Forty-Second Report of Session 2024-25 Department for the
Environment, Food and Rural Affairs Water Sector Regulation
Introduction from the Committee In England and Wales, the supply of
clean drinking water to homes is predominantly managed by 16
companies, of which 11 also supply wastewater services, and who are
monopoly suppliers to most consumers. Defra is the Government
department with policy responsibility for the water sector in
England. There are...Request free trial
Forty-Second Report of Session 2024-25
Department for
the Environment,
Food and Rural
Affairs
Water Sector Regulation
Introduction from
the Committee
In England and Wales, the supply of clean drinking water to homes
is predominantly managed by 16 companies, of which 11 also supply
wastewater services, and who are monopoly suppliers to most
consumers.
Defra is the Government department with policy responsibility for
the water sector in England. There are three regulators who
oversee water companies in England.
- The EA regulates water companies for their impact on rivers
and other water bodies, sets and enforces water quality
standards and tackles pollution, including from wastewater
management, in England.
- The Drinking Water Inspectorate regulates drinking water
quality and sufficiency.
- Ofwat is the economic regulator, responsible for setting
the funding envelope for every company every five years.
In 2023 Defra published the Environmental Improvement Plan, which
set out targets for the sector to reduce: the impact of sewer
discharges; phosphorus in treated wastewater; public consumption
per head and leakage. Defra also estimates that England will face
a shortfall of 5 billion litres of water every day by 2050, based
on current usage.
The water sector estimates it needs to spend almost £290 billion
on improvements to infrastructure over the next 25 years, as well
as £52 billion on 30 major capital projects to enhance water
supply, to meet these challenges. Customer bills will rise an
average of £31 per household, before inflation, each year for the
next five years. The last time bills rose at this rate in real
terms was 20 years ago.
Meanwhile, consumer trust stands at its lowest since monitoring
began in 2011, according to research conducted by the Consumer
Council for Water (CCW). Issues like water pollution and
financial mismanagement have been in the public eye. As at
January 2025, both Ofwat and the EA had open enforcement cases
against every major wastewater company in England and Wales. Some
investors have set up complex financial structures and extracted
large dividends from the sector. On two occasions since 2004,
individual companies have paid dividends of over 100% of the
equity in the company.
This could not be prevented by the regulators. The financial
resilience of the sector has weakened and Ofwat has signalled
concerns about the financial resilience of 10 of the 16 major
companies. Thames Water had to agree a short-term rescue plan in
October 2024 to continue operating, but its long-term future is
still not secure.
Based on a report by the National Audit Office, the Committee
took evidence on Monday 9 June 2025 from Water UK; Consumer
Council for Water; First Economics; Department for Environment,
Food and Rural Affairs; Environment Agency and Ofwat. The
Committee published its report on 18 July 2025. This is the
Government's response to the Committee's report.
Relevant reports
Government response
to the
Committee
- The government agrees with the Committee's recommendation.
Target implementation
date: January
2026
- At the 2024 price review (PR24), Ofwat allowed funding for
delivery of substantial improvements for customers and the
environment through a quadrupling of investment for the water
sector over the next five years. To protect customers from
companies failing to deliver these improvements or deliver them
late, Ofwat set out "Price Control Deliverables" (PCDs). PCDs
set out outputs that companies are expected to deliver in terms
of infrastructure delivery. Where water companies fail to
deliver these outputs, they will return funding to customers.
- Ofwat will track the progress companies make towards PCD
output targets through delivery plans and companies will report
against these plans on a six-monthly basis. Companies are also
required to include a short summary describing their plan and
the progress against it in a language and format that is
accessible to customers and clearly available on the company's
website. This summary should describe what is being delivered
and the progress the company is making towards delivering the
programme and be regularly updated.
- Working with its partner regulators Ofwat is also working
to improve the transparency of the progress companies are
making towards delivery of their PR24 enhancement programmes.
It will publish its review of delivery plan progress next year.
- Ofwat agrees that companies should take further proactive
action to communicate to customers what bill increases are
delivering. It will engage with companies over the next six
months on their plans to explain to customers within their 2026
bills, why bills are rising and what improvements in
infrastructure the funding will deliver.
- The government agrees with the Committee's recommendation.
