c. The Environment Agency should ensure it is actively monitoring and enforcing compliance with discharge perm
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Government response AI summary
The government agreed with the recommendation, stating that the Environment Agency (EA) already monitors and enforces compliance with discharge permits. However, it did not commit to the specific requests for the EA to write to the Committee or publish a monthly list of delayed developments, …
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HM Treasury
4
Conclusion
42nd Report - Water sector regulation
Accepted
The Environment Agency is failing to ensure that wastewater companies meet their environmental targets, resulting in excessive use of combined sewer overflows and environmental pollution. The EA and Ofwat are taking enforcement action against every wastewater company for their poor performance on storm overflows. Previous mismanagement has presented a risk …
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The Environment Agency is failing to ensure that wastewater companies meet their environmental targets, resulting in excessive use of combined sewer overflows and environmental pollution. The EA and Ofwat are taking enforcement action against every wastewater company for their poor performance on storm overflows. Previous mismanagement has presented a risk to public health. Over a quarter of the EA’s 4,600 inspections of wastewater treatment works last year found issues, including 92 serious breaches. The EA says there are too many offences to prosecute them all, and intends to use new powers to raise civil penalties, which it expects will be faster and cheaper than prosecutions. Companies currently volunteer undertakings (where they take action to fix the issue or return money to bill-payers) in a minority of cases. Otherwise, fines go to HM Treasury. Defra has still not distributed the £11 million Water Restoration Fund it created in 2024 from water company fines to make environmental improvements, despite announcing recently that a further £100 million would be available. Going forward, companies are expected to spend around £12 billion in the next 5 years on storm overflows, but this will only fix around 44% of overflows. recommendation a. Defra should disburse the amounts promised through the Water Restoration Fund in 2024 and set out plans for the additional funding announced in June, by the end of 2025. Defra and the Environment Agency should work urgently to ensure money raised from fines permanently goes to improving the system and not simply returned to the Treasury 5 b. The Environment Agency and Ofwat should write to the Committee, alongside the Treasury Minute response to this report, setting out how they will hold water companies to account for fixing problems and improving their environmental performance
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Government response AI summary
The government states Ofwat has tripled enforcement capacity and uses regulatory tools to hold companies to account. The Environment Agency has exceeded inspection targets and transformed its regulatory approach. The Chief Executives of both regulators have written to the Committee as requested.
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HM Treasury
5
Recommendation
42nd Report - Water sector regulation
Accepted
Financial fragility of a few large companies in the sector is leading investors to lose confidence in regulation as well as the sector. We need to return to a water sector that is low risk and low return. Currently, company group structures are complex, and some companies in groups are …
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Financial fragility of a few large companies in the sector is leading investors to lose confidence in regulation as well as the sector. We need to return to a water sector that is low risk and low return. Currently, company group structures are complex, and some companies in groups are not regulated by Ofwat at all, and excessive dividends have been paid in the past. The regulatory environment needs to change to prevent a repetition in the future. Companies have high levels of debt and charged large amounts on interest on their inter-company loans, and 10 companies did not generate enough income in 2023–24 to cover their interest payments. Three companies (including Thames Water) now cannot pay out a dividend without Ofwat’s permission. Untargeted regulation contributed to downgrades of the credit-worthiness of the whole sector in 2018 and again in 2024, alongside concerns about financial performance. There is also the immediate prospect of Thames Water becoming insolvent and having to enter the Special Administration Regime. Decisions are needed to secure the future of water supply to millions of customers. Ofwat and Defra have not been clear on what might happen under the Special Administration Regime, including the costs for customers. All of this has contributed to a rise in the sector’s risk profile. Ofwat has consequently increased the amount customers have to pay in their bills to cover returns for investors, which reflects the sector’s higher risk profile. recommendation Over the course of the next six months Ofwat should review its powers and capability to ensure it can take action needed to improve the financial resilience of the whole of the sector, and be clear in public about what is likely to happen and who will bear the costs in the event of a company insolvency.
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Government response AI summary
The government states Ofwat continuously monitors financial resilience and has secured £1.9 billion in new equity for six companies. A new single water regulator will be established, and the government will respond to the Independent Water Commission's recommendations in a White Paper this autumn, with …
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HM Treasury
6
Conclusion
42nd Report - Water sector regulation
Accepted
No-one is taking responsibility for ensuring that the regulatory system works, as is evident by its failings. Defra has overall responsibility for the regulatory framework. However, it is not planning an improvement of the system it describes as “piecemeal”. There are gaps in key areas such as oversight of the …
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No-one is taking responsibility for ensuring that the regulatory system works, as is evident by its failings. Defra has overall responsibility for the regulatory framework. However, it is not planning an improvement of the system it describes as “piecemeal”. There are gaps in key areas such as oversight of the security (including cyber-security) of the wastewater network. The EA is not monitoring the net zero impact of water companies’ work, despite the fact that the wastewater network is responsible for 1.2% of all UK emissions. There is no single guiding mind balancing the need for improvements with the impact on bills and in the past the wrong approach has been taken. Regulators and the sector now face a 6 huge challenge to make environmental improvements and meet water supply needs. Long-term resilience in the face of climate change has also been deprioritised. recommendation Defra should use this Committee’s and the NAO’s findings, alongside any recommendations from the Water Commission once it is published, to clarify and fill gaps in regulator responsibilities and be explicit on when and how trade-offs will be considered.
