Issued by: Independent Water Commission

Interim report sets out scale of change needed to reform water sector

The interim findings from the Independent Water Commission (https://www.gov.uk/government/publications/independent-water-commission-review-of-the-water-sector) have been published today (Tuesday 3 June) ahead of its final report this summer.

Sir Jon Cunliffe, Chair of the Commission, has set out five areas where he believes wide-ranging and fundamental change is needed to reset the water sector in England & Wales.

These include clearer direction from government, stronger regulation of water companies, bringing decisions on water systems closer to local communities, and greater focus on responsible, long-term investors.

The Commission’s full conclusions and detailed recommendations will be published later in the summer. This interim report sets out the Commission’s preliminary conclusions and direction of travel; several key decisions will be covered in the final report.

The findings are informed by the Commission’s Call for Evidence (https://www.gov.uk/government/calls-for-evidence/independent-commission-for-water-call-for-evidence), which ran from 27 February – 23 April and received more than 50,000 responses from the public, campaigners, industry, the regulators and many others.

Sir Jon Cunliffe said:

“There is no simple, single change, no matter how radical, that will deliver the fundamental reset that is needed for the water sector.

“We have heard of deep-rooted, systemic and interlocking failures over the years – failure in Government’s strategy and planning for the future, failure in regulation to protect both the billpayer and the environment and failure by some water companies and their owners to act in the public, as well as their private, interest.

“My view is that all of these issues need to be tackled to rebuild public trust and make the system fit for the future. We anticipate that this will require new legislation.”

The five areas are:

1. Strategic Direction & Planning

• At a government level, there needs to be clearer, long-term direction on what it wants from the water system. We want clean and healthy waterways and we need to balance the different pressures on water – from the water industry, agriculture, energy, transport and development – and take account of cost. This requires government to set out its priorities and timescales for the system much more clearly than it does at present.

• Our water systems – rivers, aquifers and coasts – need much better planning and coordination at a regional level. The Commission is considering options to move from the complex planning process we have now to a regional “systems planning” approach in England, bringing better coordination with local authorities and a stronger voice for local communities. It means bringing decisions on water systems, such as where new infrastructure is built or how pollution from different sources should be tackled, closer to the communities who depend on them.

2. Legislative framework

• Water legislation has evolved in a piecemeal fashion over a long period of time - there are currently around 80 pieces of legislation covering the sector. As a result, the legislative framework for water is complex, inconsistent in places and very difficult to navigate.

• The Commission sees a strong case for review, rationalisation and consolidation of existing legislation, to simplify the framework, to create greater flexibility for regulators, and to update standards and broaden objectives. This could include new objectives around public health given the growing recreational use of water.

3. Regulatory reform

• The Commission believes a fundamental strengthening and rebalancing of Ofwat’s regulation is needed with the introduction of a ‘supervisory’ approach, as found in sectors such as financial services. The current model relies heavily on ‘comparability’ – benchmarking companies against one another to assess efficiency and justify customer bills. A ‘supervisory approach’ means a deeper understanding of circumstances and finances to enable intervention early before issues arise, as well as supporting companies when they are going in the right direction.

• On environmental regulation, the Commission is clear that we need to equip a more capable regulator, with the right technology and skills, a stable and consistent approach to funding, and the flexibility to enable innovative solutions that deliver the greatest environmental benefits.

• Much of the friction, cost and complexity in the regulatory system comes from the way in which economic and environmental regulators with different remits interact. The Commission is considering options for significant streamlining and alignment of the regulators to address this. It will make its recommendations in its final report.

4. Company Structures, Ownership, Governance and Management

• The Commission is looking at the ownership, governance and management of private water companies and whether more needs to be done to support transparency and accountability, which could include stronger duties for management. Further recommendations will follow in the final report.

• On ownership, the Commission is clear that the water industry should aim to attract and retain long-term investors seeking low risk, low return investment. This will require restoring investor confidence in the predictability and stability of the regulatory system.

5. Infrastructure & Asset Health

• There is not sufficient understanding of the health and resilience of the water industry’s asset base – its pipes, water treatment plants and pumping stations. Assets have not been, and have not been required to be, fully mapped and there is variation between companies in how they assess asset health.

• The Commission is considering new infrastructure resilience standards at a national level, as well as requiring companies to assess and report asset health, at set intervals, to regulators. This means companies do not just fix failures when they fail, but responsibly plan for the long-term condition and resilience of these critical assets.

Sir Jon Cunliffe continued:

“I have heard a strong and powerful consensus that the current system is not working for anyone, and that change is needed. I believe that ambitious reforms across these complex and connected set of issues are sorely needed.

“I have been encouraged to see, on all sides of the debate, that people have been prepared to engage constructively with our work; I look forward to that continuing as we enter the final stages.”

The Independent Water Commission was announced by the UK and Welsh governments in October 2024 (https://www.gov.uk/government/news/governments-launch-largest-review-of-sector-since-privatisation). It is operating independently of UK and Welsh Ministers.

It is supported by an advisory group, with leading voices from areas including the environment, public health and investment.

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