Target implementation
date: until
December 2030
- The Independent Water Commission provided several
recommendations to improve the long-term assessment, monitoring
and maintenance of asset health in the water sector, in
addition to recommendations to improve assurance of
infrastructure delivery. 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 is consulting on the implementation of a new asset
management licence condition which will require companies to
gain external certification to the internationally recognised
Asset Management Standard as well as provide updates on their
progressing maturity.
- To address some water companies' relative weakness in asset
management maturity, Ofwat is progressing a number of themes of
work including developing an asset condition assessment
methodology. Companies will be expected to apply this
methodology using a combination of existing and new inspection
or survey data. The resulting insights will inform investment
proposals submitted through the PR24 cost change process and
future price reviews. Ofwat estimates that, building on data
collected at PR24, it will have data that accounts for around
80% by value of the sector's asset base by 2027. This is an
ambitious project which will consider different ways of
providing regulatory assurance, and Ofwat will give careful
consideration to what is deliverable and proportionate.
- The Environment Agency has increased the number of staff
dedicated to regulating the water industry by 440, including
regulatory officers, data analysts, and enforcement
specialists. Understanding whether infrastructure projects
funded in PR24 are completed as required will be part of the
regulator's inspections. The evidence being gathered will
inform future annual performance assessments, investment plans,
and proactive enforcement
action.
- The Environment Agency and Ofwat are also developing a
Delivery and Monitoring Framework (DMF) to ensure the timely
completion of the water industry investment programme. This
will be ready in the first half of 2026. This will track the
completion of enhancement actions and report on progress and
enable the sharing of intelligence across water regulators.
- The government agrees with the Committee's recommendation.
Recommendation implemented
- The Chief Executive of the Environment Agency has written
to the Committee setting out in more detail how it will work
with water companies to ensure planning solutions are
prioritised before planning applications, thereby limiting
delays to development brought about by objections.
- The Environment Agency is already working with water
companies through the Regulators Alliance for Progressing
Infrastructure Development (RAPID) to ensure that large
strategic resource options are planned well in advance of
planning applications and will build on this by expanding joint
early-planning frameworks and improving long-term forecasting,
including through the government's Water Delivery Taskforce.
- The Environment Agency will continue to encourage
pre-application discussions with water companies on schemes
through its cost-recovery discretionary pre-application service
for projects under the Town and Country Planning Act and
Development Consent Order
regime. This will increasingly be supported by digital tools,
data-sharing platforms, and agreed protocols to identify and
resolve potential issues before formal submission.
- The National Framework for Water Resources already provides
a strong foundation for communication and public engagement,
and the Environment Agency will strengthen its role in the
years ahead by embedding regular review cycles, expanding
public dialogue, and using targeted outreach to increase
understanding of the need for large-scale strategic resource
options, helping to reduce local objections and accelerate
delivery.
- Water company Water Resource Management Plans (WRMPs)
already set out the options likely to be progressed over the
next 25 years based on local growth and water demand forecasts.
Going forward, the Environment Agency will work with companies
to make these plans more dynamic and responsive to inform
strategic planning, pre-empt infrastructure constraints, and
give communities earlier visibility of the solutions required.
- Through these steps, the Environment Agency aims to embed
early collaboration, transparent decision-making, and strategic
foresight into the planning system, ensuring that
infrastructure is ready when and where it is needed, while
protecting the environment and supporting sustainable growth.
- The government disagrees with the Committee's
recommendation.
- Defra has established a cross-Government Water Delivery
Taskforce, including the Environment Agency and other
regulators, to provide oversight and leadership where
environmental planning concerns from a lack of water or
wastewater capacity may inhibit development. The Taskforce
tracks the progress of delivery on key projects via a dashboard
enabling Defra to keep a firm grip on delivery of projects and
intervene early to remove blockers. This approach is already
showing results, with more than 10,000 homes unblocked in
Oxford by overcoming wastewater capacity constraints.
- The Environment Agency advises local planning authorities
and is not the decision maker for planning applications. It is
only one of several statutory consultees, and it is not
possible to correlate their advice with whether a planning
authority issues permissions.
- The Environment Agency does, however, publish data on the number
of planning applications responded to within 21 days or
otherwise agreed.
- The Environment Agency currently responds to around 10,000
applications per year. As part of the organisation's commitment
to support growth, the Environment Agency committed to
responding to 95% of planning applications within 21 days from
September 2025 onwards, which they achieved in quarter one of
this year, 2025.
- The Environment Agency is a statutory consultee for several
types of planning applications. It provides advice in relation
to planning policy on flood risk, protection of land and water
quality, water resources, waste regulation, and biodiversity.