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Government response AI summary
The government plans to abolish Ofwat and merge its functions into a single new regulator, subject to consultation this autumn. It will publish a Strategic Policy Statement and ministerial direction this autumn to clarify expectations and respond to the Independent Water Commission's recommendations via a …
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HM Treasury
7
Recommendation
42nd Report - Water sector regulation
Accepted
Defra seems to be passively waiting for the Water Commission to report before making changes to the system. Defra has acknowledged the need for a complete reset of strategic planning and has committed to accepting the recommendations for the Water Commission, but it expects they may take legislation to fully …
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Defra seems to be passively waiting for the Water Commission to report before making changes to the system. Defra has acknowledged the need for a complete reset of strategic planning and has committed to accepting the recommendations for the Water Commission, but it expects they may take legislation to fully implement. This scale of change must be carefully managed to avoid making the sector even more unpredictable. Both Defra and the regulators recognise that change cannot wait until the Commission makes its recommendations. The EA and Ofwat are working to improve their information sharing, and the EA is planning to increase its water inspection programme up to 10,000 inspections a year. However, neither Ofwat nor the EA has yet set out when they will use the powers they have been granted by the Water (Special Measures) Act, despite citing them as key to improving company performance. There should be a very clear sense of urgency around the changes that are needed. The regulators and the sector can and should act now to win back trust and move away from the unacceptable performance of the past. recommendation a. By Autumn 2025, Ofwat and the Environment Agency should publish a roadmap to implementation of their new powers, including those under the Water (Special Measures) Act 2025. Defra should not wait for the Water Commission to take actions where it can see an immediate need as those powers are embedded, such as the Environment Agency’s new powers to impose civil penalties and Ofwat’s powers over executive bonuses. b. Defra must set out a clear roadmap and timeline for future changes, as part of its response to the final report of the Cunliffe review. The final report is due in summer 2025 and we expect Defra’s roadmap to follow in autumn 2025. 7 1 Planning and acting for the long-term future of the water sector Introduction
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Government response AI summary
The government will publish a White Paper for consultation and a new Water Reform Bill this autumn 2025, along with a transition plan. It will also clarify expectations through a Strategic Policy Statement and ministerial direction later in 2025, addressing the roadmap for future changes.
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HM Treasury
1
Conclusion
42nd Report - Water sector regulation
Accepted
On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Environment, Food and Rural Affairs (Defra), the Environment Agency (the EA) and the Water Services Regulation Authority (Ofwat) on regulating the water sector.1 We also took evidence from the Chief Executive …
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On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Environment, Food and Rural Affairs (Defra), the Environment Agency (the EA) and the Water Services Regulation Authority (Ofwat) on regulating the water sector.1 We also took evidence from the Chief Executive of Water UK, David Henderson; the Chief Executive of the Consumer Council for Water, Dr Mike Keil; and John Earwaker, Director of First Economics.
