Ofwat could be scrapped in water reforms

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An independent review of the water industry is to recommend sweeping changes to the way the sector is managed, including the potential replacement of Ofwat with a strengthened body combining economic and environmental regulation.

Former Bank of England governor Sir Jon Cunliffe will publish the findings of the Independent Water Commission on Monday, with stakeholders across the industry expecting significant changes to regulation to be at its heart.

The existing regulator Ofwat has been under fire from all sides in recent years amid rising public anger at levels of pollution and the financial management of water companies.

Campaigners and politicians have accused Ofwat of failing to hold water operators to account, while the companies complain that its focus on keeping bills down has prevented appropriate investment in infrastructure.

In an interim report, published in June, Sir Jon identified the presence of multiple regulators with overlapping responsibilities as a key issue facing the industry.

While Ofwat is the economic regulator, the Environment Agency has responsibility for setting pollution standards, alongside the Drinking Water Inspectorate.

Sir Jon's final report is expected to include a recommendation that the government consider a new regulator that combines Ofwat's economic regulatory powers with the water-facing responsibilities currently managed by the EA.

In his interim report Sir Jon said options for reform ranged from "rationalising" existing regulation to "fundamental, structural options for integrating regulatory remits and functions".

He is understood to have discussed the implications of fundamental reform with senior figures in industry and government in the last week as he finalised his report.

Environment Secretary Steve Reed is expected to launch a consultation on the proposals following publication of the commission report.

The commission is also expected to recommend a "major shift" in the model of economic regulation, which currently relies on econometric modelling, to a supervisory approach that takes more account of individual company circumstances.

Sir Jon has said the water industry requires long-term strategic planning and stability in order to make it attractive to "low-risk, low-return investors".

The water industry has long complained that the current model, in which companies are benchmarked against a notional model operator, and penalised for failing to hit financial and environmental standards, risks a "doom loop".

Thames Water, currently battling to complete an equity process to avoid falling into special administration, has said the imposition of huge fines for failing to meet pollution standards is one of the reasons it is in financial distress.

Publication of the Independent Commission report comes after the Environment Agency published figures showing that serious pollution incidents increased by 60% in 2024, and as Thames Water imposes a hosepipe ban on 15m customers.

Ofwat, Water UK and the Department for the Environment all declined to comment.

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