Where it does currently raise objections to determining bodies,
objections are often resolved through additional submissions
from applicants.
- The Environment Agency has committed to a range of reforms
to contribute to the Government's growth agenda. This includes
improving their land use planning services; making their
permitting services more effective and efficient for key growth
sectors; creating a more transparent data system for
regulation; supporting the government's approach to
strategic spatial planning; and working with the Government to
reform the regulatory framework.
- The government agrees with the Committee's recommendation.
Recommendation implemented
- Growth within a sewerage catchment must not lead to a
breach of environmental permits. The Environment Agency
monitors and enforces compliance with environmental permits
using its regulatory powers to protect the environment. Water
companies, through their investment and planning functions,
create the capacity for their wastewater assets to accommodate
the additional capacity needed for growth. If this leads to a
deterioration of performance, this may result in enforcement
action, in line with the Environment Agency's Enforcement and
Sanctions Policy. A water company is also legally required to
comply with its environmental permits as part of its licence of
appointment. Again, noncompliance that contravenes this licence
may result in enforcement action by Ofwat.
- The Environment Agency supports sustainable growth,
ensuring that it does not cause permit breaches or
environmental pollution.
- The water industry now has a statutory duty to produce
Drainage and Wastewater Management Plans (DWMPs). These plans
will outline how companies intend to extend, improve, and
maintain a resilient drainage and wastewater system over the
next 25 years, considering pressures from climate change, urban
creep, and population growth.
- The government agrees with the Committee's recommendation.
Target implementation
date: end of
2025
- Ofwat supports the UK Government's economic growth mission
through its Growth Duty. On 15 March 2025, the Chief Executive
of Ofwat wrote to water companies asking what more could be
done to accelerate the delivery of major projects to support
economic growth and remove the barriers to doing so. Ofwat has
been assessing and developing ideas raised by companies in
response.
- In order to allow increased flexibility of funding
mechanisms for water companies, Ofwat consulted in July 2025 on
a proposed in-period adjustment mechanism for critical cost
areas where costs remain uncertain. This process will give
companies earlier certainty over costs that will be recovered
at the next price control period, and if necessary, provide
access to additional revenue in this period. It covers several
critical areas of investment including projects that may
benefit new housing development, commercial developments and
economic growth.
- Ofwat is also proposing to introduce greater flexibility
into the regulatory framework through a mid-Asset Management
Period (AMP) growth reopener. This mechanism would
enable water companies to apply for additional funding during
Asset Management Period 8 (2025–30) in response to
higher-than-expected growth in population, households, or
business demand, with adjustments made to allowed revenue at the
end of AMP8. Companies would be able to submit proposals between
March and May 2027, allowing Ofwat to assess whether they are on
track with their existing AMP8 commitments before considering any
additional allowances. To be eligible, companies must provide
sufficient evidence in their proposal, such as evidence of growth
in demand and what progress they have made in delivering their
existing commitments.
- The government agrees with the Committee's recommendation.
Target implementation
date: Spring
2026
- The Water Restoration Fund (WRF) was established in April
2024 to reinvest water company environmental fines and
penalties back into projects to improve the water environment.
£11 million of fines were collected from April 2022 and October
2023 and made available on a competitive basis through the WRF
for the regions in which the fines were collected. WRF projects
are now underway, with the first payments issued in July 2025.
The successful WRF projects will be announced in the coming
months and before the end of 2025.
- In June 2025, the government announced that fines and
penalties levied against water companies since October 2023, as
well as future fines and penalties, will be reinvested into
projects across the country to clean up our rivers, lakes and
seas. Proceeds from water company fines and penalties will not
be spent on water company infrastructure or to meet their
wastewater target, which will be funded through the Water
Industry National Environment Programme (WINEP). Further
details of the projects and programmes funded by these fines
will be set out by the end of the financial year.
- The government agrees with the Committee's recommendation.
Recommendation implemented
- Ofwat will use its suite of regulatory tools to hold
companies to account, as recently seen with its enforcement
decisions against several companies for their management of
sewage treatment works. It has also tripled its enforcement
capacity in recent years following extra funding, as approved
from the Treasury.
- Ofwat monitors the performance of companies against the
PR24 eight performance measures focused on reducing pollution
and improving river health.