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Government response AI summary
The government states there will be a quadrupling of investment in the water sector. Ofwat has established Price Control Deliverables to ensure companies deliver improvements and will track progress and publish a review next year. Ofwat will also engage with companies over the next six …
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HM Treasury
8
Conclusion
42nd Report - Water sector regulation
Acknowledged
Customer trust is at its lowest level since monitoring began in 2011.14 The Consumer Council for Water told us that, according to its survey, environmental performance was the biggest driver of dissatisfaction amongst customers.15 Committee members also drew attention to problems experienced by our constituents, including poor company responses to …
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Customer trust is at its lowest level since monitoring began in 2011.14 The Consumer Council for Water told us that, according to its survey, environmental performance was the biggest driver of dissatisfaction amongst customers.15 Committee members also drew attention to problems experienced by our constituents, including poor company responses to issues with burst pipes, and sewer flooding in particular.16 Company performance on key metrics, such as supply interruptions and 9 C&AG’s Report, para 1.10 10 Qq 58, 60, 62 11 Qq 58, 62, 64 12 WSR0003 13 Qq 63-64 14 Qq 1, 8; C&AG’s Report, para 1.6 15 Q 2 16 Qq 42, 94-95, 97, 99, 106, 108 10 pollution incidents, has stagnated over the last ten years.17 As the Consumer Council for Water explained to us, at the moment people feel water bills are not fair.18
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Government response AI summary
The government recognises that customer trust in water companies is low and that environmental performance is a key driver of customer dissatisfaction, and is taking action to hold water companies to account for their environmental performance and to ensure that they are transparent with customers …
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HM Treasury
9
Conclusion
42nd Report - Water sector regulation
Acknowledged
Customer bills cover operating costs; returns for financing used to pay for capital enhancements; and a contribution towards capital repayments.19 The Consumer Council for Water told us that to rebuild trust people need to understand what they are getting for their money.20 Ofwat described the way companies have explained customers’ …
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Customer bills cover operating costs; returns for financing used to pay for capital enhancements; and a contribution towards capital repayments.19 The Consumer Council for Water told us that to rebuild trust people need to understand what they are getting for their money.20 Ofwat described the way companies have explained customers’ bills as “unsatisfactory”, and told us that companies ought to supply information to customers, and make it simple, accessible and consistent.21 Maintaining vital infrastructure
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Government response AI summary
The government agrees that customers need to understand what they are getting for their money, and states Ofwat is working with water companies to improve the clarity and transparency of bills.
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HM Treasury
10
Conclusion
42nd Report - Water sector regulation
Acknowledged
Water companies have a large and extensive network of assets that they are responsible for maintaining, including reservoirs, treatment works, pumping stations, and water supply and sewer pipes. Ofwat published a targeted review of asset health in 2017, followed up by work on asset management maturity in 2021. In December …
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Water companies have a large and extensive network of assets that they are responsible for maintaining, including reservoirs, treatment works, pumping stations, and water supply and sewer pipes. Ofwat published a targeted review of asset health in 2017, followed up by work on asset management maturity in 2021. In December 2024, it published a Roadmap for enhancing asset health understanding in the water sector. At the current rate of replacement, it will take water companies 700 years to replace the entire network of water mains. This rate is below the level at which Ofwat set expectations for the last five years, and what it considers the sustainable rate of 125 to 160 years.22 The EA told us that failing assets are causing severe environmental pollution, and they should therefore take much more urgent action to remediate this than it has thus far.23
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Government response AI summary
The government supports the work of Ofwat to ensure water companies have robust plans for asset maintenance and replacement, and notes that Ofwat published a targeted review of asset health in 2017, followed up by work on asset management maturity in 2021, and in December …
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HM Treasury
11
Conclusion
42nd Report - Water sector regulation
Acknowledged
Ofwat told us that it is challenging to understand asset health for a sector where so many of the assets are below ground and can only be measured indirectly.24 Ofwat illustrated this problem when it told us about the challenge of making sure companies replace mains which are in a …
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Ofwat told us that it is challenging to understand asset health for a sector where so many of the assets are below ground and can only be measured indirectly.24 Ofwat illustrated this problem when it told us about the challenge of making sure companies replace mains which are in a poor condition.25 But Ofwat currently uses retrospective measures which record asset failure – such as sewer collapses and mains repairs. External commentators, including the Competition and Markets Authority, and the National Infrastructure Commission, have called for more forward- looking measures.26 Ofwat is still working on getting standards in place 17 C&AG’s Report, Figures 3-6 18 Q 8 19 C&AG’s Report, para 1.8 20 Q 23 21 Q 61 22 C&AG Report, paras 2.45, 2.47-2.48 23 Q 42 24 Q 37 25 Q 41 26 C&AG’s Report, para 2.46 11 to consistently understand asset health, and told us that it will still take 2-3 years to get the right information for companies to be able to make the case for funding.27It should be possible to collate this information in a shorter timescale.
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Government response AI summary
The government notes Ofwat's powers to require companies to develop and implement long-term asset management plans and take enforcement action against companies that fail to maintain their assets properly, and that Ofwat has recently consulted on proposals to strengthen its powers to require companies to …
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HM Treasury
12
Conclusion
42nd Report - Water sector regulation
Acknowledged
The UK has one of the highest standards of drinking water quality in the world, and the Drinking Water Inspectorate (DWI) does inspect water supply assets.28 But the responsibility for wastewater is much less clear. The EA’s responsibility is to conduct inspections only to assess compliance with environmental permits. Ofwat …
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The UK has one of the highest standards of drinking water quality in the world, and the Drinking Water Inspectorate (DWI) does inspect water supply assets.28 But the responsibility for wastewater is much less clear. The EA’s responsibility is to conduct inspections only to assess compliance with environmental permits. Ofwat is not an inspectorate, and Defra told us that regulation had moved away from direct regulation and inspections since 2011.29 Water UK told us that Ofwat has not had a chief engineer in place since 2005. The EA says it is getting back into the business of doing significant inspections, having conducted 4,600 last year and planning to carry out 10,000 this year.30 Long-term planning
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Government response AI summary
The government recognises the importance of robust regulation to ensure water companies are meeting their obligations to protect the environment and provide high-quality drinking water and is committed to ensuring that regulators have the powers and resources they need to hold water companies to account.
