Expert analysis of the UK water sector
Excerpts from the latest edition of The UK Water Report.
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A sneak peak at this month's top stories
Hit single
The sector strongly supports the prospect of one, joined-up water regulator – but views are mixed on how best to make it work.
By Karma Loveday
Water sector opinion, as articulated by those in our research community, The Water Report Expert Forum, is enthusiastically behind the idea of setting up a single regulator in England and Wales, wrapping in drinking water, environmental and economic functions. The opportunities are seen to be numerous. They include:
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Ending the overlap/gaps between regulators, and instead enabling intelligence sharing and integrated solutions to address several challenges through one action or investment.
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Providing better clarity for all, including on strategic direction, leading to less conflict.
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Offering better value, including by ending duplication and better utilising resources.
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Aligning priorities to overcome the current siloed approach and drive better outcomes. This includes enabling informed trade-offs to be made.
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Agreeing a glide path between short and long-term objectives.
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Enabling a consistent strategic narrative.
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Supporting regional (cross-sector) and catchment planning.
All that said, the Forum was cognisant of the risk involved in bringing regulators together under one banner. A key concern was getting the right balance between the composite interests – environment, finance and customer. Two-thirds of Forum respondents said the various functions should have an equal say in strategic decision-making.
Some believed economic functions would try to dominate and would need to be reined in. One said: “Without this [equality], funding and direction go/are directed by whoever is loudest. Historically, this has been the economic regulator, which has almost entirely led to the dire situation the industry is in now.” Another argued: “The raison d'etre for the existence of water companies is to provide a service: drinking water for public health and environmental protection. Money/finances/economic regulation are only a facilitator for these primary purposes.”
Elsewhere, we asked The Water Report Expert Forum for views on: what the integrated regulator’s core objectives and duties should be; the best governance arrangements; what qualities the leadership of the new regulator should have or avoid; and for recommendations on the practical aspects of the transition.
In the round, this revealed that while the idea of a single regulator unites the sector, establishing one that is effective and meets everyone’s idea of what good looks like will be quite the task.
"The raison d'etre for existence of water companies is to provide a service: drinking water for public health and environmental protection. Money/finances/economic regulation are only a facilitator for these primary purposes"
Fixing water: the view from the markets
What do investors think is needed to restore the fortunes of UK water?
By Verity Mitchell
Debt issuers and investors met at the Moody’s UK Water conference to discuss their priorities for fixing water, as the Government decides which of the 88 proposals from Sir Jon Cunliffe’s Water Commission will be included in a White Paper.
A few key themes emerged from the presentations and conversations at the conference:
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Ending the blame game – There seemed to be a broad consensus that restoring the public’s faith in water must be the priority. A new, more collaborative rhetoric will be needed, not simply the continuation of a culture of blame.
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Managing the monitoring message – Publicly accessible performance information, customer outcomes and environmental impacts will provide the independent verification that people will trust. The water industry and its regulators will need to manage this wealth of data with an intelligent narrative around appropriate and realistic environmental improvement.
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Investors want simplicity – Multiple new regulatory levers have led to two significant credit downgrades. Moody’s discussed what greater stability might look like under a new regulatory regime, and what characteristics would restore the credit quality of UK water.
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A transition plan – Government, water companies, capital providers and rating agencies all agree that moving to a new regulatory system will be a significant challenge. These significant structural changes are unlikely to deliver a new form of regulation within the current timetable for PR29. Several companies suggested that an interim determination might be needed whilst the new structure is constructed.
A new, more collaborative rhetoric will be needed, not a simply the continuation of a culture of blame.
Ups and downs
The CMA did not offer a smooth ride for anyone in its provisional redeterminations, increasing the rate of return but curtailing allowed expenditure in some cases.
By Karma Loveday and Verity Mitchell
Collectively, the customers of Anglian Water, Northumbrian Water, South East Water, Southern Water and Wessex Water will pay 3% more, on top of the 24% average bill increase made by Ofwat’s final determinations, under the Competition and Markets Authority’s provisional PR24 appeal decisions. This will bring in an extra £556m of revenue, 21% of what the disputing companies sought.
All companies benefit from a rate of return increase, from Ofwat’s 4.03% to the CMA’s 4.29%. But only three (South East, Southern and Wessex) also benefit from a cost allowance lift.
