Q&A: Investigating UK water industry regulation

The UK Industry and Regulators Committee has been investigating the regulation of the water industry, including looking at the Water Services Regulation Authority (Ofwat’s) performance in relation to its statutory duties, the investment and approach needed to prevent storm overflow overuse and steps that must be taken to secure future water supply.

During its investigation, the Committee took evidence from Thérèse Coffey, Secretary of State for Environment, Food, and Rural Affairs, regulators, water company CEOs, consumer groups, and industry and investment experts.

We take a look at the findings of the report.

Why is the Industry and Regulators Committee launching an inquiry into the work of Ofwat?

The Environment Agency’s most recent annual water and sewerage company performance assessment found that the environmental performance of water companies was at its lowest ever level and most companies’ performance was declining. It said that unless change is made, in 20 years the UK will not have enough water to match demand. It is felt that water companies, which supply the UK’s water and maintain associated infrastructure for water and sewage, must improve their practices dramatically to prevent further damage to the environment and secure future supply.

What does the committee think Ofwat needs to do better?

The committee said that Ofwat and the Environment Agency must go further to hold water companies to account for environmental pollution through penalties and prosecution. They also want the Government to ensure adequate funding is available for this.

How will the committee’s recommendations be funded?

The committee wants Ofwat to find ways to increase investment outside the Price Review process and consider the important role that third-party competition could play in reducing costs, as it did with the Thames Tideway tunnel project, which is being paid for by Thames Water’s 15 million wastewater customers through their bills. It said that Ofwat has failed to ensure companies invest sufficiently in water infrastructure, choosing to keep bills low at the expense of investment that is now sorely needed.

Did the report address the substantial bonuses associated with water companies in the current climate?

Yes. It said water companies have been overly focused on maximising financial returns at the expense of the environment, operational performance and financial sustainability. The committee said water companies should not be able to receive substantial bonuses while their companies have missed performance targets and polluted the water environment.

Should the Government also be held accountable for the current issues with the water industry?

The report found that the Government has not put in place a joined-up approach to the key issues facing the sector, including reducing water pollution and securing future supply. The committee suggests it must give Ofwat guidance on how it should handle the trade-off between balancing the financial needs of customers during a cost-of-living crisis with the urgent need for infrastructure and environmental investment. It should also ensure adequate funding is available to the Environment Agency to inspect and enforce environmental offences by water companies.

And what about current legislation?

The committee is asking for new legislation to introduce a single social tariff in time for its inclusion in the next Price Review which will protect vulnerable customers from bill increases and provide a baseline of support for customers regardless of who supplies their water.

It would also like a National Water Strategy to be published which sets clear expectations in relation to the quality of the water environment and the resilience of water supplies, giving regulators clear benchmarks to work towards.

Were there any other recommendations from the report?

Yes. It was also mentioned that there should be consideration into banning the sale of wet wipes that are not rapidly biodegradable. The committee would also like to accelerate the planning process for reservoirs, including designating, and if necessary, amending its National Policy Statement for Water Resources Infrastructure as a matter of priority. And finally, it would like to make water metering compulsory for all households and businesses where it is possible to do so.

What happens now?

The Government is now considering the recommendations from the report. It has until 22nd May 2023 to respond to the report.