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HM Treasury
13
Conclusion
42nd Report - Water sector regulation
Acknowledged
In 2020, the previous Public Accounts Committee recommended that Defra provide an update on how it planned to accelerate the pace of infrastructure improvement, to address the gap between future water supply and demand in England, which was estimated to be 3.6 billion litres per day by 2050.31 Five years …
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In 2020, the previous Public Accounts Committee recommended that Defra provide an update on how it planned to accelerate the pace of infrastructure improvement, to address the gap between future water supply and demand in England, which was estimated to be 3.6 billion litres per day by 2050.31 Five years later, that gap is now estimated to be 5 billion litres a day by 2050. The regulators have come together to form the Regulators’ Alliance for Progress for Infrastructure Development (RAPID), to support and accelerate the development of new water infrastructure. Through RAPID, water companies have identified 30 major water supply projects which are needed to ensure the nation’s supply of water in the long term and where construction will take place over the next 15 years. These 30 projects include 9 reservoirs. Another reservoir near Portsmouth is already under construction.32 This will be the first reservoir built in 30 years.33 Ofwat estimates that companies will spend £52 billion over the lifetime of the projects, and that in most cases these costs will be funded outside of the price review process.34 Ofwat told us it has provided funding for companies to develop options for water supply projects.35 27 Q 37 28 Qq 16, 24; C&AG’s Report, para 1.19 29 Q 108; C&AG’s Report, para 2.4 30 Qq 10, 75 31 Committee of Public Accounts, Water supply and demand management, Ninth Report of Session 2019–21, HC 378, 1 July 2020 32 C&AG’s Report, paras 1.3, 2.39, 2.41 33 Q 17 34 C&AG’s Report, para 2.42 35 Q 51 12
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Government response AI summary
Defra, the EA, and Ofwat are working together through RAPID to accelerate the development of new water resources infrastructure and the government has also set ambitious targets to reduce leakage and demand, and is working with water companies to help them meet these targets.
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HM Treasury
14
Conclusion
42nd Report - Water sector regulation
Acknowledged
Defra told us that the importance of water to big investment and development opportunities was clear.36 But Water UK told us a lack of water in Cambridge had delayed the building of a new cancer hospital.37 The EA told us it had had to do a lot of work with …
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Defra told us that the importance of water to big investment and development opportunities was clear.36 But Water UK told us a lack of water in Cambridge had delayed the building of a new cancer hospital.37 The EA told us it had had to do a lot of work with local authorities and water companies to develop a plan which would allow for building 50,000 homes in and around Cambridge.38 The EA told us it has a statutory obligation to support sustainable development, but has nevertheless in some cases objected to new development because water companies do not have the infrastructure to cope with increased demand. It told us that in Oxford, this delayed the building of 7,000 homes, which the EA acknowledged was “a very big act by us”.39
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Government response AI summary
Defra, the EA, and Ofwat are working together to ensure that water resources are taken into account in planning decisions and a minister-led taskforce has been set up for high-profile infrastructure projects.
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HM Treasury
15
Conclusion
42nd Report - Water sector regulation
Acknowledged
Defra and the EA could not tell us how many proposed new homes are not being built because of water system constraints.40 Defra told us that it has set up a minister-led taskforce for high-profile infrastructure projects, working to ensure they can be built quickly.41 We explored with witnesses how …
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Defra and the EA could not tell us how many proposed new homes are not being built because of water system constraints.40 Defra told us that it has set up a minister-led taskforce for high-profile infrastructure projects, working to ensure they can be built quickly.41 We explored with witnesses how quickly schemes could be planned for and funded. The EA told us that it had to be realistic about sudden changes in housing ambition, given the timeline of the planning process for water resources. Ofwat told us that it takes account of plans when it agrees funding in the price review and that the current price review was finalised.42 Funding is now set until 2030. The threshold for re-opening a price review to reflect additional costs is high, at 10% of the company’s annual turnover.43 36 Q 50 37 Q 17 38 Qq 50-52 39 Qq 50, 53 40 Qq 52-53 41 Qq 36, 50, 74 42 Qq 51, 101 43 C&AG’s Report, paras 1.9, 2.25 13 2 Regulating water companies’ operational and financial performance Environmental performance of the water sector
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Government response AI summary
Defra, the EA, and Ofwat are working together to ensure that water resources are taken into account in planning decisions and a minister-led taskforce has been set up for high-profile infrastructure projects.
