Delivering a reset for water
Summary of our response to the Independent Water Commission’s Call for Evidence
Eager for change
The creation of the Independent Water Commission reflects a recognition by the government, the public and the water companies that the current system of regulation is not working. Restoring ecological health to our waterways, rebuilding tired infrastructure and restoring the public’s trust in the water sector will all require a fundamental reset of the system. The British public overwhelmingly want cleaner waterways and resilient infrastructure, but these things come with trade-offs, such as the cost to consumers.
The water industry supports the aims of the Commission and is eager for change.
Diagnosing the regulatory problem
The work of the Commission represents the first proper look at the water sector in over thirty years. As a consequence, the regulatory system has grown up in a piecemeal way and become confused.
One result of this failing regulatory system has been an inability by water companies and regulators to meet the public’s expectations of the water environment. Permitted investment since 2010 has been insufficient to replace ageing assets and tackle the causes of spills and overflows. This is not to say, of course, that all water companies have behaved perfectly. It is now clear that a minority of companies in England borrowed too much, which has made their financial position vulnerable and forced their managers to devote precious time to strengthening balance sheets instead of their customer and environmental performance. And, as with any sector, the quality of top management teams has varied from outstanding to poor.
The need for change is vital, not least to ensure the sector can continue to attract the billions in private investment needed over the next few years.
Catch-up investment - a necessary first step
To its great credit, Ofwat has recently recognised the need for investment on a much greater scale than it has ever done before. The 2024 price review has approved a quadrupling of new investment in capital projects in the water sector over the next five years.
This will deliver vital, tangible benefits – reduced leakage, fewer sewage spills, and the beginnings of improved resilience in the face of a growing population and changing climate. But even after £104 billion of investment has been made by 2030, we will not be able to pretend all challenges will have been solved.
Crucially, we must never again find ourselves in the position of having to sharply increase bills to make up for a long period in which they and investment were supressed, with all of the additional cost and consumer harm that results from wild swings. This, above all else, is why the system must change.
Investment needs have never been greater
Core to delivering the objectives of government, regulators and companies is investment. Existing infrastructure was not designed for the climate we are now seeing, a rapidly growing population or new sources of water demand, such as from data centres. We urgently need to invest to improve resilience and increase supply. The UK will face a water deficit of 5 billion litres per day by 2050 without remedial action (around a third of current supply), and the plans that have been agreed to date are unlikely to be enough. Wastewater capacity is also under increased strain.
We must put in place a regulatory system fit for the future. It needs, not only to enable companies to raise more than £270 billion of private capital over the next 25 years, but also for that capital to be deployed faster and more efficiently.
£104bn
investment will be made by 2030
£270bn
private capital needed over the next 25 years
5bn
litres of water in deficit per day by 2050
Attracting more investment to fund improvements
If we are to deliver and maintain this step change in water sector investment, the companies making these investments need to be able to raise the money. The current framework of economic regulation does not sufficiently capture the need for water companies to be investable in order to deliver performance improvements.
The approach of the economic regulator in England and Wales should be based on clear resilience standards set by elected governments, make greater use of engineering-based assessments, and consider the realities faced in each region, including companies’ specific investment needs.
A new approach
The water industry is up for the reset the sector needs. Water companies want to be able to restore ecological health to our waterways, upgrade infrastructure and enable economic growth. Delivery, if done right, will slowly start to improve public trust in the sector. We know that will require a period of significant change and water companies stand ready to play their part.
Our message is clear: the need for change is vital, not least to ensure the sector can continue to attract the billions in private investment needed over the next few years.
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Delivered within twelve months of the Commission reporting, this should set clear, long-term outcomes for water companies, regulators, government departments, other public bodies and – crucially - other sectors all to work towards, based on the best available evidence and supported by measurable interim milestones. Government should use this as an opportunity to move away from years of siloed, narrowly focused targets that often bring perverse consequences. It should articulate two new overarching objectives: one for the environment and one for recreation and public health.
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We need the introduction of legally-binding resilience standards, ensuring that networks are upgraded to be resilient to climate change and extreme weather, and heavily reduce the length and severity of service failures and emergency incidents. Resilience standards, with accompanying levels, should be set as a minimum for drought, peak water demand, asset resilience and flood resilience by the end of 2026. Set over 25 years with interim milestones, the standards would be binding on the government (like Environment Act targets in England), with public bodies like regulators required to ensure their achievement, for the first time properly enabling the management of the long-term national risks facing society.
