The system of regulating water companies needs "a complete overhaul" as the sector hikes customer bills to expand failing infrastructure and tackle pollution, MPs have said. The Public Accounts Committee (PAC) said the Government must act with urgency to strengthen oversight of the sector to rebuild trust and ensure its poor performance improves.
In a report released on Tuesday, the committee highlighted how bills are expected to rise at their fastest rate in 20 years while customer trust in the sector is at an all-time low. Years of underinvestment, a growing population and extreme weather caused by climate change have led to intense pressure on England's ageing water system, causing widespread flooding, supply issues, sewage pollution and leakages.
Financial crisis hits water sector
Last year 10 companies were unable to generate enough income to cover their interest payments at a time when the sector must invest in environmental measures, cut leaks and build new reservoirs in the coming years to avoid a shortfall of five billion litres by 2050. "The environmental performance of companies is woeful," the report said.
"Ofwat and the EA (Environment Agency) have failed to secure industry compliance." The PAC said reforms to the system of regulation carried out by the Environment Agency and the Drinking Water Inspectorate (DWI) are needed "to address the fragmentation of accountability and failure to enforce current environmental standards".
Regulatory gaps leave customers exposed
"There are gaps in critical areas such as oversight of the wastewater network and understanding of the condition of assets," the report read. "No-one is taking ultimate responsibility for balancing affordability with long-term needs."
The PAC's inquiry found that 20% of people are struggling to afford their water bills while companies are implementing huge bill increases without explaining why, or how the money will be spent. In response, the group of MPs recommended Ofwat sets 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.
Sewage improvements fall short
The report also warned that company plans to spend around £12 billion in the next five years to update the antiquated sewage system will only fix around 44% of sewage overflows. And while the Environment Department (Defra) created a £11 million fund for rolling out environmental improvements from water company fines in 2024, the money has not yet been distributed, with the PAC urging the Government to do so by the end of the year.
Elsewhere, the committee warned that there appears to be "no single guiding mind" balancing the need for improvements with the impact on bills. It is therefore calling for the Government to plug the gaps in regulator responsibilities and be explicit on the trade-offs between the need for improvements, water supply needs, and the impact on bills.
Urgent action needed
In terms of financial failings, the PAC is urging Ofwat to review its powers and capabilities to ensure it can act to improve the financial resilience of the sector. Sir Geoffrey Clifton-Brown, PAC chairman, 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. Customers are being expected to shoulder the burden of water companies' failings, without being told why or on what their money will be spent."
Call for sector transformation
"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," Clifton-Brown said. "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."
Environment Agency responds
"Government must act now to strengthen regulators and support their efforts to hold companies to account," he added. An Environment Agency spokesperson said: "We take our role in protecting environment and regulating the water sector very seriously."
"Our enforcement action has led to over £151 million in fines since 2015 and we are conducting the largest ever criminal investigation into potential widespread non-compliance by water companies at thousands of sewage treatment works. We're also modernising our approach to regulating the water sector, with more regulation and enforcement officers, better data and are on track to carry out 10,000 inspections this year."
(PA/London) Note: This article has been edited with the help of Artificial Intelligence.
