42nd Report - Water sector regulation

Select Committee
Public Accounts Committee HC 824 18 July 2025
Report Status Government responded
Conclusions & Recommendations 30 items (2 recs)
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Government Response (AI assessment · 30 of 30 classified)
Accepted 8
Acknowledged 21
Deferred 1
Government response
Treasury minutes: Government response to the Committee of Public Accounts on the Forty-second report from Session 2024-26 · published 15 Oct 2025
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Recommendations & Conclusions

21 results
8 Conclusion Acknowledged
Water company customer trust at lowest level due to environmental and service failures.
Conclusion
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 … Read more
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.
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9 Conclusion Acknowledged
Unsatisfactory explanation of water bills undermines customer understanding and trust.
Conclusion
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 … Read more
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.
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10 Conclusion Acknowledged
Water mains replacement rates are unsustainable, threatening environmental health and infrastructure.
Conclusion
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 … Read more
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.
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11 Conclusion Acknowledged
Ofwat's asset health measurement relies on retrospective data, impeding proactive maintenance.
Conclusion
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 … Read more
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.
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12 Conclusion Acknowledged
Wastewater asset inspection responsibilities are unclear, lacking a dedicated inspectorate function.
Conclusion
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 … Read more
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.
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13 Conclusion Acknowledged
Growing water supply-demand gap threatens future security, requiring accelerated infrastructure development.
Conclusion
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 … Read more
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.
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14 Conclusion Acknowledged
Lack of water infrastructure delays critical housing and development projects across regions.
Conclusion
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 … Read more
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.
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15 Conclusion Acknowledged
Defra and EA lack data on housing projects stalled by water system constraints
Conclusion
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 … Read more
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.
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16 Conclusion Acknowledged
Significant short-term action needed for water companies to meet environmental targets
Conclusion
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 … Read more
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.
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17 Conclusion Acknowledged
Water companies' environmental performance remains poor with increasing pollution and regulatory failures
Conclusion
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 … Read more
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.
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18 Conclusion Acknowledged
Environment Agency faces 'justice gap' in prosecuting widespread water company breaches
Conclusion
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 … Read more
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.
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19 Conclusion Acknowledged
Regulators lack power to impose enforcement undertakings on water companies
Conclusion
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 … Read more
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.
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21 Conclusion Acknowledged
Financial resilience of the water sector has weakened significantly across many companies
Conclusion
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 … Read more
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.
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22 Conclusion Acknowledged
Grant Ofwat legal powers over water companies' wider corporate structures
Conclusion
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 … Read more
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.
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23 Conclusion Acknowledged
Water companies face challenges raising new equity despite increased investor returns
Conclusion
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 … Read more
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.
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24 Conclusion Acknowledged
Costs of special administration for insolvent water companies may fall to billpayers
Conclusion
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 … Read more
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.
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25 Conclusion Acknowledged
Water regulation in England is fragmented, lacking comprehensive net zero assessment and robust wastewater security.
Conclusion
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, … Read more
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.
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26 Conclusion Acknowledged
Lack of formal mechanism to balance environmental improvements with water sector affordability and investment.
Conclusion
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 … Read more
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.
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27 Conclusion Acknowledged
Independent commission currently reviewing the water sector's regulatory system, indicating need for fundamental reform.
Conclusion
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 … Read more
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.
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28 Conclusion Acknowledged
Defra accepts interim report calling for water sector reset, creating uncertainty impacting credit-worthiness.
Conclusion
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 … Read more
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.
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30 Conclusion Acknowledged
Water regulators are increasing inspection capacity and enhancing operational cooperation and information sharing.
Conclusion
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 … Read more
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.
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