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The water industry is subject to multiple regulators that are poorly coordinated and have overlapping and sometimes conflicting duties, powers, responsibilities and interpretations of the rules. This is slowing delivery, reducing impact and increasing the cost to billpayers. Regulators should be given sharpened responsibilities and clearer duties - allowing each to focus on what it does best. This includes removing unnecessary duplication by ending Ofwat’s role in setting environmental targets, instead further empowering the Environment Agency and Natural Resources Wales. They should be supported by much clearer Strategic Policy Statements about the outcomes wanted by elected governments, how they should be prioritised and how the trade-offs should be managed.
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Regulators have huge power and autonomy over hundreds of billions of pounds of spend. That means they should be as effective as possible, but also be prepared to show how they have used the enormous trust placed in them to deliver what society needs. The Environment Agency, Natural Resources Wales, Ofwat and the Drinking Water Inspectorate should be funded properly and allowed to pay sufficiently high and flexible salaries to attract and retain the most skilled people who are also incentivised to help deliver the best overall outcomes. As the economic regulator is not accountable to government but instead Parliament, the National Audit Office should be asked to support Parliament’s oversight function by conducting a review of the effectiveness of its decisions at least every five years, including a quantitative assessment of the degree to which it is performing and taking decisions in the long term interests of society.
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Supported by a long-term investability framework that requires the regulator to restore the sector’s credit rating to ‘triple A’ (increasing stability and reducing customer bills), new supervisory teams would be empowered to intervene when a water company’s financial resilience is at risk, including by requiring minimum equity buffers and recapitalisation plans for affected companies. The best performers should be able to achieve greater autonomy and earn higher returns based on delivering excellent service.
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Each part of England and Wales is different, so we need to move away from the current crude cost models that assume near-uniform needs, issues and risks. Done right, there is huge promise in a ‘supervisory’ model that gives regulators a much greater understanding of companies and regions, enabling interventions to more quickly seize local opportunities, protect operational and financial resilience and replace regulatory burdens that are getting in the way of delivery. We propose supervisory teams would be responsible for ensuring companies have the resources they need to maintain and renew their assets and to support innovation. Comparative regulation should be retained, with performance incentives based on delivery and relative performance. Importantly, any new approach should not simply add another layer of complexity on top of the existing framework.
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The water resources planning process has contributed to maintaining security of supply for several decades. But it increasingly looks inadequate for meeting the challenges of the future, including those exacerbated by climate change. The risk of drought is rising but hosepipe bans as an emergency response are becoming increasingly unacceptable to the public. There is, therefore, now a strong case for a National Water Grid for England which would act as a system planner to optimise delivery between regions, set certain assumptions related to water security (including to allow for more investment ahead of need), find ways to accelerate regulatory processes, and to monitor and communicate risks and delivery.
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Create a new pipeline and separate treatment of ‘enhancement’ programmes, so that major projects can be approved and delivered far more quickly. Economic growth will be supported by longer price controls for major schemes, more agile mechanisms to unlock investment when it is needed, the creation of more options for rapidly procuring the delivery of major infrastructure where that is demonstrated to add value and speed up delivery, and reform of new connection charges.
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Give local groups more power over setting priorities and how they should be delivered. Government should support the development of existing river catchment partnerships, and new approaches to monitoring of what is happening, empowering citizen scientists and giving consumers a say on the development and delivery of water company plans.
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We need a consumer champion ombudsman with the legal power to resolve disputes, bringing water into line with other sectors. Customers should be enabled to take complaints directly for adjudication and enforcement once they have exhausted the company complaints process as is the case in the energy, communications and rail sectors. New consumer panels create an opportunity to strengthen consumer representation in the sector, but may require a rationalisation of the existing landscape.
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Based on mandatory smart metering in England and the removal of regulatory blockers, new tariffs should be allowed that enable the abolition of standing charges and more innovative charges that promote more sustainable usage. To protect against drought, government and regulators should explore ways to shift costs away from the majority of households towards very high users of water, such as those with large swimming pools. Government and regulators should also consider how to put in place financial rewards, through water bills, for customers that reduce the amount of wastewater or surface water entering the sewer system. We also support the UK Government’s development of a new affordability scheme for England, as enabled by the Water (Special Measures) Act 2025.
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Effective management of the water system involves different stakeholders, many of whom currently take no responsibility for the harm they cause. Failure to control pollution or rainwater at source means clean-up costs are borne by water billpayers. This is not right and must change. For the most harmful substances, a regulatory approach is needed to stop these contaminants entering waterways – including a ban on the manufacture and sale of non-essential uses of PFAS, and of mercury in dental amalgam. For other chemicals, a ‘polluter pays approach’ – such as an extended producer responsibility scheme – will likely be needed to pay for advanced ‘fourth-stage’ sewage treatment and match European treatment standards.