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HM Treasury
16
Conclusion
42nd Report - Water sector regulation
Acknowledged
Significant action needs to be taken in the short term to meet environmental targets. In 2023 Defra published the Environmental Improvement Plan and set targets for the sector to reduce leakage and demand, and address sewer discharges and phosphorus in treated wastewater. It published the Expanded Storm Overflows Discharge Reduction …
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Significant action needs to be taken in the short term to meet environmental targets. In 2023 Defra published the Environmental Improvement Plan and set targets for the sector to reduce leakage and demand, and address sewer discharges and phosphorus in treated wastewater. It published the Expanded Storm Overflows Discharge Reduction Plan in September 2023, which set targets for water companies to reduce environmental harm from combined sewer overflows to zero by 2050.44 The EA told us that the Water Framework Directive set statutory obligations to improve the quality of water bodies, which need to be delivered by 2027.45 Over the next five years the activity to meet all of these targets includes over 18,000 actions by water companies, and accounts for £27 billion of the sector’s anticipated £47 billion spend on infrastructure improvements.46
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Government response AI summary
The government agrees that significant action is needed to meet environmental targets and highlights existing plans and the EA's role in monitoring and enforcement, without committing to new actions.
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HM Treasury
17
Conclusion
42nd Report - Water sector regulation
Acknowledged
We asked the witnesses about water companies’ current environmental performance. Ofwat and the EA are taking enforcement action against every wastewater company for their management of combined sewer overflows. Water quality pollution incidents have increased.47 WildFish highlighted failures in regulation in its written submission, while in its written submission the …
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We asked the witnesses about water companies’ current environmental performance. Ofwat and the EA are taking enforcement action against every wastewater company for their management of combined sewer overflows. Water quality pollution incidents have increased.47 WildFish highlighted failures in regulation in its written submission, while in its written submission the Office for Environmental Protection set out failures to comply with environmental law by Defra, the EA and Ofwat.48 The EA told us that the sector will be spending around £12 billion on storm overflows in the next five years, but this will only fix 44% of the overflows, and Defra acknowledged the work would be “long and expensive”.49 44 C&AG’s Report, paras 1.4, 2.8 45 Q 42 46 C&AG’s Report, para 14 47 C&AG’s Report, paras 1.3, 1.14 48 WSR0001, WSR0007 49 Q 105 14 As we reported in June 2025, mismanagement of wastewater and sewage is a serious public health concern and heightens the threat of anti-microbial resistance.50 The EA told us that the original deadline for meeting the Water Framework Directive had been 2015, and that work was being undertaken now because it had “run out of delay time”.51
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Government response AI summary
The government recognises the concerns about water companies’ current environmental performance and is committed to holding water companies to account for their environmental performance, and is working to ensure that they are meeting their obligations to protect the environment.
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HM Treasury
18
Conclusion
42nd Report - Water sector regulation
Acknowledged
The EA told us it is increasing the number of inspections it does, and its teams are building up expertise in how wastewater treatment plants work.52 Of the 4,600 inspections the EA undertook last year, it told us found breaches in permits in 1,653, including 92 serious breaches and six …
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The EA told us it is increasing the number of inspections it does, and its teams are building up expertise in how wastewater treatment plants work.52 Of the 4,600 inspections the EA undertook last year, it told us found breaches in permits in 1,653, including 92 serious breaches and six which would normally lead to prosecution.53 The EA said it faces a “justice gap” where it cannot prosecute all the offences it finds, because there are too many of them and prosecution is too expensive. The EA stated that its new powers for civil penalties, through the Water (Special Measures) Act, will help to encourage companies to take action.54
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Government response AI summary
The government supports the EA’s work to increase the number of inspections it does and build up expertise in how wastewater treatment plants work and is also working to address the “justice gap” where the EA cannot prosecute all the offences it finds and is …
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HM Treasury
19
Conclusion
42nd Report - Water sector regulation
Acknowledged
Both the EA and Ofwat told us they would like to encourage companies into ‘enforcement undertakings’, whereby companies are obliged to take action to fix an issue, or return money to bill-payers. The EA told us that at present, only 12% of its cases get an offer of undertakings. Both …
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Both the EA and Ofwat told us they would like to encourage companies into ‘enforcement undertakings’, whereby companies are obliged to take action to fix an issue, or return money to bill-payers. The EA told us that at present, only 12% of its cases get an offer of undertakings. Both Ofwat and EA told us they do not have the legal power to impose undertakings, although the EA told us it is hoping to use civil penalties as a lever to get more companies to volunteer.55
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Government response AI summary
The government encourages the EA and Ofwat to use enforcement undertakings where appropriate and is working to ensure they have the necessary powers.
