Briefing for Event 4: Public Value

1  Introduction

This is the fourth and final meeting organised by the People’s Commission on the water sector. This session explores how the water sector contributes to society and the environment, and the value it generates for the public. Private value is fairly easily quantified in terms of numbers but public value is more intangible. It is us, the water users, who pay for the water system and we have no choice, so we have a right to know where our money goes. We want to be sure that our bills are spent in the best way possible to provide a healthy water ecosystem. There is plenty in the news about how we are being ripped off by the water system but then water companies say they need to raise bills to invest more. What is happening and why?

 1.1  Key areas

• Water companies have come under fire for paying out £83bn in dividends while taking on £74bn in debt. Yet Ofwat approved a 26% increase in average household bills this year. How can these two actions be reconciled?

• Can we be sure that the regulator makes sure that our money goes to the right places?

• Water company assets should have been maintained using our bill payments, and the bill hikes are supposed to be to pay for new infrastructure to improve the water sectors ability to treat dirty water. How can we know if the new money is going to ‘enhancement’ rather than to prop up the poorly maintained current infrastructure?

• It seems we pay more for projects in the water sector than other countries. Why is that and are we getting a good deal?

• Water companies are under-delivering. In “During the 2020-2024 period companies generally underspent their forecast allowance on wholesale water and wastewater enhancement activities. At a sector level, water companies spent 16% less than their forecast enhancement allowance” (Ofwat 2025). What happens to the money we have paid up front for new projects? 

• We have a traffic light system where performance is given financial penalties or rewards. Does this incentivise the right behaviours from companies?.

• The water system is entirely financed by our bills and many are struggling to pay. “Currently, as many as 34% of bill payers report struggling to pay fairly frequently” (Sylvester et al 2023).

• Is the current financing system fair? How do we ensure we have an equitable universal water system that meets the needs of people, communities and our environment. Where should finances be focused to secure a resilient water system fit for the future, taking an evidence-based approach?

• In the previous People’s Commission public event we discussed different models of ownership. What are the real costs of privatisation v public ownership? We provided some insights to this in our Mid Point Summary Report.

For our public meeting we have sought out evidence and views on what specific impact the current structure of ownership and regulation has on the outcomes we are seeing, what needs to change, and how. 

2   The context for public value in the water system

Since privatisation in 1989, it is well known that companies have paid out loads in dividends and racked up extraordinary debts. The total money spent on our water system by water companies equates to the money that we have paid through our bills in the same time (see evidence from Stanley Root in Submitted Evidence and below). What is going on?

2.1  How the water finances work

The water system was privatised in 1989 when the regional water companies were listed on the London Stock Exchange (LSE).  Now there are ten water and sewerage companies operating across the country on a regional basis. These companies are responsible for all aspects of the system from abstracting and treating raw water, distributing to houses and businesses, dealing with wastewater and sewerage before discharging it safely into rivers and seas.

Since these were privatised by listing on the LSE, some of them have been taken of the stock exchange (delisted) and are owned privately. There are four types of ownership category:

• Still listed on the LSE: Severn Trent, United Utilities and South West Water (via its parent company, Pennon).  Shares in these companies are publicly traded. The main owners are private equity but in small shareholdings (less than 10% of total ownership) so individuals do not have much control over the company.

• Owned by large conglomerates: Northumbrian Water is owned by a huge Hong Kong based company, CKI. It also owns gas and rail networks in the UK. Wessex Water is owned by a large Malaysian company, YTL,  that operates across 10 countries with investments in sectors including utilities, construction and real estate.

• Not for profit: Welsh Water was privatised along with all the other companies but was taken over by a not-for-profit company in 2001. All surplus funds are reinvested.

• Institutional investors: Thames, Southern, Yorkshire and Anglian and all the water-only companies (South East Water, Affinity Water, Portsmouth Water and South Staffs Water) are owned by consortia of financial investors that have formed a special company just for the purposes of buying the water company. These investors include private equity funds, sovereign wealth funds and pension funds.

2.2  How does economic regulation work?

Water companies are regional monopolies. There is no alternative provider and so they are regulated by Ofwat to protect consumers. The system is known as ‘price-cap’ regulation. The essence is that prices are fixed in advance for a five-year period, following negotiations between the regulator, Ofwat, and the water companies. It’s not actually prices that are fixed but the maximum revenue a company can earn based on their business plan that sets out what they are planning to spend.

The price cap is set in advance every five years in a Price Review. The last one was in 2024 which set prices for 2025 to 2030. In the review, companies set out a business plan saying what their costs will be, what they will invest and how much it will cost. Ofwat then reviews the numbers to see if this is justified and cost effective and if the business plan is coherent. They go back to the water company and after some negotiation the final price determination is issued by Ofwat. The price is based on companies’ expected costs and they are adjusted each year according to performance against a set targets. These include environmental targets. Companies can appeal to the Competition and Markets Authority if they disagree with the final ruling. In PR19, four companies appealed. In PR 24 it was it was a record five companies who have now gone to appeal their price setting process.

Alongside the price setting process, pollution is monitored separately by the Environment Agency. Firms also face fines for breaking the rules.

The idea of the price cap was that within the price limit (and the conditions of their licence) companies were able to operate with relative freedom which would give them an incentive to improve productivity as this would boost their profits. And then such improvements would be built into the following price cap and so then benefit consumers. This was the essence of privatisation – the profit motive would initially drive efficiency for shareholders, and then benefit everyone. Everyone would be a winner.

