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Ofwat is the economic regulator for the water and sewage sectors in England and Wales. But how does it work?

A sewage treatment operator carrying out essential cleaning and maintenance work.
A sewage treatment operator carrying out essential cleaning and maintenance work.

What is Ofwat? 

Ofwat is the economic regulator for the water and sewage sectors in England and Wales. It works in the interests of water consumers by making sure that water companies carry out their duties and are properly run, that the water system is resilient and sustainable, and that the market is competitive. Ofwat covers England and Wales: in Scotland and Northern Ireland, the Water Industry Commission for Scotland and the Utility Regulator respectively fulfil the same role.

How has the water and sewage market developed?  

To promote investment and efficiency, in 1989 the Thatcher government turned the 10 publicly owned regional authorities previously responsible for water and sewage into private companies regulated by Ofwat. There are now 11 major water and sewage companies, and six  more water-only companies. 40 Baker C and Carver D, ‘Constituency information: Water companies’, House of Commons Library, 27 October 2022, retrieved 25 January 2023 These companies operate the public water and sewage networks and are known as water and sewage undertakers. 

To date, these companies retain their regional monopolies for household provision, as it is difficult to introduce proper competition into a market built around massive infrastructure systems – such as pipes and reservoirs –  that make it difficult for new companies to enter the market. This creates the risk of water companies exploiting their monopoly position to charge consumers high prices, underinvest in their services, and make unfair profits as consumers have no alternative. Ofwat works to mitigate this risk. 

However, since 2017, almost all non-household customers (businesses, public bodies and charities) have been able to choose between more than 40 water supply or sewage companies. 41 Ofwat, ‘Licences and licensees’, Ofwat Website (no date), retrieved 2 February 2023  In June 2016, Ofwat published a report finding that a “net positive outcome” is likely if competition is also introduced to households, but there are currently no concrete plans to do so. 42 Ofwat, ‘Costs and benefits of introducing competition to residential customers in England – summary of findings’, 19 September 2016, retrieved 2 February 2023

How is Ofwat structured? 

Ofwat, like other economic regulators such as Ofgem, is a statutory non-ministerial government department. This means it is independent of central government control in its decisions, is not directly led by a minister and can only be reconfigured by legislation passed by parliament. However, it does take overall policy direction from the Department for Environment, Food and Rural Affairs (Defra) in England and the Welsh government in Wales. 

Ofwat is led by a board that consists of the chief executive, the chair and usually up to six non-executive directors and three executive directors. Non- executive appointments to the board are made by the environment secretary in consultation with the Welsh government. 

What does Ofwat do? 

Most of Ofwat’s mission and duties were laid out in the Water Industry Act 1991, but they have steadily evolved with new legislation, most recently the Water Act 2014 which established competition in the non-household market.  

Alongside its primary duties to protect consumer interests by promoting competition, ensure water companies are financially sustainable and well-run and to secure resilient water supply in the long run, Ofwat also has some secondary aims such as contributing to a sustainable water system, promoting efficiency in water supply and sewage systems and avoiding undue price discrimination. 43 Ofwat, ‘Our duties’, Ofwat Website (no date), retrieved 2 February 2023 Ofwat has a range of powers at its disposal to achieve its objectives, which include investigating potential breaches of the rules, imposing penalties, and setting price limits. 

Ofwat also pushes the water sector to improve environmentally. 44  Ofwat, ‘Ofwat and the environment’, Ofwat Website (no date), retrieved 2 February 2023 It works alongside the Drinking Water Inspectorate (the regulator of drinking water quality in England and Wales) and the Environment Agency and Natural Resources Wales (which handle some environmental issues in England and Wales respectively). 

How does Ofwat set prices and license companies? 

Ofwat carries out a price review every five years in the context of agreeing each company’s five-year business plan. 45 Ofwat, ‘Price Reviews’, Ofwat Website (no date), retrieved 25 January 2023  Water companies must submit their business plans and negotiate these with Ofwat, which then sets a cap on the maximum amount each water company can charge their customers. If companies fulfil their duties – which includes maintaining an agreed level of investment and environmental protection – for less than the prices they are allowed to charge, they can make a profit. Approval of a business plan is a powerful tool as it allows Ofwat not only to control pricing but also to influence levels of investment and progress towards sustainability goals. If they disagree with Ofwat’s decision, water companies can appeal to the Competition and Markets Authority.  

Ofwat also holds licensing and investigation powers. All water companies must hold a licence to do business in England and Wales. The exact licence conditions depend on whether they are an undertaker or licensee, and on individual circumstances, but common conditions relate to transparency, customer support and financial stability. Failure to comply can lead to the licence being revoked.  

Ofwat routinely investigates water companies and can impose fines of up to 10% of turnover for breaches of their obligations. It fined Southern Water £3m – as well as requiring £123m to be paid in compensation – in October 2019 for breaking its licence commitments to properly dispose of wastewater. 46 Ofwat, ‘Investigation into Southern Water’s wastewater treatment sites and the company’s reporting of relevant compliance information to us’, Ofwat Website, 10 October 2019, retrieved 20 January 2023

What problems are Ofwat grappling with? 

Ofwat has been criticised for its scrutiny of water companies’ finances and investment levels. Average household bills have increased by 40% in real terms since privatisation. 47 The Comptroller and Audit General, ‘The economic regulation of the water sector’, session 2015-16 HC 487, 14 October 2015, retrieved 25 January 2023 Alongside this, serious pollution incidents have decreased and overall water quality has improved markedly, 48 Environment Agency, ‘The state of the environment: water quality’, Environment Agency, February 208, retrieved 25 January 2023  but raw sewage was discharged into rivers 375,000 times over more than 2.7m hours in 2021.  49 Laville S, ‘Raw sewage discharged into English rivers 375,000 times by water firms’, The Guardian, 31 March 2022, retrieved 25 January 2023  In theory, this should only be permitted in exceptional circumstances (such as a large storm) to prevent the water system being overwhelmed and pipes bursting, but there has been an increase in storm discharge to an “unacceptable level” in the last few years. In part this is due to a growing population, an increase in hard surfaces and climate change,  50 Department for Environment, Food and Rural Affairs, ‘Consultation on the Government’s storm overflows discharge reduction’, 31 March 2022, retrieved 25 January 2023 but some have also linked it to low investment levels  51 Giakoumis T and Voulvoulis K, ‘Combined sewer overflows: relating event duration monitoring data to wastewater systems' capacity in England’, in Environmental Science: Water Research & Technology, 13 January 2023, retrieved 6 February 2023 and in December 2022 Ofwat itself said that companies were “falling behind” on their investment plans.  52 Ofwat, ‘PN 38/22 Some water companies investing less than half of their allowances to improve water network’, press release, 6 December 2022, retrieved 8 February 2023

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