Written evidence submitted by Consumer Council for Water (WSR0003)

About CCW

The Consumer Council for Water (CCW) is the statutory consumer organisation representing household and non-household water and sewerage consumers in England and Wales.

Since 2005, we have helped thousands of consumers resolve complaints against their water company, while providing free advice and support. All our work is informed by extensive research, which we use to champion the interests of consumers and influence water companies, governments and regulators.

We welcome the opportunity to respond to the Public Accounts Committee’s consultation on water sector regulation.

Summary

Since privatisation, the water sector has seen improvements, including reduced supply interruptions and high compliance with drinking water standards. However, despite improvements, the industry has not adequately addressed storm overflows, leading to significant sewage discharges, which are no longer acceptable to the public. The current regulatory period is set to see a significant rise in water bills, causing affordability concerns for many households.

CCW has a very good working relationship with Defra, Ofwat and the Environment Agency, and this has brought many meaningful benefits for customers.

However, CCW sees that improvements could be made to make the water sector work better in the interests of consumers. We want to see clearer roles and responsibilities for regulators to ensure effective governance and accountability in the water sector. Long- and short-term plans need to be harmonised.

CCW identifies issues with resource allocation and duplication of research efforts between ourselves and Ofwat. We also believe that, in the past, Ofwat let water companies’ gearing get out of control. It has been overgenerous in setting the Weighted Average Cost of Capital (WACC), and this has led to unfairly inflated bills for customers.

The regulatory landscape has become increasingly complex, which risks hindering effective oversight and consumer protection. Despite this, there is still no regulatory financial incentive for water companies to reduce complaint numbers – CCW wants Ofwat to introduce this incentive.

For the next price review, CCW wants to see evidence of how much Ofwat assessed the quality and extent of the companies’ customer engagement and challenge to water companies’ business plans, and how that may have influenced its determinations. This was missing in PR24.

The Environment Agency should coordinate the high-level statutory and regulatory frameworks that go into a price review better, so that customers are not hijacked by last-minute bill rises.

Background

The privatised water sector in England and Wales regulated by Ofwat has brought some benefits for water consumers.

Supply interruptions to customers have decreased five-fold and leakage has been cut by a third since privatisation. Water industry compliance with drinking water standards in England and Wales is world-leading, with only Germany, Finland and Switzerland able to match our levels of tap water quality.

However, for decades, the industry collectively failed to do enough to reduce storm overflows. In 2024, there were around 450,000 recorded sewage discharges from storm overflows in England, lasting around 3.6 million hours. A shift in public attitudes in the UK means that what may be technically legal is no longer acceptable.

Water bills rose steeply in the period immediately after privatisation, with a 40% increase above inflation between 1989 and 2014/15. After that point, until this financial year water bills fell in real terms. The current regulatory period (2025-30) will see bills rise 36% in real terms. This will place increased pressure on household finances, with 2 in 5 households having told CCW they will struggle to afford the proposed significant increases to water bills over the next five years.

Defra

CCW is an arm’s-length body sponsored by Defra and Welsh government. Defra and Welsh government civil servants utilise CCW correctly as a provider of expert advice to help with thinking on consumer policy. We have a very good working relationship at all levels of our organisations and we are aligned in our aims and objectives.

For example, CCW has for years believed that there is an urgent need for a single social tariff. We recommended this in our independent review of water affordability nearly four years ago, which was commissioned by UK and Welsh ministers. We remain keen to take forward the recommendation with the UK and Welsh governments. CCW is immensely encouraged that the recent Water (Special Measures) Act paved the way for fairer and more consistent support to ensure everyone can afford their water bill.

CCW has also recently worked closely with Defra on changes to the Guaranteed Standards of Service (GSS) regulations to improve the payments made to water customers in the event of service failures. These changes will more than double the level of payments and gives enhanced protection to every water customer in England.

Looking across the whole sector, CCW believes the UK government and Welsh government should take overall responsibility for what outcomes to prioritise from the water system. They should give clear direction to the regulators on what the priorities are.

It is not clear that this is happening at the moment. The NAO’s April 2025 Regulating for investment and outcomes in the water sector has a good diagram (Figure 8, reproduced below) showing how complex the regulatory landscape in England and Wales is.

For example, Defra produced the 2023 Plan for Water. This sets out a per-capita consumption target of 110 litres per person per day by 2050. It’s not clear who is accountable for achieving this target. The Plan for Water also includes a 2050 reduction target of 15% for the non-household market. Again, it’s not clear who is leading that or in charge of delivery.

