Recommendations & Conclusions
8 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
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
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
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