Failing water sector left to flounder as piecemeal regulators appear to be missing in action - PAC report

- Major investments desperately needed to prevent pollution from antiquated sewage systems 

- Regulators must provide much more clarity on plans to improve the financial precarity of the sector 

The water system has been left to sink for too long, with hikes in customer bills now required to update and expand the failing infrastructure. In a report on the water sector, the Public Accounts Committee (PAC) is calling for the government to act with urgency to strengthen oversight of the sector in order to rebuild trust and force the sector to improve its poor past performance. 

Water bills are expected to rise at their fastest rate in 20 years, at a time when customer trust in the sector is at an all-time low. Over the next five years, customer bills are expected to increase by an average of £31 a year. The PAC's inquiry found that 20% of people are struggling to afford their water bills – yet companies are implementing these huge increases without explaining why, or how the money will be spent. Ofwat must set clear expectations for companies to explain where customer money is being spent, why bills are rising and what improvements customers can expect for their money, in the next six months.  

A key element damaging consumer trust is the pollution resulting from decades of underinvestment in antiquated sewage systems. The Environment Agency (EA) says there are too many offences to prosecute every wastewater company for their poor environmental performance. Companies are expected to spend around £12bn in the next 5 years to update the system, but this will only fix around 44% of overflows. Defra created an £11m fund for environmental improvements from water company fines in 2024, but has still not distributed the money. The report recommends Government disburse the amounts promised by the end of the year, and for regulators to work urgently to ensure money raised from fines is reinvested into improving the system. 

The PAC warns that there appears to be no single guiding mind balancing the need for improvements with the impact on bills and as such in the past, the wrong approach has been taken. It is calling for the government to plug the gaps in regulator responsibilities (highlighted in the attached graphics) and be explicit on the trade-offs between the need for improvements, water supply needs, and the impact on bills. 

Based on current usage rates, England faces a daily shortfall of 5bn litres of water by 2050. Water companies now need to build 10 new reservoirs to avoid this shortfall, with none having been built in the last 30 years. This is not the only infrastructural issue -if work to replace the ageing water mains continues at the current rate, it will take 700 years to replace the entire network.  

The financial failings of water companies are well documented, with payments of excessive dividends worsening trust in the sector. With 10 companies unable to generate enough income last year to cover their interest payments, the PAC is calling on Ofwat to review its powers and capabilities to ensure it can act to improve the financial resilience of the sector. It should also set out what is likely to happen, and importantly, who will bear the costs in the event of a company insolvency. 

PAC Chair Sir Geoffrey Clifton-Brown said: “The monumental scale of work required to reverse the fortunes of failing water companies is rivalled only in difficulty by the efforts needed to repair customers' faith in the sector. In the face of looming water shortages, steps must be taken immediately if the Government is to set the sector back on the right path. The good news is that our inquiry heard that the quality of our drinking water is some of the best in the world. 

“Customers are being expected to shoulder the burden of water companies' failings, without being told why or on what their money will be spent. The fines imposed for the environmental harms caused by neglected infrastructure must be diverted to fund improvements, and we must know what will happen in the event of company insolvency. Reports of Thames Water's impending insolvency are deeply concerning. It is past time that we had a low risk, low return water sector, from its current farcical state of overly complex, sometimes unregulated companies, and a culture of excessive dividends and borrowing. There is also a lot to be done in the regulatory sphere, with a pressing need to improve and streamline the existing regulatory regime. 

“More must be done to stem the flow of pollution entering our waterways, as it poses a serious risk to human health and continues to degrade the quality of our lakes and rivers. However, regulators are overwhelmed by the number of prosecutions and appear unable to deter companies from acting unlawfully. Government must act now to strengthen regulators and support their efforts to hold companies to account.” 

PAC report conclusions and recommendation 

1. Water companies are implementing huge increases to the bills charged to customers without explaining why, or how the money will be spent. Ofwat sets what water companies can charge customers via the price review. Over the period 2025-2030 bills are expected to increase (in real terms) at the fastest rate for 20 years. Bills are rising to cover a 300% increase in spending on infrastructure improvements in 2025-2030, as well as increases in operational spending and finance costs to compensate for the sector's rising risk profile. Customer trust is at the lowest level in more than a decade driven by poor company performance, particularly on the environment. Ofwat acknowledges consumers are not getting satisfactory information from companies on why bills are rising, or on the support that is available: Ofwat indicated 20% of people are struggling to afford their water bill. Water companies need to explain to customers why the money is needed, and deliver what is expected, to win back trust. 

Recommendation 1. Within the next six months Ofwat must set clear expectations for companies to set out where customer money is spent, why bills are rising and what improvements in infrastructure the funding will deliver. 

2. 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 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 2. 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. 

3. 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 Environment Agency 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 Environment Agency 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 3. 

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. 

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 EA should ensure it is actively monitoring and enforcing compliance with discharge permits, particularly where new development is likely to put additional strain on existing infrastructure, to ensue existing pollution problems do not get worse. If serious risks to the environment arise due to inadequate sewage systems, they should consider blocking developments until the necessary infrastructure is built. 

d) By the end of 2025, Ofwat must set out a clear path by which it could reopen the price review if needed to permit new investment that pertains to new housing developments, commercial developments and economic growth. 

4. 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 Environment Agency'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 4. 

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 

b) The Environment Agency and Ofwat should write to the Committee, alongside the Treasury Minute response to this report, setting how they will hold water companies to account for fixing problems and improving their environmental performance 

5. 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 5. 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. 

6. 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 Environment Agency 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 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 6. 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. 

7. 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 Environment Agency 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 7. 

a) By Autumn 2025, Ofwat and the EA 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 EA'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.