A New Course for Water?

Described by Government as a “once in a generation” plan to overhaul the water system in England , the recently published Department for Environment, Food & Rural Affairs (DEFRA) White Paper outlines ambitious and far reaching plans for regulatory change in the water sector. The proposed reforms will have a significant impact on stakeholders across a number of metrics including, regulatory scrutiny, compliance and investment.

Going with the current?

Labelled “A New Vision for Water”, the White Paper responds to and adopts many of the recommendations the Independent Water Commission laid down in its final report (our analysis of which is here), but also includes some entirely new proposals.

The headline grabbing recommendation to abolish Ofwat and set up a new single regulator that will incorporate the water functions of the Environment Agency, Natural England and the Drinking Water Inspectorate has been confirmed. The new regulator will enjoy a wider regulatory remit, e.g., through the introduction of new powers allowing it to take enforcement action against any third party operating a water treatment or supply asset. The new organisation’s powers and oversight will also be bolstered by the addition of a “Chief Engineer” to its board, who will provide long-term guidance in relation to infrastructure resilience and asset health.

Other significant recommendations taken forward include: 

• The new regulator adopting a “supervisory approach” to regulating water companies, while keeping benchmarking and modelling as an “important tool to avoid abuse of monopoly power”. Teams will be established within the new regulator with company-specific expertise who will be responsible for oversight and funding decisions for each water company. This will be within a “constrained discretion” framework that aims to empower the regulator to have greater flexibility to support improving outcomes, underpinned by appropriate guardrails and principles of good regulatory practice. This supervisory approach will sit alongside a new Performance Improvement Regime (PIR) for poorly performing water companies.
• The Government will seek to further promote competition in the water industry. This will include amending the Specified Infrastructure Projects Regulations (SIPR) to enable a wider range of projects (including non sewage-focused projects) to qualify for delivery under SIPR, building on the success of the Thames Tideway Tunnel, meaning that more projects will be delivered pursuant to a competitive tender, driving efficiencies. The SIPR procurement model will sit alongside Ofwat’s Direct Procurement for Customers (DPC), considering the value of water infrastructure investment being committed via SIPR and DPC during Asset Management Period 8 (the current five-year investment cycle for the water industry). In addition, Government will focus on the long-term strategic framework for regulating the New Appointments and Variations (NAVs) market working with other organisations, including government departments, to promote house-building and to reduce unnecessary regulatory burdens placed on NAVs.
• Consolidation of planning processes from the existing 20+ into 2 core planning frameworks for water supply and water environment to reduce the costs of required water infrastructure upgrade projects and to significantly reduce the administrative burden on companies. This would include the establishment of a regional water planning steering group and increased coordination with local partnerships.
• Development of new requirements related to asset-mapping, management and developing asset health. This includes new forward-looking asset health metrics and applying statutory resilience standards. There will be more investment in the asset resilience base through changes to the Price Control process to ensure companies are incentivised to bid for the investment they need with appropriate ringfencing of capital maintenance expenditure.
• Replacing the Competition and Markets Authority’s (CMA) price review redeterminations dispute process with a more focussed appeals process, a long advocated for change.

An overarching aim underpinning the proposed reforms is attracting investment into the sector, e.g., by moving away from the “boom-and-bust” delivery cycle of the current 5-year industry price reviews and to a 5/10/25-year planning approach, reducing volatility and increasing certainty for water companies, investors and customers.

Going out with the tide?

In some significant respects, the White Paper either goes beyond the recommendations of the Independent Water Commission’s final report, or appears to row back on these. For example:  

• It promises to “consider taking forward a new regime for senior accountability” in the sector, learning lessons from similar regimes implemented in the financial services sector, but does not expressly commit to putting this in place – whereas the Independent Water Commission was clear in its recommendation that a senior accountability regime should be established.
• It further considers adding the water industry as a new sector requiring mandatory notification under the National Security and Investment Act (NSIA). Mergers between water companies are already subject to a separate CMA regime but placing the sector in scope of NSIA would (a) impose an obligation on investors to notify Government of transactions which result in a change of control of a relevant company, and (b) expressly allow Government to further scrutinise investment in the sector, including investment by UK companies.
• Conversely, the White Paper is silent on the Independent Water Commission’s recommendation that the new regulator should have additional powers to block material changes to the ultimate controllers of water companies.
• It proposes the creation of a new ombudsman designed specifically for the water industry. The Independent Water Commission recommended the Government consider converting the Consumer Council for Water into a new mandatory Water Ombudsman, whereas the White Paper envisages an entirely new, bespoke, body with a stronger customer advocacy role.
• Rather than significantly reforming the system of Operator Self-Monitoring on pollution incidents, the Government has decided to entirely end its use and replace it with “Operator Monitoring”, driven by greater digitisation and automation, making data accessible to the public in near-real time and involving “intelligence-led” inspections.

What will come out in the wash?

The White Paper outlines significant reforms but stakeholders will need to wait for the Government’s Transition Plan, due to be published later in 2026, and a new water reform bill, which Government has promised to introduce during this Parliament, for key details of how the proposals will operate in practice.

In the medium term, stakeholders will be keen to understand how Government will manage “operational risks” of transitioning to the new regulator. For example, how Government will ensure continuity of ongoing price controls, enforcement cases, or improvement programs while the new regulator is being set up – the level of inter-agency cooperation required to achieve this is potentially very significant. The new regulator’s mandate will also need to reconcile economic, environmental and consumer protection duties that previously sat across multiple bodies, and it will be important to understand exactly which functions are being ceded to it by the Environment Agency and the Drinking Water Inspectorate.

A key challenge in the longer term will be adapting to increased supervisory scrutiny. The new supervisory model will see water companies undergo ongoing “health checks”, which has the potential to help “catch” issues early and result in more achievable targets than the 5-year price review cycles. However, the regulator will need to strike the right balance between scrutiny and intervention, e.g., to set improvement plans or penalties mid-period to “fix failures” and protect customers, and ensure that it does not overly constrain or second-guess business decisions, leading to delays or a lack of certainty. Companies will need to adapt and ensure that their compliance processes and culture are sufficiently “proactive” to match the increased level of scrutiny.

Companies will also want to understand how the new supervisory model will fit in with existing benchmarking and modelling tools (this interaction promises to have a material impact on how the new regulator will operate) and to keep a watching brief on the possible introduction of a “senior managers” regime.

Stakeholders will also want to monitor that Government remains committed to “positive messages” included in the White Paper, such as “not trapping water companies in a cycle of decline” through excessive enforcement action, or maintaining a high bar for intervention via the Special Administration Regime to tackle underperformance.

Ultimately, it will be crucial for stakeholders to continue to keep a very close eye on developments as these trickle through and continue to engage with Government on its proposals.