A shallow dive into the Independent Water Commission’s final report on the water sector

I distinctly remember the day in May 2017.  I was due to give a talk to the firm on the water sector.  On that day, for the first time since I had been focusing on providing legal services to the sector (over 7 years), the sector was in the news because Jeremy Corbyn had announced that he planned to make a manifesto commitment to nationalise the sector.

How different things are now.  Barely a day goes past without a story being in the press about some aspect of how the water sector operates.  This week we have had the publication of the widely anticipated review by the ndependent Water Commission (the “Commission”)  into the water sector (the “Report”).   If the recommendations are taken forward, this will be a radical reshaping of how the sector has operated since privatisation.  In this article I look at some of those key recommendations.

In summary, the Commission identified a number of key issues that need addressing to ensure the future for water and a sustainable water system for years to come, setting out 88 recommendations aimed at transforming the water sector. I highlight seven of the key themes and recommendations.

Effective strategic governance and guidance  

Strategic direction from government is needed to guide the use and development of water systems and to restore the water environment. The competing demands and pressures on our water system means that only government can set out the overall objectives and priorities, balancing the demands of the system and ensuring that long-term objectives are at the forefront of decisions. 

The Commission recommends that with collaboration between the governments in England and Wales the development of a National Water Strategy (the “Strategy”) is required. The Strategy should be long-term with a minimum horizon of 25 years, ensuring that there are interim milestones on a 5- and 10-year basis. The Strategy must provide a clear framework to address the current and future demands on water from all sectors and stakeholders. The current strategic policy statement should be replaced by ministerial priorities issued to the regulator on a 5-yearly basis. 

Regional water systems

Existing functions should be brought together to streamline existing planning procedures, ensuring that local players are involved in the process from start to finish. The Commission suggests that planning responsibilities and resources should be transferred from the regulators to nine new regional water authorities, eight in England and one national water authority for Wales. 

The authorities could be independent allowing input and representation from a number of key regional stakeholders such as local authorities, public health representatives, environmental representatives, agricultural representatives and consumers. 

This system would allow local issues and pressures to be considered when determining water investment plans at a more regional and local level, allowing the planning processes to be streamlined, funding directed to where it is needed the most and ensuring accountability from all sectors who impact on water resources in those specific locations. 

Legislative framework

Current legislation is outdated and complex and requires a review to ensure its applicability to current and future pressures and circumstances. The Commission specifically highlighted the Water Framework Directive (“WFD”) as legislation to improve. The scope of WFD should be reviewed and high-level objectives on environmental quality should be addressed through effective legislative changes. Specific issues identified with the WFD include its limitation in scope, lack of overall progress to achieve targets and challenges with the classification framework and design of its targets and objectives. 

Legislation should be less prescriptive, with more constrained discretion, enabling local planning systems and the regulators to make decisions in the round. The Commission recommended reform of the WFD framework and how it is implemented. The government in England and the Welsh government should issue a consultation on the implementation and effectiveness of the WFD and conduct a thorough review of the WFD through a forward-looking lens, considering its fitness for the future. The Commission also suggested that taskforces should be chaired by the Chief Medical Officer to consider how public health could be brought effectively into water quality legislation. 

The Commission also considered updates and reforms to the Urban Waste Water Treatment Regulations to ensure the delivery of better outcomes and a more considered sustainable approach to wastewater management and drainage.

Consideration by the government must also be given to extended producer responsibility scheme and whether it is required in the water industry to fund improvements. 

The Commission highlighted the importance of long-term planning and investment, noting that the current Price Review mechanism creates challenges for future planning and investment. The short-term focus which has been reinforced by the ridged funding mechanisms and delivery deadlines means that large-scale, long-term investment is discouraged due to initial up-front costs and future uncertainties. The Report suggests that the Price Review process should be amended to ensure it encourages companies to plan and invest for the long-term such as investing in and maintaining assets. 

Structured regulation

The Commission recognised that the Environment Agency does not have the ability to hold the water sector or other sectors that are impacting on the water sector to account.

Reform of operator-monitoring has been suggested by the Commission, by strengthening the regulator’s ability to monitor the operator-monitoring system through enhanced inspections, automation, digitalisation and third-party assurances. The use of technology such as AI has been suggested to improve monitoring and reviewing the full impact of sewage spills, rather than simply noting their timing. Other forms of pollution such as pollution from agriculture, microplastics and PFAS should also have increased and more effective monitoring systems in place. 

Enforcement should be tightened when it comes to abstraction limits, sludge management and drinking water standards. 

The Commission carefully considered the effectiveness and future of Ofwat, the water regulator in England and Wales. It noted that there needs to be a rebalancing of the approach to economic regulation and the oversight of water companies, and instead focus on judgement-based supervisory engagement with water companies. In doing so, the Commission concluded the current regulatory landscape is fragmented and overlapping, and that a unified effective regulator is essential for improving the water industry and that Ofwat was not fit-for-purpose. In England, a new regulator has been proposed to centralise the functions of Ofwat, the Drinking Water Inspectorate, water-environment related functions of the Environment Agency and Natural England. In Wales, the functions of Ofwat were recommended to be integrated into Natural Resources Wales, the Welsh environmental regulator.

