Environment Matters – Choppy Waters: navigating the Government’s reform of the English water sector – S3E2

Pippy Shepherd, Associate (00:46)

Thanks, Mike. Good to be here.

Simon Tilling, Partner (00:47)

Thanks Mike, great to be here.

Michael Barlow (00:54)

So as briefly I said in the introduction, today’s podcast is looking at DEFRA’s Water Sector Reform White Paper. And this White Paper is looking to introduce very wide-ranging reforms to the sector and really looking to set out a clearer long-term direction.

And one of the key bits that’s been highly publicised is also the introduction of a new regulator, which will consolidate the relevant water functions from the existing regulators into one body. And it’s going to have enhanced regulatory powers. So that’s the sort of framework of what we’re going to be talking about. Simon, I think it was you that suggested calling this episode ‘Choppy Waters: navigating the Government’s Reform of the water sector’. Do you think that we’re in for a bit of a bumpy ride?

Simon Tilling (01:44)

Yes, I do, Mike. I think it’s one of those examples where the destination is clear enough. We all know where we’ve got to get to, but I think getting from where we are now to there is not going to be straightforward. We’ve got real headwinds, I think. We’ve got investor confidence. We’ve got public understanding of what needs to happen. We’ve got the capacity and capability of the regulator that needs to be worked through, and we’ve got to rebuild trust and think all of those issues have got to be grappled with if we want to and achieve the ambition that’s in this White Paper.

Pippy Shepherd (02:18)

Yeah, I would agree with that, Simon. I mean, I think, as you said, it’s safe to say that there is a long journey ahead. And I think a lot of the important detail is still currently missing. We’re anticipating this will be set out in the transition plan, and that’s going to cover implementation and timings. We’ve been told this is going to be published at some point in 2026. Given the delays in the publication of the White Paper, it will be interesting to see if the momentum continues and if we do get that this year.

Michael Barlow (02:47)

Yeah, thank you both for those sort of initial comments. So, we’re all agreed that potentially it’s going to be a little bit bumpy. So, let’s see if we can unpack that a bit and see what the proposals are and have a think about why we think that might be slightly bumpy.

So, let’s, as we usually do, start by putting this into a bit of context. I mean, it can’t have escaped anyone’s notice that the water sector has been making headline news for several years now. It’s a big political issue. It’s certainly in the public consciousness. And I think it’s fair to say that some form of reset was certainly needed.

Again, just giving a bit of context, obviously when the Labour Government came in in 2024, this was one of their priorities and they asked Sir John Cunliffe to do a review and his Independent Water Commissioners Report was published in June 2025. So, all of this follows on from that Report which made a number of recommendations for reform and also is centred around the creation of a more bespoke regulation for water companies. So, what we’re going to be talking about today is the Government response to that, is their Water Sector Reform White Paper, which was published on the 20th of January this year, described by the Government as heralding a once in a generation plan to transform the water system for good and really set out three key goals to meet by the reform of the sector, which were: delivery of safe and secure water supplies, protection and enhancement of the environment, and to deliver fair outcomes for customers and investors.

And then those three goals are split down into seven key themes, which each address an area of reform which the Government is planning to deliver. And those seven themes are: a new direction for water, so the Reforms are going to set clear a long-term direction for the sector. Second one, resetting regulation.

So, as we’ve mentioned, the establishment of a new integrated water regulator, attracting investment, reform to make the sector more attractive and reliable for investors who are seeking stable and fair returns. Putting customers first, the creation of a new independent water ombudsman to better protect customers. Clear action for clean water, so reforms to deliver cleaner water systems.

Water security, developments to streamline development in water security and to improve asset health. And lastly, transition plan. The White Paper says the Government will publish a transition plan this year in 2026 to set out how these regulatory reforms will be implemented.

Let’s unpack what all of that means in practice. The first big theme, which I mentioned is, what the Government’s calling a new direction for water. And sets out that DEFRA wants to take a much longer-term view of the sector, expanding the strategic policy statement so that it looks twenty-five years ahead and is refreshed every five years.