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HM Treasury
20
Conclusion
42nd Report - Water sector regulation
Accepted
Over the period 2019 to 2024 water companies paid over £430 million in penalties as a result of enforcement action from the EA and Ofwat. Of the fines imposed by the EA, 84% went to HM Treasury.56 Defra told us that it is looking at ways of channelling money into …
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Over the period 2019 to 2024 water companies paid over £430 million in penalties as a result of enforcement action from the EA and Ofwat. Of the fines imposed by the EA, 84% went to HM Treasury.56 Defra told us that it is looking at ways of channelling money into local water projects.57 In 2024 it set up a Water Restoration Fund, using £11 million from fines which it had agreed with HM Treasury could be used on water projects. This money has not yet been disbursed to the chosen recipients.58 In June, Defra announced that a further £100 million from fines and penalties levied against water companies since October 2023 would be spent on projects to clean up rivers, lakes and seas. It did not provide a timeline for when the projects would be announced, or when funding would be disbursed.59 50 Committee of Public Accounts, Antimicrobial resistance: addressing the risks, Thirtieth Report of Session 2024–25, HC 646, 13 June 2025 51 Q 43 52 Q 56 53 Q 75 54 Qq 76-77, 88 55 Qq 45-46, 89 56 C&AG’s Report, para 1.15 57 Q 46 58 Qq 46, 90; C&AG’s Report, para 1.18. 59 Defra, Government to invest over £100m in water company fines to local environmental projects, 19 June 2025 15 Financial resilience of the water sector
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Government response AI summary
The government recognizes the importance of using penalties paid by water companies to benefit the environment and cites the Water Restoration Fund as an example.
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HM Treasury
21
Conclusion
42nd Report - Water sector regulation
Acknowledged
The financial resilience of the water sector has weakened. While Water UK pointed out to us that some companies are resilient, Ofwat has signalled its concerns about the financial resilience of 10 of the 16 major companies.60 In 2023–24, 10 companies could not cover their interest payments with cash from …
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The financial resilience of the water sector has weakened. While Water UK pointed out to us that some companies are resilient, Ofwat has signalled its concerns about the financial resilience of 10 of the 16 major companies.60 In 2023–24, 10 companies could not cover their interest payments with cash from operations.61 Defra told us that Ofwat has powers to prevent companies from paying dividends if their financial resilience is insufficient, known as “cash lock-up”. Ofwat told us that it is exercising this power for three companies currently, including Thames Water.62 The Consumer Council for Water told us that Thames Water is the extreme case of increased financial risk.63 We noted that Thames Water is now having to seek new investors to remain solvent, since it only has enough cash to stay afloat until 2026.64
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Government response AI summary
The government is concerned about the financial resilience of the water sector, notes Ofwat's powers to prevent dividend payments, and is committed to working with Ofwat to ensure water companies are financially resilient.
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HM Treasury
22
Conclusion
42nd Report - Water sector regulation
Acknowledged
Companies have taken large dividends in the past – in 2005 and 2018 a company paid a dividend of more than 100% of the equity in the company, and in 9 other cases in the last 34 years companies have paid dividends of more than 60% of the equity in …
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Companies have taken large dividends in the past – in 2005 and 2018 a company paid a dividend of more than 100% of the equity in the company, and in 9 other cases in the last 34 years companies have paid dividends of more than 60% of the equity in the company.65 Ofwat told us that high dividends have resulted in weak financial resilience in companies, and that those dividends have often been funded by financing decisions and do not reflect operational performance.66 Companies have taken on high levels of debt, with the sector average at 70% of the value of the company – above the 55% Ofwat expects.67 The regulators could not prevent this happening in the past. The Consumer Council for Water told us that this leads to an increase in risk. We noted that that high levels of debt are due to poor financial management, not borrowing to invest.68 Likewise we noted that complex company structures can affect the regulated company – such as Kemble’s performance affecting Thames Water.69 Ofwat has visibility of these wider corporate structures, but does not have powers over those entities.70 This needs to urgently change. Ofwat told us that it ring-fences the regulated business to protect customers. Ofwat told us it has increased 60 Qq 5, 19; C&AG’s Report, para 3.7 61 C&AG’s Report, para 3.22 62 Qq 34, 68-69 63 Q 5 64 Qq 32-33 65 Qq 78-79; C&AG’s Report, para 1.22 and Figure 7 66 Qq 67-69 67 C&AG’s Report, para 3.4-3.5 68 Qq 5, 109 69 Qq 14, 34 70 C&AG’s Report, para 3.26 16 its powers to prevent money leaving companies.71 But in 2018 and in 2024 the whole sector’s credit-worthiness was downgraded, in part due to decreased regulatory predictability.72
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Government response AI summary
The government acknowledges water companies should not be paying excessive dividends at the expense of investment, and notes Ofwat's powers to prevent dividend payments if financial resilience is insufficient and monitoring of water companies' dividend policies.