Defra and Welsh government should clearly define the roles and responsibilities of the regulators to properly empower them, and resource them to do that actual job. Each of the regulators should focus on its own remit and deliver that really well.

CCW wants to see a clear expectation from UK government in England for water companies and retailers to collaborate to help businesses save water. Under the current regulatory framework, there is no incentive to deliver this collaboratively. It is important to make this a requirement for retailers as well as water companies.

CCW would like both UK and Welsh governments to properly take into account water bill payers’ and the public’s views on what the priorities for the sector should be, and clearly demonstrate how this has been done.

Long-term strategic plans that underpin five-year business plans should not be re-written every five years. Water companies and other organisations should set a long-term plan and then revisit it at five-yearly price reviews to see what external factors (political, economic etc) have changed and change the plan accordingly.

Five-year price controls should be set in the context of long-term strategies. If long-term plans are robust, this could reduce the regulatory burden and reduces the risk of short termism. Ofwat’s introduction of adaptive planning at PR24 has mitigated this to a degree.

Ofwat

CCW works with Ofwat every day, at every level. We have a very good relationship with our colleagues there and we have achieved a lot together to improve services for water consumers.

CCW and Ofwat collaborated to develop - and shape the guidance for - a dedicated condition in the licence of each company in England and Wales to transform the care they give their customers. Ofwat introduced this new set of rules, known as the Customer Licence Condition, in February 2024. Since then, CCW has been supporting Ofwat in monitoring companies’ compliance with the licence condition, and sharing insights into customers’ experiences.

CCW is currently working with Ofwat and the water companies on their vulnerability strategies, which will be published at the end of June 2025.

In June 2023, CCW started a joint research programme with Ofwat to help us better understand people’s experiences of water or sewerage incidents. We reviewed what water companies do well; what could be improved and what could be done differently to ensure customers are provided with the right help and support when things do go wrong. Using the learnings from the research, we compiled a best practice checklist for companies to ensure customers are at the centre of incident management plans.

Ofwat and CCW collaborated on delivering successful research during the recent price review (PR24). This covered standardised guidelines for companies to test their business plans and research with customers, and to test Ofwat’s draft determinations. Our joint work led to more consistency and comparability with the research results.

Also during the PR24 period, we collaborated to deliver two successful rounds of Your Water Your Say sessions for each of the 16 water companies in England and Wales. These open sessions allowed consumers to directly challenge water company executives on their plans. We worked together to agree the terms of the online challenge sessions, supported the independent Chair and encouraged the water companies to fully engage with the whole concept.

However, an imbalance of resource between our two organisations leads to duplication, confusion and the wrong allocation of resources that come out of public money. For example, despite the existence and statutory remit of CCW, Ofwat does research on customer views. A very recent example of a piece of research that sits firmly within CCW’s remit is Ofwat’s May 2025 Billing journeys: Water customers’ experiences.

We estimate Ofwat spent over £800,000 on research in 2024-25. CCW’s entire budget in 2024-25 was £7 million. CCW should be the first port of call for all customer research.

Duplication also means billpayers are in danger of paying twice. They pay for CCW via a levy on water bills. Then on top of that, Ofwat is funded by licence fees collected by water companies – which is ultimately also paid for by billpayers.

Over the last few years, we have seen a positive shift in Ofwat’s effectiveness at regulating the industry.

CCW believes that in the past, Ofwat let water companies’ gearing get out of control.

Since privatisation in 1989, water companies have increasingly relied on debt to fund infrastructure investments.

In PR24 final determinations - Aligning risk and return (December 2024), Ofwat states:

Companies have freedom to deviate from the notional capital structure, within the constraints of the price control determination, the licence and their wider obligations. However, they do so at their own risk. We consider that gearing levels that exceed 70% may not be sustainable in the long term. Therefore we signal more firmly than before our view that gearing levels that exceed 70% are above the level that is consistent with water companies meeting the requirement of maintaining long-term financial resilience.

 

 

 

Gearing increased from the late 1990s, in many cases substantially higher than Ofwat’s notional gearing.

This presents a moral hazard - companies get the benefits when there’s an upside in higher gearing (cheap debt = higher profits). But they look to Ofwat to make allowances for customers to fund the recovery when there’s a downside (higher debt repayments at higher interest, and past underinvestment). Looking at the current situation of Thames Water, the downside is also a deterioration in service for customers as the company is significantly cash constrained.

So companies extract value in good times, but they want regulatory leniency in the bad times (that they themselves caused by their past decisions).

