Water regulator Ofwat faces abolition after official review

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Ofwat, the water regulator for England and Wales, should be replaced by an “integrated” watchdog for the industry, according to an independent review of oversight of the sector.

The review led by Sir Jon Cunliffe, a former deputy governor of the Bank of England, was commissioned by environment secretary Steve Reed in the wake of public anger about pollution, rising bills and executive pay in the industry.

Cunliffe’s main recommendation was for a new water regulator in England to replace Ofwat and the Drinking Water Inspectorate and to assume the water-related functions of the Environment Agency and Natural England.

In Wales, Ofwat’s economic responsibilities should be integrated into Natural Resources Wales, an existing body, Cunliffe said.

Reed will make a speech later on Monday in which he is expected to launch a formal consultation into the regulatory overhaul.

The report comes as the UK’s water industry has faced a succession of crises. The largest company in the sector, Thames Water, has been teetering on the edge of financial collapse owing to its huge debt pile.

On Friday, the Environment Agency revealed that the number of serious pollution incidents by water companies in England rose 60 per cent last year on the previous year.

The Cunliffe report, released on Monday, has 88 recommendations and runs to 465 pages. The commission’s mandate did not extend to considering possible nationalisation.

The report said that climate change, population growth and economic development would put “huge pressure” on water systems in the coming decades.

“The current regulatory landscape is fragmented and overlapping, and fully joined-up regulation is essential for the system to meet the demands of the future and ensure that private water companies act in the public as well as the private interest,” it said. 

“A powerful, single regulator for water would simplify the system, reduce duplication, close regulatory gaps and ensure a much stronger ‘whole-firm’ view of each company,” it added.

The report argued that the new body would also improve investor confidence through a more stable regulatory regime.

It recommended new powers for the regulator to block changes in water company ownership, for example when investors are deemed not to prioritise the long-term interests of customers.

The report suggested the addition of “public benefit clauses” to water company licences, adding that the regulator should be able to set “minimum capital” requirements so that water companies are less reliant on debt and more financially resilient. 

The report also proposed that a formal turnaround regime should be established for the regulator in England and Wales to support the recovery of poorly performing companies.

This could allow regulators to “defer or waive fines” if they damage a utility’s ability to make infrastructure investments, it said, with restrictions on management bonuses and shareholder dividends mooted as a condition of entering the regime.

Cunliffe has called for ministers to transfer planning responsibilities from existing regulators to nine new regional water authorities. 

Under the proposals, the Consumer Council for Water, the consumer watchdog, would be upgraded to an “Ombudsman for Water” with stronger powers.

The report recommended a “national social tariff” to help low-income customers who need support to pay their bills. This would replace the current patchwork of support, which varies between water companies.

Cunliffe conceded in a BBC interview that bills would probably keep rising faster than inflation. And he said he would not support caps on executive salaries in the sector given the need for water companies to attract the “best people”.

Water UK, an industry lobby group, said: “Everyone agrees the system has not been working. Today is a major moment and this fundamental change has been long overdue.”