2.3  What could possibly go wrong?

There are some fundamental challenges with this regulatory structure:

2.3.1 Contested interests

Ofwat has two key responsibilities: to protect the interests of consumers AND to make sure that firms can finance their investments. But these are not straightforward. Consumer interests are in bills being as fair as possible, not that they need to be impossibly low as we all want to pay enough for an efficient water supply, but so they are fair. Firms are operating in the interests of shareholders and have an incentive for bills to be higher, not just to finance investment but to generate profits, and secure dividends. But the negotiation is made incredibly complicated in the regulatory process which lasts for years and generates hundreds of pages of analysis.

2.3.2 Information asymmetries

Ofwat cannot know what firms are really up to. They, and the EA, carry out inspections and require firms to certify that the things are in order but the regulator cannot check everything. Regulation is outcomes-based so that it is up to firms to determine how outcomes are achieved as long as the targets are met. Previously water companies had to employ Reporters who worked independently reporting to the regulators, checking up on investments, but the Cameron government got rid of them in a policy to reduce the burden of regulation. But this means the regulator does not actually know if investments have been made. They don’t really know if the investment being proposed is really the best value for money. And they didn’t know that firms were not investing in their sewage infrastructure until campaign groups brought it to light. Ofwat is now investigating whether company business plans are actually based on accurate (no artificially inflated) figures with regard to the costs of projects (The Guardian 2025).  What happens to the money we have paid up front for new projects. 

2.3.3 Overpromising and Under-delivering

Water companies are under delivering on improvement. “During the 2020-2024 period companies generally underspent their forecast allowance on wholesale water and wastewater enhancement activities. At a sector level, water companies spent 16% less than their forecast enhancement allowance” (Ofwat 2025). The enhancement projects were built into business plans, and paid for by bill payers. Water companies now say they will bring that money forward into the next period (2025-30) and scale up their delivery. 

2.3.4 Shareholders make money in different ways

Crucial to the water story is that the regulator does not intervene in debt levels or dividends, as these were seen as outcomes from the market (although some modifications have now been brought in to limit payouts in the case of poor company performance but this was only from 2023). Firms were free to hike up debts to finance operations and pay out any surplus to shareholders, as long as they assured Ofwat that they were maintaining the sewage infrastructure. Total debt in the sector has gone from zero to £74bn. For the four biggest privatised water companies, for every £100 they invested in infrastructure, they paid £77 in debt interest and dividends(Stanley Root Evidence)

2.4  What have we paid for already?

The water companies have to certify that they have enough money to carry out their required duties but it seems that this was not the case. At the Environment Farming and Rural Affairs Committee (EFRA) in 2025, water companies repeatedly said they have not had enough money to maintain their infrastructure, despite the regulator’s requirements to do so. Company Board’s self-certification of their ability to meet regulator requirements within the price settlement, was a prerequisite for the regulator approving debt and dividends. It is not clear what infrastructure maintenance has actually taken place since privatisation, and what the lack of maintenance means for the future bill for fixing the assets.

2.5  Now we have two major crises in the water sector

2.5.1 Thames Water is on the brink

In 2024 Thames Water doubled its sewage discharges “The total amount of raw sewage discharge in 2024 (298,081 hrs) is 50% larger than that for 2023 (196,414 hrs) and 4 times that for 2022 (74,693 hrs)” Peter Hammond. It was handed record fines of £122.7m in 2025 for environmental failings and over payment of dividends,  following on from £104m in 2024 for pollution. Thames Water has come close to running out of money, and has only managed to keep going with an expensive £3bn loan from creditors to add to its £19bn debt. And others have come close – Southern Water. 

2.5.2 Devastating sewage spills

• Destroying our environment: all our rivers are polluted and all our chalk streams are in poor health.  Untreated sewage was dumped in our waterways 450,398 times for over 3.6 million hours in 2024.

• Affecting businesses in seaside towns both tourism and those dependent on seas being clean.

• Creating a public health hazard for anyone getting into our waters, be it kids paddling at the seaside or in our rivers in the summer, to people surfing or fishing.

3. Where to now?

Big spending is planned - Ofwat has given the green light to £104bn of investment to maintain and upgrade the system over the next five years, including £44bn of new infrastructure investment. (Gill Plimmer, Financial Times)

 But let’s not forget that it is customers that are sustaining this whole immense water system. There are no subsidies. The new investment will be financed by a 36% increase in bills.

 Companies are saying that for too long there has been political pressure to keep bills down and now they need more money for vital investment in infrastructure.  But the equity investment from shareholders needs to increase.

The government is saying public ownership is too expensive. In the People’s Commission Mid Point Summary Report we exposed that the purported £99 million costs of public ownership is a myth not a fact. English law doesn’t require compensation, and any compensation is at the discretion of parliament. The figure being used by government is based on water companies Regulated Capital Value which is not its market value. Based on the evidence received by the People’s Commission to date, not only is public ownership affordable, it is likely that the whole system can be run more efficiently and cheaper under public ownership. 

“..private equity investors have found innovative financial mechanisms for increasing investor returns that are unrelated to productive activity. The resulting financialised, highly-indebted corporate structures create costs and risks for utilities which raise concerns for social equity” (Bayliss et al 2023)

 At what point do we consider that the current system has failed and needs replacing, or will new reforms patch it up?