And the first version of this guidance is to land early enough to shape the next price review. So PR29, which will be coming through in three or so years. And they’re also signalling a major legislative overhaul described as an ambitious reset of the legal framework for water. So, I think that’s going to mean updating parts of the Urban Wastewater Treatment Regulations and the Water Framework Directive. So, all of that, which I just described, points towards a pretty fundamental shift in direction for the sector. What are your thoughts on that, Simon?

Simon Tilling (06:45)

Yeah, well certainly they have ambition here on the legislative front. And let’s be fair, some of this has been on the cards for a while. I think there’s been talk of amending and reforming the Water Framework Directive ever since the UK left the European Union. And to be clear, there are plenty of opportunities that we could realise from having a more streamlined legislative framework that fits what the UK is trying to achieve and fits better for the UK’s privatised water sector. And it makes me recall the phrase, which I think is Michael Gove, which was, there’s no point in leaving the EU to keep everything the same. But there’s, you know, there’s good change and there’s bad change. Change doesn’t really tell you much at all. The devil here is in the detail and we don’t yet have that detail.

What I would say is, this could be positive if it’s done right, but it will need careful work. I think the Water Industry Act 1991, if you really look at it and try and understand it as a whole, it’s a bit of a mess. There’s plenty of opportunities here to improve the legislative basis on which we build the water sector and our water environment, the protection and enhancement of our water environment. But the Government’s going to need bandwidth to actually get this right. If they’re going to deliver on this ambition that they’ve promised, they’re going to need to be careful, it’s going to need to be thoughtful. And I just wonder in where we are with our politics and with our Government and with the parliamentary time, if we’ve got the time to achieve everything this is promising, or whether it’s going to be a bit more piecemeal and time will tell on that.

Michael Barlow (08:34)

Yeah, I think I agree with that. A lot of this legislation is forty years old and really could do with an overhaul. But I think to deliver this change, there’s going to have to be a big focus on public understanding, isn’t there?

Pippy Shepherd (08:52)

Yeah, there absolutely is. I think public perceptions of the industry have certainly shifted in the last few years. A lot of it possibly in reaction to sort of headlines, media reporting, and it’s almost gone from, if you like, flush and forget to this quite sort of sustained moral outrage. But in reality, as we know, it really isn’t as simple as that. And what DEFRA is essentially saying is, you we need to be more open, transparent about how complicated this all is and we need to get the public to recognise that the challenges have been building for decades. And on that basis, they’re not going to be fixed overnight. And I think that that is a really important conversation to have in order to bring the public on board and along on the journey.

Michael Barlow (09:33)

Yeah, absolutely right. There’s no way that this can be achieved without bringing the public along. Now, we’ve mentioned it already, but the big headline item is, and the one that’s been grabbing all of the attention, is the creation of this new regulator. Obviously, the intention is to combine Ofwat with the water functions of the Drinking Water Inspectorate, the Environment Agency, and Natural England all into one regulator. That sounds pretty radical to me. What do you think Pippy?

Pippy Shepherd (10:03)

I think it’s safe to say it is a big shake up and this delivers on the recommendations from the John Cunliffe Review. I think on one hand, there’s no doubt that the sector has been pulled in different directions. So Ofwat’s sort of traditional focus has been on economic regulation, you know, making sure monopolies don’t overcharge and keeping bills down for customers. Whereas on the other side, the Environment Agency and other regulators have been focused on environmental outcomes. So, they’re both, you know, pulling different levers and having one board with one direction might help.

But on the other hand, there is always going to be this tension between environmental improvements and keeping bills down. And having those two tensions within one single regulator won’t make them go away, those issues still need to be grappled with. And you’ve got two very different types of people coming at it. You’ve got economists and ecologists, and we’re putting that under one roof, so there will be potential challenges for integration, I think.