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HM Treasury
23
Conclusion
42nd Report - Water sector regulation
Acknowledged
First Economics told us that financial resilience depends on having confidence that financial markets will supply water companies with new debt and equity.73 Ofwat estimates companies will need around £12 billion in new equity over the next five years to support their spending plans.74 Ofwat told us that companies had …
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First Economics told us that financial resilience depends on having confidence that financial markets will supply water companies with new debt and equity.73 Ofwat estimates companies will need around £12 billion in new equity over the next five years to support their spending plans.74 Ofwat told us that companies had raised £5 billion in equity over the last five years. It also acknowledged that some companies are facing challenges in raising investment.75 Both equity and debt investors require a return for their investment allowing for the risk associated with the investment. Ofwat has also increased the level of returns for investors over the next five years which is covered by customer bills.76 The Consumer Council for Water told us that a low-risk, low-return environment was needed, and First Economics confirmed that this would be one way to bring bills down.77
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Government response AI summary
The government recognises that financial resilience depends on confidence in financial markets, is committed to creating a stable regulatory environment, and is working with Ofwat to ensure water companies are financially resilient.
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HM Treasury
24
Conclusion
42nd Report - Water sector regulation
Acknowledged
We sought to understand would happen if a water company became insolvent. Defra told us that that the special administration regime will ensure that services are protected.78 Defra also acknowledged that there would be costs involved in setting up such a regime, which the government would seek to recover.79 If …
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We sought to understand would happen if a water company became insolvent. Defra told us that that the special administration regime will ensure that services are protected.78 Defra also acknowledged that there would be costs involved in setting up such a regime, which the government would seek to recover.79 If government costs cannot be recovered elsewhere, the government now has the power to recover them through customer bills.80 Defra told us that it needed to be careful about this, and the impact on billpayers.81 Roles and responsibilities within the regulatory framework
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Government response AI summary
The government confirms that the special administration regime will protect services if a water company becomes insolvent and it has the power to recover costs through customer bills if necessary, committed to protecting customers in such an event.
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HM Treasury
25
Conclusion
42nd Report - Water sector regulation
Acknowledged
Defra has overall responsibility for setting the policy and regulatory framework for water in England.82 Defra told us there is “too piecemeal a picture” of regulation currently, with overlaps and gaps in responsibilities.83 71 Qq 34, 110 72 C&AG’s Report, para 3.32 73 Q 3 74 C&AG’s Report, para 3.6 …
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Defra has overall responsibility for setting the policy and regulatory framework for water in England.82 Defra told us there is “too piecemeal a picture” of regulation currently, with overlaps and gaps in responsibilities.83 71 Qq 34, 110 72 C&AG’s Report, para 3.32 73 Q 3 74 C&AG’s Report, para 3.6 75 Qq 100, 110 76 C&AG’s Report, paras 3.23, 3.35 77 Qq 10-11 78 Q 109 79 Q 32 80 C&AG’s Report, para 3.28 81 Q 109 82 C&AG’s Report, para 2.2 83 Q 84 17 We asked Defra and the regulators about two key areas of regulation: the net zero impact of the sector, and the security of the network. On net zero, the EA told us it does not comprehensively assess the impact of the actions it asks water companies to take on net zero, and that it was focused on delivering specific outcomes such as phosphorus reduction, because of the way the environmental law is focused. The EA told us emissions from wastewater represent 1.2% of the UK’s emissions, and that they are doing a lot of work towards meeting the industrial emissions directive.84 Meanwhile, Ofwat must have regard for the government’s net zero target through its consumer, resilience and sustainable development duties. On network security, including cyber security, DWI is responsible for checking that water companies have taken appropriate action in the supply of drinking water to be protected from attacks.85 Defra acknowledged that the framework for wastewater is not as robust.86
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Government response AI summary
The government acknowledges the need for a joined-up approach to water management and is considering the Water Reform Committee's recommendations, with next steps to be set out in due course.
