Source · Select Committees · Public Accounts Committee
Recommendation 5
5
Accepted
Ofwat to review powers to improve water sector financial resilience and clarify insolvency costs
Recommendation
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.
Government Response 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 Ofwat committed to working on financial resilience over the next six months.
Government Response
Accepted
HM Government
Accepted
The government agrees with the Committee’s recommendation. Monitoring Financial Resilience (MFR) report but its monitoring and engagement with companies is conducted year-round. Where Ofwat identifies an elevated concern or a need for the company to take action regarding the risks to its financial resilience, the regulator engages on a more frequent or targeted basis, requiring more information from the company and, as required, reporting on improvements, including action plans to address the issues identified. In 2025, six water companies have had injected or made an unconditional commitment to invest new equity totalling £1.9 billion, of which £1 billion relates to four companies which were in Ofwat's "Action Required" or "elevated Concern" categories in last year's MFR report (Southern Water, South East Water, Affinity Water and SES Water). Should a regulated company become insolvent, the Special Administration Regime (SAR) exists to ensure that services to customers continue while the business is rescued or transferred to a new owner. In the majority of cases the costs of the SAR process would be borne by the company's investors/creditors, but if this is not possible then any costs incurred by the Government can be recovered from the company's customers through future bills. The government has announced that a new single regulator will be established, bringing together the functions of Ofwat, Environment Agency, Natural England and the Drinking Water Inspectorate into one regulator. Ofwat will remain in place during the transition to the new regulator and government will ensure they provide the right leadership to oversee the current price review and investment plan during that time. The Independent Water Commission provided several recommendations on strengthening financial resilience. The government is considering the Commission's recommendations and will respond to them in its White Paper due to be published for consultation this autumn. Ofwat will work with Government over the next six months and beyond to ensure that this approach continues to improve the financial resilience of the water sector.