Simon Tilling (11:00)

Yeah, I couldn’t agree more, Pippy, I think there’s a lot of practical challenges here. There’s a lot of cultural challenges here. And there’s another issue I want to pick up on, which I think hasn’t really had that much airtime so far, which is that the stripping of water functions out of the Environment Agency is going to be going backwards on a concept we’ve had back since the 1990s, which has been pretty steady, which is the concept of integrated pollution control, where one regulator looks at impacts to land and waste management and impacts to air and impacts to water, all within the same umbrella organisation. And the logic of the integrated pollution control agenda from the 1990s, which is until now been relatively unchallenged, is that you can then look at the best practicable environmental option, that was the phrase they used, for looking at everything in the round. And so, you would put experts of water, and experts in waste, and experts in industrial technologies, into the Environment Agency. So, you had one body that really understood that. And to my mind, there’s been lots of benefits to integrated pollution control. In fact, the UK developed that and it was very much taken up by the EU and became the focus of integrated pollution prevention and control in the European Union.

And this change, let’s be clear, is driven by the regulation of the water sector and undoubtedly, that needs to be looked at. The regulation hasn’t achieved everything it should have achieved. Significant improvement is needed. But I do question whether the answer to that, which is very much water sector driven, is the taking part of integrated pollution control and having a water regulator with the water functions of the Environment Agency for the other industries too, agriculture and wider industry in a different body to the rest of the Environment Agency. And I’m not saying there’s a right and wrong here, but to my mind, there hasn’t really been a discussion or a debate really about the unpicking of integrated pollution control. It’s all been driven by a desire to take action on water sector regulation.

And I just think that needs more airtime, more debate as this works its way through. I have to say, it’s probably going to happen because the Government has very much adopted the Cunliffe Recommendation of one regulator here and time will tell whether that has as many upsides as downsides. But I just think a little bit of debate about that side of things would be useful.

Michael Barlow (13:36)

Yeah, I agree. I think what we really don’t want to happen is you solve one problem and create another, or more than one.

And one of the other points coming out of the Reforms as well is not just the integration of this new regulator that just discussed, but the idea of having dedicated supervisory teams for each water company from the regulator. And the idea of this is that the supervisors are able to really get under the skin of how each individual company works.

So, it’s engineering issues, it’s operational challenges, it’s whole way of working. And the idea of that, of course, is that the regulation or the regulatory functions become more proactive and tailored, moving away really from the one size fits all regulation of the water sector. And what do you think of that bit of the proposal, Simon?

Simon Tilling (14:29)

Yeah, I think that there’s a really good idea here within this concept of supervisory function. But again, we’ve got some we’ve got some real headwinds and some real challenges, I think, to turn that from a good idea to something that can actually be delivered. One of those headwinds is public perception. Now, if you really have a supervisory approach, what you’ve what you’ve got, if it’s the right sort of supervisory approach and not micromanagement by a regulator of an independent private water sector. But if you’ve got real supervisory approach, you’ve got trust, you’ve got working together, you’ve got properly understanding exactly what’s going on. And let’s be clear, a lot of the noise in the sector at the moment is around criticism of the Environment Agency itself for being too soft and Ofwat for being too soft on the water sector. And if you’re going to get supervisory, you’re going to have regulators quite integrated with the water companies understanding what’s going on.

And we’ve got this concept of regulatory capture, which is the idea that actually regulators get too close to the industries they’re regulating, and I think we have to really work on the public perception on this, because what can be achieved if people really understand what’s going on could be very beneficial for everybody, but the benefits of that relationship based approach has got to be accepted, otherwise we’re not going to get away from that trust issue. So that’s a really big issue to grapple with.