Point 3.5 of the NAO’s April 2025 Regulating for investment and outcomes in the water sector states:

Ofwat’s funding methodology uses a weighted average cost of capital (WACC) between debt and equity, using a set gearing ratio. By increasing debt above Ofwat’s gearing assumption, companies have been able to increase their equity returns, at no extra cost to the consumer over the price review control period, because the returns to debt investors are usually lower than the returns to equity holders.

 

CCW contends that in the past, water companies “geared up” because it was cheap, then used that money to pay dividends. Although it is technically correct that this came at no extra cost to the consumer over the price review control period, that money could have been spent on improvements.

Ofwat now has more powers to regulate water companies’ finances. It could have asked for these powers at an earlier date to regulate this aspect of the sector before it got out of control.

Originally, the thinking behind having private companies run public sector services was that they would make profit by operating more efficiently. Sometimes it seems that water companies are seen as a financial instrument to be exploited for maximum profit – and the notion of providing a good service has been lost.

CCW also believes that Ofwat has been overgenerous in setting the Weighted Average Cost of Capital (WACC).

A 2019 report by Citizens Advice - Monopoly Money: How consumers overpaid by billions - Citizens Advice - estimated that between 2005 and 2019, Ofwat allowed water customers in England and Wales to be overcharged by £13 billion due to the way the cost of capital was set. The report echoed concerns CCW had raised throughout the last decade that the regulator had been overgenerous to companies on financing costs.

Utility regulators predicted that costs, such as debt, would be higher than they were in fact. They also over-estimated how risky utilities were for investors. Water companies were able to walk off with the spoils, when that money could have been reinvested in cleaning up rivers, securing more water resources or ending water poverty.

In February 2025, CCW commissioned an independent report that suggests that Ofwat’s weighted cost of capital allowance for companies could have been 1.08% lower, saving customers £5.4 billion over the current five-year PR24 pricing period – that's £41 per household per year. The report found:

CCW’s CEO, Mike Keil, said in the Financial Times in May 2025:

The water companies appealing for bigger bill rises argue they have been short-changed by Ofwat but this new analysis casts serious doubt on those claims and suggests they could stand to benefit from an overgenerous deal at customers’ expense.

CCW believes risks should be allocated to companies rather than customers to avoid rewarding inefficient financial structures at customers’ expense.

Over successive price reviews, Ofwat regulation has become ever more complex - often with new regulatory tools stacked onto earlier ones. It has added a new layer of regulation each time it finds a gap in information; evidence of an inadequate measure; or areas that could be incentivised. This ‘layering’ of regulation has led to complexity and a lack of transparency. This makes it challenging for stakeholders to understand, and leads to accusations from companies that regulation is too burdensome and over-engineered. 

Some examples of this increasing complexity:

Price-setting methodology

Ofwat’s PR methodology has become noticeably more complex from PR14 through PR19 and into PR24. The expansion of Outcome Delivery Incentives (ODIs) and separation of price controls (with separate cost models for each element) are drivers of this.

A look at the Ofwat methodology documents at each price review illustrates this. The methodology was 260 pages at PR14, over 3000 pages at PR19 and 1,500 at PR24.

The increasing volume and range of drivers in the statutory environment programmes also adds to this.

New cost adjustments and volatility mechanisms

Price settlements every five years are now less certain as there are more mechanisms that have been introduced to adjust them ‘in period’ than before, to accommodate uncertain or volatile costs, and a greater range of incentives. These include

At a very late stage in the PR24 process, Ofwat introduced an outturn adjustment mechanism (OAM) that adjusts returns for all companies. Its purpose is to rebalance the overall financial impacts of Outcome Delivery Incentives across the sector to ensure a “fair bet” for efficient companies. CCW believes that, to effectively balance customer and investor needs, Ofwat should have recalibrated performance commitment targets and the associated ODIs to ensure they are both challenging and achievable, rather than layering on top an additional mechanism – especially one that risks shielding lower-performing companies from declining returns.

As a result of cost adjustments and volatility mechanisms, the bill levels set out at Final Determination can differ significantly from the actual bills received by customers during the five-year regulatory period. This makes the overall process less transparent and makes engagement with customers on the overall package of service and costs more difficult. In addition, all these mechanisms add more complexity to an already intricate price setting process.

Even despite all these added mechanisms, CCW does not think the balance of incentives is right. For example, in April 2020, Ofwat introduced C-MeX (Customer Measure of Experience) – a financial and reputational incentive mechanism designed to provide customers in the water sector with excellent levels of service. Companies receive a score based on the satisfaction ratings given by customers in monthly surveys. Each company can receive outperformance payments, or incur underperformance payments, based on how it scores compared to other companies.