Investors will be pleased with the 26 basis points weighted average cost of capital (WACC) increase. This reflected market movements since Ofwat’s cut-off date of September 2024. The CMA also made a departure from previous WACC calculations by assuming that the wholesale WACC is equal to the appointee WACC. It is considered that there is no double-counting of returns between the wholesale and the retail controls. This increased the wholesale WACC by a further 6 basis points, compared to Ofwat’s FD.
The 16% increase in the cost of equity to 5.9% from 5.1% was partially mitigated in the overall number by a cut in the allowed return on embedded debt by 14% to 2.38%, based on the CMA’s long-term CPIH assumption of 2.4%.
All five companies that appealed will need to raise additional equity to underpin their investment programmes. This new money will now command a higher return. Having all obtained higher allowances, they may well consider that the CMA redetermination process was worth the effort.
Investors will be pleased with the 26 basis points weighted average cost of capital increase.
A (cautionary) tale of transition
Australia has heeded lessons from the UK and wants to step up investment before trust is damaged. Sydney Water’s price determination is a landmark moment.
By Karma Loveday
Climate change and the demands of growing populations are forcing water systems around the world to adapt. In many developed countries, the need to replace or upgrade ageing assets is piling on additional pressure, as are higher public and regulatory expectations concerning the water environment. The cost of change is hard to stomach, where customers have become accustomed to stable prices for many years, and see water as a steady state affair.
The UK water sector’s journey to securing a bumper £104bn of allowed expenditure in AMP8 has been painful. In the process, public trust has been decimated and the regulatory system that has presided since privatisation has been deemed unfit to continue.
Australia’s water sector is only too aware of the cautionary tale provided by the UK. It needs to transition in the face of parallel challenges: growth, climate change, ageing assets and regulatory compliance demands. But as yet, its performance has not faltered, and it retains customer trust. Water leaders there are determined not to leave things until the breaking point. That involves making a case for far higher-than-usual investment, before the consequences of failure have had a chance to bite.
Australian water utilities, together with their trade association, the Water Services Association of Australia (WSAA), have been banging this drum for a few years now, since the UK’s fate started to unravel. Last month came something of a test case in how successful they have been, in the form of Sydney Water’s price determination. The utility managed to secure 85% of what it asked for in its revised (post-draft determination) pricing proposals.
Adam Lovell, executive director at WSAA, comments: “This is an incredibly important decision, not just for Sydney Water, but for the country. This is the biggest capital programme that's ever been put forward, and it represents a fundamental step change in investment. It's a landmark for the Australian industry, because we've seen what's happened in the UK; we have forward investment projections that show similar needs across the country. If Sydney Water hadn't had a good determination, it didn't bode well for investment across the country.”
"It's a landmark for the Australian industry, because we've seen what's happened in the UK"
Leaders of the pack
Severn Trent and Portsmouth Water lead the sector on green and wider performance respectively, as the industry-wide showing sinks.
By Peter Luff, Vision Consulting
Ofwat has issued its annual Water Company Performance Report showing industry performance across a wide range of metrics in 2024-25. Portsmouth Water was the only one deemed to be ‘leading’. Five were considered ‘lagging behind’: Southern Water, Welsh Water, Thames Water, Yorkshire Water and SES Water. The remaining 11 companies were placed in the ‘average’ category.
Collectively, the industry performed most strongly on priority services provision (for customers who need extra help), unplanned outages, mains repairs, and sewer collapses. The weakest areas were pollution and leakage.
This was echoed in Environmental Performance Assessment data for 2024. Severn Trent alone secured the highest rating of four stars. All others were rated two stars except Thames Water, which received only one star. In all, the industry secured 19 out of a maximum of 36 stars, its worst performance in the current five-year period.
Pollution numbers were the most pertinent problem. Serious pollution numbers increased by 60% to 75% – the majority from Thames, Southern and Yorkshire. Total pollution incidents also increased.
"Serious pollution numbers increased by 60% to 75% – the majority from Thames, Southern and Yorkshire."
Breaking through PFAS barriers
DWI research is pioneering tailored approaches to fighting forever chemicals, based on specific water characteristics and PFAS profiles.
By Drinking Water Inspectorate
The Drinking Water Inspectorate (DWI), working with leading researchers at Cranfield University, has completed an efficacy study for the removal of PFAS using conventional treatment methods at both bench and pilot scale.