Another big issue here is about skills, because if you’re actually going to have the environment, well, the new regulator supervising and therefore actually making judgments, you’ve got to have the skills and capabilities to be able to make those judgments in the regulator. And certainly, from the Environment Agency side, due to organisational changes over the past decade or more. There’s a lot of juniors in the Environment Agency, very well-meaning people who really care about achieving good things for the environment. But we’ve lost, I think, a lot of the experience from the regulator that we had a decade or so ago. So if you’re going to get this right, it’s going to need a lot of upskilling and there’s a big task, lot more to do because if I understand, what I understand by supervisory function is a lot more local tailored decisions, the regulator more closely involved in working to get the outcomes we want, that’s great.

But we do need that co-working and what we don’t need and what we can’t afford really is risk aversion, undue caution, people being too scared to help make those decisions and then we stagnate, we just lose the momentum in delivering this, even in this five year period, one hundred and four billion pounds worth of investment, we desperately need that to flow, we need the results and so a supervisory approach is only good if it doesn’t clog everything up.

Pippy Shepherd (17:31)

And it’s interesting that the supervisory concept, Simon, is a nice segue onto the confirmation that operator self-monitoring will be brought to an end. For those who don’t know, operator self-monitoring was introduced, I think it was in 2009. And this is where water and sewage companies sample and analyse permitted discharges against numeric parameters in their environmental permits. And this, the end to that process is being sold as water companies no longer marking their own homework on pollution incidents. And I think that demonstrates there has been a lot of criticism of ‘OSM’ as it’s called. And I think some of that is misplaced because there is value in self-reporting to a certain extent it’s got to be understood that the Environment Agency can’t be everywhere.

Water and sewage companies are set up to conduct this monitoring, so I think there is also, lots more self-reporting in the water sector than other sectors where there’s no obligation to self-monitor and in those circumstances a lot more goes under the radar. So, yeah, as I said, I think there’s value in it, but of course there’s a role for the EA to be more visible as well. And the water sector did accept a while ago that as a means of demonstrating compliance and building confidence, bringing the regulator in might be part of that sort of that puzzle piece. And we know that there has been a targeted increase in recent years of Environment Agency boots on the ground. There’s an increase in the water enforcement workforce. There has been, I think, a cash injection of one hundred and eighty-nine million in this financial year and inspections have increased. They were at four thousand last year, I think, and the target is ten thousand for this financial year. So that visible role we are already seeing within the sector.

Michael Barlow (19:20)

Yeah, no thanks for that. OSM is one of those areas which I think is, the public found difficult to understand, but you can see that there is some benefits to it for regulation and the regulatory regime and costs and so on, but again, there’s a trade-off there and creates risks.

And then just picking up on the theme that we’ve just been discussing about tailored decision making.

One of the other key features is this phrase constrained discretion, which I think we picked up on our previous podcast actually on regulatory regulation and governance. Basically, the theory behind that is that the regulator is going to have more flexibility to focus on outcomes rather than a sort of box-ticking process. Do you think that’s going to work in the sector?

Simon Tilling (20:10)

Well, I think it’s a great theory and I’m really intrigued by the concept of constrained discretion. I think, frankly, we could all think of examples where the right process has led to the wrong decision or the wrong outcome. And I think even the regulators from time to time would say, yeah, I can see where you’re trying to get to and that might be better, but hey, this is the process I’ve got to follow. But how does it work?

Where’s the confidence again, this comes back to a point I made about the expertise and capabilities in the regulator, but you’ve got to have real confidence to take decisions that deviate from process. How do we get from where we are now, which is risk aversion to that state? And the other thing I think we have to acknowledge is there’s a lot of strategic litigation out there by interest groups challenging regulatory decisions where they don’t like it and those decisions are much more defensible if you’ve just followed a process. If you’ve gone out on a limb and tried to achieve an outcome and somebody else doesn’t like that outcome, you’re leaving yourself more vulnerable and with the rise of this strategic  litigation and the rise of judicial review for interest group reasons, you do have regulators looking over their shoulder. So, I think it’s a great idea.

It’s interesting to see how it will be delivered.