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HM Treasury
26
Conclusion
42nd Report - Water sector regulation
Acknowledged
We asked whose responsibility it is to balance environmental need with affordability. Ofwat told us that there is no formal basis for making trade-offs between affordability and making improvements, nor was there in previous price reviews.87 Defra acknowledged that there had been “deep under-investment” leading to a big jump up …
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We asked whose responsibility it is to balance environmental need with affordability. Ofwat told us that there is no formal basis for making trade-offs between affordability and making improvements, nor was there in previous price reviews.87 Defra acknowledged that there had been “deep under-investment” leading to a big jump up now.88 Water UK told us that a former minister had turned down a reservoir application in the past on the basis of “no immediate need”. It also told us that it would have been cheaper to start infrastructure projects when interest rates were lower.89 First Economics told us that the previous price review was a “lost opportunity” to do more investment, and this was a collective failure on the part of the regulators, Government and companies.90 The role of the independent Water Commission
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Government response AI summary
The government states that Ofwat has a statutory duty to ensure that water companies can finance their functions while protecting customers, and that Defra sets the overall policy framework and environmental objectives.
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HM Treasury
27
Conclusion
42nd Report - Water sector regulation
Acknowledged
An independent Commission, headed by Sir Jon Cunliffe, is currently reviewing the water sector regulatory system.91 Defra told us that recognised that the sector needed a “fundamental reset”. Defra told us that the Commission was asked to cover areas including the regulatory system structure for planning as well as strategic …
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An independent Commission, headed by Sir Jon Cunliffe, is currently reviewing the water sector regulatory system.91 Defra told us that recognised that the sector needed a “fundamental reset”. Defra told us that the Commission was asked to cover areas including the regulatory system structure for planning as well as strategic planning, what the 84 Qq 80-82 85 C&AG’s Report, para 2.4 86 Q 83 87 Qq 84-85 88 Q 49 89 Qq 17-18 90 Q 9 91 C&AG’s Report, para 7 18 legislative framework looks like, and how to reform regulation.92 The NAO report set out its recommendations with the expectation they would be considered alongside the recommendations of the Commission.93
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Government response AI summary
The government agrees the water sector needs a fundamental reset and is considering the Water Reform Committee's recommendations, with next steps to be set out in due course.
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HM Treasury
28
Conclusion
42nd Report - Water sector regulation
Acknowledged
Defra told us that the Commission’s interim report says that the sector needs a reset in its strategic planning, legislative framework, regulatory framework, water company structures, governance, assets and resilience.94 Defra told us that it fully accepted the contents of the interim report, and had big changes to make.95 In …
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Defra told us that the Commission’s interim report says that the sector needs a reset in its strategic planning, legislative framework, regulatory framework, water company structures, governance, assets and resilience.94 Defra told us that it fully accepted the contents of the interim report, and had big changes to make.95 In 2024, Moody’s cited the uncertainty associated with the government review of the sector as one of the reasons it downgraded the credit-worthiness of the whole sector.96
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Government response AI summary
The government agrees the sector needs a reset and is considering the Water Reform Committee's recommendations, with next steps to be set out in due course.
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HM Treasury
29
Conclusion
42nd Report - Water sector regulation
Accepted
Defra acknowledged that some issues were too pressing to wait until it implemented the Commission’s recommendations. Defra told us that it took some of the actions needed in the Water (Special Measures) Act. However, EA told us that its power to take action when storm overflows are used on days …
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Defra acknowledged that some issues were too pressing to wait until it implemented the Commission’s recommendations. Defra told us that it took some of the actions needed in the Water (Special Measures) Act. However, EA told us that its power to take action when storm overflows are used on days without rain will not come into force until 1 January 2026.97 Ofwat also told us it was consulting on the approach for the fit and proper test over next two to three months. Defra told us that the Act also establishes new customer panels and other measures to make companies more directly accountable to customers, but did not tell us when they would be in operation.98
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Government response AI summary
The government agrees that some issues are too pressing to wait, and cites the Water Act 2024 and Ofwat's consultation on the fit and proper person test as actions already taken.
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HM Treasury
30
Conclusion
42nd Report - Water sector regulation
Acknowledged
The regulators told us about operational changes they were making now. The EA told us it has increased its capacity to carry out inspections, and expects to do 10,000 a year from next year, including returning to areas where issues were found this year.99 We asked the regulators if there …
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The regulators told us about operational changes they were making now. The EA told us it has increased its capacity to carry out inspections, and expects to do 10,000 a year from next year, including returning to areas where issues were found this year.99 We asked the regulators if there was more they could co-operate on. Ofwat told us that enforcement teams across the two regulators work together, and bring intelligence together on company performance. The EA also told us it and Ofwat are building a platform for sharing information, to be able to join up better.100 92 Qq 48, 95 93 C&AG’s Report, para 25 94 Q 95 95 Q 48 96 C&AG’s Report, para 3.32 97 Qq 91, 107 98 Qq 29, 85 99 Q 75 100 Qq 111, 113 19
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Government response AI summary
The government welcomes the operational changes that the regulators are making to improve their oversight of the water sector and notes that the EA has increased its capacity to carry out inspections of water company sites and assets, and Ofwat is working with the EA …
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HM Treasury