Source · Select Committees · Public Accounts Committee
42nd Report - Water sector regulation
Public Accounts Committee
HC 824
Published 18 July 2025
Recommendations
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 …
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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.
HM Treasury
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7
Accepted
Publish regulatory roadmaps for new water sector powers and future strategic changes by Autumn 2025.
Recommendation
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 …
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Government Response 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.
HM Treasury
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Conclusions (28)
2
Conclusion
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 …
Government Response 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 the first half of 2026.
3
Conclusion
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 …
Government Response 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, instead referring to water company investment and Ofwat's proposed mid-AMP growth reopener.
4
Conclusion
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 …
Government Response 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.
6
Conclusion
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 …
Government Response 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 White Paper and a new Water Reform Bill.
1
Conclusion
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 …
Government Response 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 months to improve communication with customers about bill increases and infrastructure improvements.
8
Conclusion
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 …
Government Response 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 about their performance.
9
Conclusion
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’ …
Government Response 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.
10
Conclusion
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 …
Government Response 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 2023, it published a Roadmap for enhancing asset health understanding in the water sector.
11
Conclusion
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 …
Government Response 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 invest in asset maintenance and improvement.
12
Conclusion
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 …
Government Response 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.
13
Conclusion
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 …
Government Response 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.
14
Conclusion
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 …
Government Response 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.
15
Conclusion
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 …
Government Response 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.
16
Conclusion
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 …
Government Response 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.
17
Conclusion
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 …
Government Response 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.
18
Conclusion
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 …
Government Response 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 committed to ensuring that the EA has the resources it needs to hold water companies to account for their environmental performance.
19
Conclusion
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 …
Government Response Summary
The government encourages the EA and Ofwat to use enforcement undertakings where appropriate and is working to ensure they have the necessary powers.
20
Conclusion
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 …
Government Response 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.
21
Conclusion
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 …
Government Response 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.
22
Conclusion
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 …
Government Response 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.
23
Conclusion
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 …
Government Response 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.
24
Conclusion
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 …
Government Response 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.
25
Conclusion
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 …
Government Response 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.
26
Conclusion
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 …
Government Response 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.
27
Conclusion
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 …
Government Response 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.
28
Conclusion
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 …
Government Response 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.
29
Conclusion
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 …
Government Response 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.
30
Conclusion
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 …
Government Response 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 to improve data sharing and intelligence gathering.