Pippy Shepherd (21:31)

Yeah, and I mean in terms of –  I think it’s a great concept the idea of constrained discretion – but what it then turns up is a potential issue around consistency and the tensions there because you know there are already concerns that there are different approaches in different regions that sort of make it fair to say that you can’t compare those to those and you know regulators do actually have statutory duties in terms of ensuring that they follow the principles of consistency when they’re conducting or carrying out their functions. So, it’s enshrined in law, not just as a point of fairness. And I think a really good illustration of this is if you take the EPA, which is the Environmental Performance Assessment, and this is a non-statutory tool that is used to compare water companies. This has been subject to criticism from inconsistent application.

And if you look at the metrics and the methodology by which water companies are assessed, you do start to see how you get these variable results when you consider things like population, sort of sewer length, geographical location, and so on. So, I think it’s a really good question. How can you ensure that there is constrained discretion as well as consistency?

Michael Barlow (22:42)

Yeah, I think we could probably do a whole other podcast on the benefits and challenges with the EPA. That’s probably not one to go into more detail here. Just turning to one of the other features then is the sort of push to have a bigger understanding of the health of the different assets that the water companies have. And this proposal that the new regulator will have a chief engineer.

That seems to me to be a fairly significant departure from where we currently are.

Pippy Shepherd (23:13)

Yeah, I mean, I can see the sense in it. You know, these at the moment, they’re engineering businesses and we definitely do need to have better baseline data on asset health and if you’ve got forward looking metrics and sort of lagging indicators and you can see the issues before they become pollution, before, sorry, they become pollutions. I think that there’s definite benefit and logic in having those in place.

Michael Barlow (23:37)

Yeah, I think that’s going to be one to keep an eye on, but will be interesting. One of the other points is the idea of simplifying the number and complexity of the plans that water companies have to produce. Obviously, there’s quite a raft that they have to do at the moment. I think there’s twenty different plans floating around the sector. And the idea is that those get consolidated down to two core planning frameworks, one for the environment and one for the water supply. Anyone got thoughts on that?

Simon Tilling (24:12)

Yeah, Mike, I mean, I really like this idea. We have a, and you can understand that a reaction to problems to generate more plans. And so, I mean, if we just look, these are driven by Government and Parliament. When we have too much use of storm overflows, came to the public attention, we had the Environment Act 2021 require the Secretary of State to produce a Storm Overflow Discharge Reduction Plan.

That of course leads to the water companies having to have their own plans for storm wave and flow discharge reduction. Pollution’s became a big thing on the public agenda. So, the Water Special Measures Act 2025 mandated water companies to have Pollution Incident Reduction Plans that are now statutory as well. Now, all these plans are fine. They’re all solving a particular issue, but unless you’ve got an overall strategy, the plans are going to pull in different directions.

So, and they’re to pull your finances, your resources in different directions and so you’ve got too many plans to deliver all at once. And really, what a water company is here to do, protect the water environment through the safe and environmentally responsible treatment of wastewater and to deliver safe drinking water while considering abstraction demands. So, two plans, one for each of those is exactly the right way to go, and then all your other subplans can fit under it. There will be detail under there, of course, but if they’re driven by two strategic plans, two strategic master plans, if you like, hopefully we’ll have less of being pulled in different directions or responding to the latest crises rather than having this long-term vision, which is at the heart of this water sector reset.

Michael Barlow (25:52)

Yeah, I’m all in favour of having less plans, not least because it would reduce the number of acronyms that we have to get our heads around.

So, then I think one of the other key things that we need to just to touch on is the question of investment. None of this is going to happen without investment into the sector and DEFRA is obviously trying to calm the waters here and they want the sector to feel more predictable and less volatile so that long-term investors are attracted to the sector. And part of that is obviously simplifying performance commitments and linking targets to current performance rather than historical baselines. They also, in relation to the price reviews, have confirmed they’re keeping the basic premise of five-year price review cycles, but they’re putting it into a longer-term context with five, ten, and twenty-five year planning structure. So, the idea being then you then get firm funding for the first five years, indications of direction of travel for the next five, and then long-term signals beyond that. And that’s meant to reduce the uncertainty and avoid what happens quite often now, which is the cliff edge at the end of each price review.