7.The Environment Agency has transformed its regulatory approach
to target key areas
andadoptamoreproactive,preventativestance.TheEnvironmentAgencyhasexceededthe
target of 4,000 inspections by the end of March 2025 and are on
track to complete 10,000 within the year. The serious cases of
non-compliance are being considered for enforcement, while most
minor breaches will be addressed through local operational
action. Crucially, inspections generate intelligence that enables
preventative measures. This will help avert future incidents and
contribute to a water system that is more resilient.
- Both regulators are also focusing on long-term planning,
investment, legislation implementation, and addressing root
causes. The Chief Executives of both regulators have written to
the Committee to set this out in more detail.
- The government agrees with the Committee's recommendation.
Target implementation
date: January
2026
- Ofwat categorises companies according to their financial
resilience status in its annual 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.
- The government agrees with the Committee's recommendation.
Target implementation
date: Summer
2026
- The government has set out its initial response to the
Independent Water Commission's recommendations, as set out in
the statement made by
the Secretary of State on 21 July.
- The government's initial response was that, subject to
consultation this autumn, the government will abolish Ofwat and
merge its functions with water functions across the Environment
Agency, Natural England and the Drinking Water Inspectorate to
form a single new regulator.
- Until the single water regulator is fully established, the
existing regulators will continue to carry out their functions
and enforcement responsibilities in full. The government will
clarify its expectations through a Strategic Policy Statement
and ministerial direction, expected to be published later this
Autumn.
- The government will respond to the Independent Water
Commission's recommendations in full via a White Paper,
published for consultation this Autumn, and a new Water Reform
Bill that will be introduced early this Parliament. In its
response it will consider the Committee's and the NAO's
findings.
- The government disagrees with the Committee's
recommendations.
- The government is taking action to implement the Water
(Special Measures) Act 2025 powers as quickly as possible. The
government has already brought into force provisions to make
Pollution Incident Reduction Plans (PIRPs) statutory in
England. Similarly, new provisions have already been into
force, strengthening the penalty for obstructing
investigations. Obstruction offences can now be heard in the
Crown Court, with a maximum penalty of 2 years imprisonment for
directors and executives, where obstruction occurs with their
consent, connivance or neglect.
- Ofwat has been working on the design of its new powers
under the Water (Special Measures) Act 2025 since the
legislation was first introduced and it has made substantial
progress, including putting in place a new rule which has
already required six water companies to prohibit the payment of
bonuses to executives for poor performance in 2024-25.
4.DuringAutumn2025Ofwat is
consultingonseveralrulesrelatingtotheWater(Special Measures) Act
including a rule to ensure companies involve consumers in
decision making, a rule for companies to test fitness and
propriety of senior staff, and on updates to regulatory
accountingguidelines(RAGs)todeliverrequirementsontransparentfinancialreporting.Ofwat
will also launch consultations on revised Governance Code. Ofwat
has set a target date of April2026 for watercompanies
tocomplywithrules on consumer involvementandfitnessand propriety
(subject to consultation). In July 2026 companies will also
publish Annual Performance Reports (APRs) containing new
requirements on financial reportingtransparency.
- The Water (Special Measures) Act (WSMA) 2025 has also
introduced new powers for the Environment Agency. They will
recover approximately £21 million each year through the new water
industry enforcement levy to fund costs associated with
regulating the industry.
This includes the cost of investigations and both existing and
any new enforcement activities against pollution discharges
caused by water companies. On 19 August, the
Environment Agency published its conclusions to their
consultation and confirmed the levy will go ahead.
- The WSMA also includes powers to enable faster enforcement
action against water company offences. These powers need to be
implemented through secondary legislation. Defra will consult
on its proposals this autumn, before introducing the secondary
legislation.
- The Environment Agency will then also revise and consult on
its Enforcement and Sanctions Policy that sets out how they
will use the new penalty powers and update its implementation
plans accordingly and publish a roadmap.
- The government agrees with the Committee's recommendation
Target implementation
date: end of
Autumn 2025
- The government will respond to the Independent Water
Commission's recommendations in full via a White Paper,
published for consultation this autumn 2025, and a new Water
Reform Bill to be introduced early this Parliament. The
government will publish a transition plan alongside the White
Paper.
- Until the single water regulator is fully established, the
existing regulators will continue to carry out their functions
and enforcement responsibilities in full. The government will
clarify its expectations through a Strategic Policy Statement
and ministerial direction, expected to be published later in
2025.
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