The Independent Water Commission’s interim findings: Pressure builds for reform, but a sea-change looks unlikely

Following a Call for Evidence that elicited over 50,000 responses, the UK’s Independent Water Commission (Commission) has published its interim findings,[1] highlighting five areas it believes to be critical to reforming the UK water industry. The report considers possible reforms to strategic direction and network planning; the current legislative framework; the role of the regulator; the structure and governance of water companies; and the management of infrastructure and asset health. Our team has produced a detailed briefing, in which we review the Commission’s preliminary recommendations and consider the implications for the industry and investors.

The Commission’s preliminary findings include: 

1. Strategic direction and planning: the Commission recommends clearer, long-term direction on what the UK government wants from the water system and suggests that “this requires government to set out its priorities and timescales for the system much more clearly than it does at present”.
2. Legislative framework: the Commission found that the legislative framework governing water lacks clarity, and sees a strong case for review, rationalisation and consolidation of existing legislation. Noting that this is a major exercise and beyond the Commission’s scope, the Commission has undertaken to consider priority areas for review in its final report.
3. The role of the regulator: the Commission heard evidence that public trust in the current regulatory framework, which involves a range of different bodies including Ofwat, has been “severely eroded” and will make more detailed recommendations in relation to economic and environmental regulation in its final report, along with recommendations for reforming the structure of the regulatory framework, for example to address overlapping remits for oversight and enforcement.
4. Company structures, ownership, governance and management: the Commission is still evaluating whether there is a link between ownership models (for example, listed models and private equity models) and performance, and will examine the issue further in the final report, along with providing recommendations for strengthening corporate governance and accountability. In relation to investor appetite, the Commission is clear that the water industry is likely to be best served by investors that take a long-term, low return, low risk investment approach.   
5. Infrastructure and asset health: the Commission’s current view is that there is a strong case for the implementation of a comprehensive infrastructure resilience framework across all water companies in England and Wales, including the establishment of outcome-focused resilience standards. We can expect to see further detail on this in the final report.

Whilst the Commission’s interim report provides a helpful insight into the direction of travel, there is more work to be done ahead of publication of the final report this summer. As well as the further examination of a number of issues covered in the interim report, the Commission will also consider gaps in environmental regulatory oversight and options for improving approaches to environmental performance, along with more consideration of what a supervisory approach should involve and deliver, conclusions regarding the price review process, and consideration of the Special Administration regime and customer bills and protections. It will then be for the Secretary of State to respond to the Commission’s report and proceed with implementation of the recommendations, as appropriate. Given the tone of the Commission’s interim report, regulatory reform should be expected. 

The Commission is clearly navigating a delicate policy balancing act of reconciling the objective to attract private investors in the sector whilst also protecting the interests of customers and members of the public. The preliminary recommendations do appear to recognise the importance of the former objective in achieving an effective and resilient water industry, which can, in turn, underpin public interest objectives. Striking the right balance in the Commission’s final report will be key to maintaining confidence in the UK’s water sector.

For a more comprehensive analysis, please read our publication here.

For further information, please speak to one of the authors, and/or your usual contact at Slaughter and May. 

[1]Independent Water Commission publishes interim findings - GOV.UK