Consumers

Consumers should have stronger redress and advocacy against water companies, through the establishment of a water ombudsman. This will create a streamlined, clear process for customers seeking redress from water companies. Citizens Advice was also recommended to step into the role as a consumer advocate.

The Commission also recognised the importance of providing a stronger safety net for the most vulnerable in society, who are most exposed to water poverty. It reaffirmed the importance of the government taking forward the national social tariff, as recently announced, to provide low-income households with support to pay their water bills, intended to address the inconsistency in support currently offered throughout England and Wales. 

The Price Review process should be reviewed to enable consumers greater powers to bring appeals against the price determinations, as well as the powers afforded to regulators to challenge price determinations. 

Water companies 

Although the Commission found no evidence of a causal link between ownership models and environmental and other performance indicators, and recognised the fact that water companies are private companies that are entitled to a return on their investments. The Commission warned that returns should not come at the expense of public interest. 

Changes to regulation, specifically economic regulation should be introduced to lower the regulatory risk but also reduce the variability of returns for water companies. A ‘minimum capital’ requirement should be implemented to make companies more financially resilient, with less reliance on debt. 

Investor confidence also needs to be boosted through greater transparency on proposals and objectives, and a mechanism allowing the government to assist the regulator in ensuring stability, predictability and trust for long-term investors. The Commission recommended that this should be one of the objectives of the Strategy, and maintaining investability of the water sector becomes one of the duties of the new water regulator. 

Further powers for the new regulator should include the power (where necessary) to block changes to ownership of water companies, set gearing levels and give direction to the ultimate controller of the company, in specific circumstances where a water company’s actions do not align with long-term interests of the water company.

The public purpose of water companies should be clear in licence conditions, ensuring that company governance aligns with the governance code for listed companies, bringing in statutory guidance for senior executives. 

The health and resilience of the water industry, water and waste waterways

The Commission notes that the overall health and resilience of waterways is unknown, largely due to the practicalities of the water system being underground, therefore making it hard to map the health of water assets. 

The management, monitoring and delivery of water infrastructure should be overhauled to ensure the effective implementation of safeguards for the provision of water and wastewater management for future generations. New requirements for water companies to map and assess their assets should be introduced, in addition to modifying health measures used in Price Reviews from backward-looking indicators and measuring past failures, to forward-looking in-depth assessments, alongside setting national resilience standards for water.

The Commission identified ongoing public health risks of a failing water system, specifically for members of the public who enjoy water-based activities. The Report considered whether stricter treatment requirements should be placed on water companies to address the emerging and increasing risks of pollutants such as PFAS, microplastics and micropollutants. 

Government response and commitments 

The Report came a day after the government announced its intention to conduct a major clean-up of the UK’s rivers, lakes and seas. The government pledged to halve sewage pollution from storm overflows by 2030, set statutory targets to reduce phosphorous loadings from treated wastewater by 80% by 2038 against a 2020 target (with an interim target of a 50% reduction by January 2028), implement sustainable drainage systems (“SuDS”) into new developments and compel water companies to run trials using nature-based solutions to address water management challenges. 

The Commission’s Report and the government’s response marks a pivotal moment for the water sector in the UK, setting the stage for major regulatory reform, legislative changes and a re-setting for the health of the UK’s water system. 

Out of the 88 recommendations in the Report, the government has already confirmed plans to abolish Ofwat and establish a new centralised regulator. Ofwat will remain until the transition to a new regulator has been completed, it will therefore oversee the current price review and investment plan. 

The Environment Secretary Steve Reed announced in Parliament on 21 July 2025 following the publication of the Report that a further five of the recommendations provided by the Commission will be fast-tracked, these include:

• Establishment of a new water ombudsman by upgrading the Consumer Council for Water;
• Ending operator-monitoring for water companies, and a transition to open-monitoring;
• Committing to ‘a regional element’ of the new water regulator to ensure greater local involvement in water planning;

• Adopting a ‘Water Skills Pledge’ to ensure the water sector has the skills and workforce to deliver wide scale investment;
• Recognising the risks that investors undertake and provided they meet their obligations investors will be given a fair, stable return on their investment. 

The Government's full response to the Report will be outlined by a white paper later in the year following consultations this autumn which will help inform a new Water Reform Bill. 

In Wales the deputy first minister and cabinet secretary for climate change and rural affairs said he intends to “progress” the Commissions recommendation for a separate economic regulator in Wales. 

Our team will be monitoring changes closely and will be considering the implications for the water sector and water companies. 

Written with help from Carys Cox

The Independent Water Commission’s final report sets out recommendations for reform to improve the water sector regulatory system in England and Wales.

https://www.gov.uk/government/publications/independent-water-commission-review-of-the-water-sector