Currently there is no regulatory financial incentive to reduce complaint numbers. When it comes to complaints, CCW would rather customers didn’t have to make them at all and we think companies should therefore be financially incentivised to reduce them. High volumes of complaints are evidence of a poor experience for many customers and can be an indicator of more fundamental problems.

CCW wants to see an additional metric put into C-MeX that measures customer complaint volumes (per 10,000 connections). That measure should make up 25% of the value of C-MeX. If Ofwat believes that “providing an excellent customer experience for customers is fundamental for maintaining trust and confidence in the water sector,” it must provide financial incentives for water companies to do that right from the start.

The volume and diversity of consumer engagement that water companies, CCW and Ofwat carried out for PR24 far outstrips what was done for previous price reviews. CCW appreciates this increased appetite to understand people’s views and priorities.

However, apart from a brief mention in the quality assessment summaries, CCW can find little explanation of how much Ofwat assessed the quality and extent of the companies’ customer engagement and challenge to the business plan, or how that may have influenced its draft or final determinations.

This is particularly disappointing considering the requirements Ofwat placed on companies in relation to transparency about the use of evidence from customer engagement in its decision making. Ofwat has not followed its own guidance in its draft and final determinations. This sends a message to water companies that paying attention to the billpayers’ opinions and priorities is nothing but lipservice – and yet customers are paying for almost everything.

Environment Agency

The work the EA has done to produce the National Framework for water resources (it is launching an update on 17 June 2025) has been game-changing in terms of identifying the scale of the challenge ahead and what needs to happen to meet it. It also established the regional planning groups, which are now working with other water-dependent sectors on how to meet future needs by managing water resources in a more holistic way than ever before. This will support the government’s growth agenda.

EA’s participation in RAPID (Regulators Alliance for Progressing Infrastructure Development) is also moving forward strategic resources options, while still protecting the environment.

EA is doing good work at the moment getting water companies and the public prepared for a possible drought this summer. CCW is part of this collegiate effort so we see all the work going on – much of it behind the scenes.

Looking at EA’s work across the whole water industry, CCW believes that the organisations which set the high-level statutory and regulatory frameworks that go into a price review (eg WINEP, WRMP, NEP and NRW) should coordinate these plans better with the price review process.

In between Ofwat’s draft determinations (in July 2024) and its final determinations (December 2024), the Environment Agency added significant-cost WINEP schemes into PR24. In Wales, the details of the NEP and its delivery were also updated at the last minute after NRW’s storm overflow classification guidance change.

CCW does understand that these items are statutory obligations. But because of these late additions, customers’ actual bills went up in April 2025 by quite a lot more than was visible to them at draft determinations. This shows a lack of transparency as well as a lack of understanding of the impact the final costs on customers. This lack of co-ordination means that costly projects are being loaded into the price review process without due scrutiny and challenge from the people – customers - who are paying for them.

Customers should be properly informed and consulted about the aspects of statutory programmes which are up for debate eg scheduling/the use of nature-based solutions/pay now or leave for future generations.

CCW

CCW is the independent voice for water consumers in England and Wales. We help consumers resolve complaints against their water company - or their retailer, if they’re a business. We also provide free advice and support, and we champion the interests of consumers and influence water companies, governments and regulators.

CCW received 10,689 complaints in 2024-25. That’s a 2% increase on the 10,457 we received in 2023-24.

Between April 2024 and March 2025, we recovered over £1.3 million in redress for household and business customers.

Over the last couple of years, there has been increasingly intense public interest in the water industry. In addition, the rising cost of living made customers more aware of their water bills – and what they were getting in return - especially when bills went up by a record 26% on average in April 2025.

Against this backdrop, CCW spends a lot of time and resource fulfilling our statutory function to provide information to customers about consumer matters. 2024-25 saw CCW feature in an unprecedented amount of media coverage with 8,248 mentions across print, online and broadcast. And 7,700 people downloaded our water-saving podcast, Waterfall.

CCW’s annual tracker survey (2024 Water Matters) gauges customers’ awareness of a range of financial support measures. We found that awareness of all of these had risen to the highest recorded level since Water Matters began, with a significant rise from the previous year:

Between April 2024 and March 2025, 5,787 people used our website to check what benefits and grants could be available to them, and we estimate they identified unclaimed annual welfare benefits of over £22.5 million.

359,569 people used CCW's water meter calculator in 2024-25. We estimate that the combined potential saving for users was nearly £52 million - approximately £144 per user.

Taking all these customer benefits into account (direct financial redress, unclaimed benefits identified and savings from switching to a water meter), CCW delivers a return on investment of over 10 to 1.

May 2025