The research focused on understanding how different England and Wales water sources – groundwater, upland surface water and lowland surface water – respond to various treatment technologies. This approach recognises that water quality significantly influences treatment effectiveness, a factor often overlooked in international studies.
The research team tested six major treatment approaches against fifteen different PFAS compounds, providing unprecedented insight into treatment effectiveness. This study found that longer-chain PFAS compounds are generally easier to remove than shorter-chain variants. The systematic approach identified four technologies with the greatest potential for full-scale implementation: advanced ion exchange resins, membrane filtration, granular activated carbon, and novel surface-modified clay materials.
"Water quality significantly influences treatment effectiveness"
Competition Watch
Small talk
Two years on from its Five Year Review of the market, CCW says small businesses should now remain eligible to switch.
By Karma Loveday
The Consumer Council for Water (CCW) will not now recommend that small businesses be removed from the retail market.
The confirmation came as the watchdog published its two-year progress report from its 2023 Five-Year Review of business customer experience in the market. At that time, CCW said the market was failing to deliver for the vast majority of customers, and that sub-0.5 megalitre a year users should cease to be eligible (unless they had contracted with a retailer already) unless tangible benefits were realised by 2025. It set the metric of a 10% increase in switching numbers by this customer group, and a 5% increase in contract renegotiation.
While contracting levels have fallen short of its targets, CCW said an independent report by CEPA had found customers were not suffering harm from being in the market, and that the experience of low-volume consumers is set to improve from the smart meter rollout and Market Performance Framework reform. Therefore, while it will keep the position under review, “we will not be recommending a change in legislation to remove low consumption customers from the market, at this current time”.
"The experience of low volume consumers is set to improve from the smart meter rollout and Market Performance Framework reform."
Market health service
WICS kicks off its Market Health Check to see if retailers are going above and beyond.
By Karma Loveday
The Water Industry Commission for Scotland (WICS) has kicked off its first Market Health Check – a review to verify whether retailers active in the Scottish business market are delivering on their commitments under a new Code of Practice and continuing to meet their licence obligations.
Beginning last month, the process will take until July 2026, after which WICS will share the results publicly. This will give business customers information on how their suppliers are performing against their promises, and will enable retailers to identify areas in need of improvement so they can strengthen their service.
All active retailers in Scotland have voluntarily signed up to the Code of Practice introduced in April 2025, under which they commit to go beyond the basics to deliver enhanced service standards. These include providing a cooling-off period for customers on sign-up, enhanced information, and a smooth switching process. The Code was developed collaboratively by WICS, Scottish Water, Consumer Scotland, the Central Market Agency and retailers.
Mark Cassidy, WICS’ new director of markets, said: “Scotland’s water market was designed to deliver greater benefit to business customers — and this new Code of Practice ensures it continues to do just that. By setting clear expectations and introducing robust, independent checks, we’re giving businesses confidence in their choice of provider while ensuring retailers meet the high standards their customers expect and deserve.”
"By setting clear expectations and introducing robust, independent checks, we’re giving businesses confidence in their choice of provider while ensuring retailers meet the high standards their customers expect and deserve."
CONTENTS
This month's articles
Expert Forum
Support for a single regulator
4
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Report
CMA provisional determinations
10
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Feature
The UK proves a cautionary tale for Australia
14
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Report
Tougher standards coming for the EPA
20
Pg
Report
Portsmouth leads the Water Company Performance Report
22
Pg
News Review
CCC warns that we need to prepare for 2°C of warming
26
Pg
Industry Comment
DWI research on fighting PFAS
28
Pg
Report
CCW says small customers should stay in the market
31
Pg
Report
WICS' Market Health Check and BR-MeX begins
33
Pg
Report
What would fix water for investors?
8
Pg
News Review
Drought spreads to Sussex
13
Pg
Report
Environmental Performance Assessment ratings sink
18
Pg
Report
C-MeX results: Best to worst gap widens
21
Pg
Industry Comment
How would performance look under supervisory regulation?
24
Pg
News Review
Ofwat promises to change
27
Pg
Industry Comment
Changing FOG behaviors
30
Pg
Industry Comment
Wave and Northumbrian's Big Blue Eco Booster project
32
Pg
Report
Balancing cost and water efficiency in bulk tariffs
34
Pg