There’s also a suite of more technical changes, which is sort of widening the scope of projects that are available under SIPA, which is one of the regimes for delivering infrastructure, exploring green bonds in more detail, creating a supplier of last resort mechanism for retailers, and I think it interestingly replacing the CMA redetermination process, which with something that’s more streamlined. And I think that would be welcome because those challenges are lengthy and very expensive. So, I think there’s quite a lot of plumbing changes in the background aimed at making the whole system feel more stable for investors and I think those will be welcomed.

Pippy Shepherd (27:45)

Yeah, and actually, you know, not just investors, there have been changes or a renewed focus on consumers, which their branding is going to put in customers first, and the proposals include this new independent water ombudsman to strengthen customer protection. And the new regulator is also going to convene a water quality advisory group. And on top of that, there’s a kind of stated aim to enhance the customer experience measure or CMEX.

And I think they are also proposing to ensure voices of customers and communities play a key role. So, there would be these new powerful customer panels is how they’re described. And yeah, it’d be very interesting to see how that plays out as well, given the public interest in the changes to the industry.

Michael Barlow (28:30)

Yeah, thanks for that, Pippy. So, I mean, just sort of summarising from my perspective here, you know, there’s an awful lot of change that is being proposed here. Some of it’s quite radical. Some of it, you know, has a risk of creating some other challenges while solving certain issues. I think the real issue at the moment is we just don’t have the detail of how any of these things are going to work.

And obviously, we’re waiting for this transition plan that’s going to come out later this year, and it may be that we’re going to have to come back and revisit this when that transition plan comes out. But I found that discussion really, really useful. Simon, Pippy, have you got any sort of final thoughts?

Simon Tilling (29:15)

Yeah, thanks Mike. I think there’s loads of potential here, isn’t there? When you look at this, what we’ve discussed today, great opportunities, lots of good ideas, but lots that still needs careful thought. So, I’m going to come back to that theme I’ve already covered about needing real time and a very measured and careful implementation of these ideas to actually make them good and not make the problem worse. And let’s be frank, that requires grown up debates about what the trade-offs will be, how we get investor confidence and also increase public trust. There’s a journey we’ve got to go on and what I’d really like to see as we deliver this is some of the heat taken out of the debates. I mean, to be clear, these are political judgments. These are societal issues, but what I’d like to see is the sort of small ‘p’ politics out of it, by which I mean, partisan point scoring and grandstanding.

I think that could get in the way of these measured, careful, thoughtful debates. And if that happens, I’d be fearful of a squandered opportunity.

Pippy Shepherd (30:19)

Yeah, I think you summed that up really well, Simon. I completely echo that. And I keep coming back to this statement in the White Paper where, you know, DEFRA says, we will play a role in ensuring the public understand the complexity of addressing long standing challenges, that they recognise their inherent trade-offs to be managed in the system and that fundamental change takes time. And I think it’s really important that that’s the statement and that it’s almost incumbent on the Government to stand by that and fulfil that commitment. As you said, it’s a huge fundamental sector reset. It’s exciting, it has its challenges as we’ve identified, but it is a huge undertaking and on that basis, it really has to be done right.

Michael Barlow (30:59)

Yeah, lots of food for thought. All right, that’s all we have time for today. So, huge thanks to both Simon and Pippy for their contributions.

We also thank you for listening to this episode of Environment Matters. We hope you enjoyed this episode. This and all of our other podcasts are available on Apple, Spotify, or wherever you listen to your podcasts. So do please look out for our future episodes, which we’re looking to produce every couple of months. And if you’d like to know more about our Environment or Energy teams and how our experts can work with you, you can contact me or the rest of the team via our website.