England and Wales’ embattled water regulator will be abolished under recommendations from a government-commissioned review due out on Monday, the Guardian understands.
Ministers will announce next week a consultation into creating a new regulator, to coincide with the results of a review into the water industry directed by former Bank of England deputy governor Sir Jon Cunliffe.
This consultation is likely to conclude with the abolition of Ofwat, the watchdog that polices how much water companies can charge for services in England and Wales, sources said.
Ofwat has faced intense criticism over its failure to prevent sewage spills, hefty payments of dividends, and ballooning debts across England and Wales’s water companies. The review will recommend a new regulatory system.
Cunliffe’s review was set up by the government amid growing public anger about record sewage spills and rising bills, as well as the fraying finances of some of the biggest utilities.
It will be the largest review of the sector since its privatisation under Margaret Thatcher. At the launch of the review last year, the environment secretary, Steve Reed, said it would “shape new legislation to reform the water sector so it properly serves the interests of customers and the environment.”
Critics have said Ofwat presided over a culture of underinvestment in water infrastructure and financial mismanagement by water companies since its creation in 1989. The most troubling case for the government is the UK’s largest water company, Thames Water, which is loaded with £20bn in debt and struggling to stave off financial collapse.
Thames Water is in talks with Ofwat over a takeover by creditors who hold much of its debt, and is trying to secure leniency from fines and penalties. Should those negotiations fail, it is likely to fall into temporary state ownership via the special administration regime.
Cunliffe warned in his interim review that the current regulatory system, including Ofwat, had “largely lost public trust”.
Industry leaders have also long bemoaned a lack of coherence in water regulation, with different regulators and agencies doubling up on areas of investigation. This has made it hard to have timely decisions, allowing investigations to drag on rather than prevent or address environmental harm and pollution.
Cunliffe had also suggested “fundamental, structural options for integrating regulatory remits and functions”. There are now three regulators for water – Ofwat, the Environment Agency and the Drinking Water Inspectorate.
Water campaigner and former Undertones frontman Feargal Sharkey said: “The bonfire of the quangos in the industry needs to go further, we need remedial and radical action and we demand it now.
“A regulator that has never been prepared to acknowledge its role at the epicentre of greed, corruption and incompetence is just as guilty as any water company of polluting rivers and exploiting customers.”
A government spokesperson said: “We do not comment on speculation”.
Insiders at Ofwat have expressed concern that scrapping the regulator without a clear plan for the future could add to uncertainty at a sensitive time for investment. However, sources said they supported combining some different investigatory and punishment powers within one regulator – even if it cost them their jobs.
One insider said “simply scrapping Ofwat would not be a quick fix”.
“If this were an easy way to avoid putting Thames Water into special administration, I think the government would have done it already,” they added.
A senior Whitehall source said they feared the politicisation of regulatory changes could make it harder to attract investment for the water industry in the short and medium term.
“Investors need to know what they are buying,” the source said. “That includes regulation.”
On Friday, it was revealed serious pollution incidents by water companies were up by 60% last year compared with the year before. The total number of serious pollution incidents in 2024 was 75, up from 47 in 2023, Environment Agency figures showed. Of these, 81% (61) were caused by three companies: Thames Water (33), Southern Water (15) and Yorkshire Water (13). Thames Water’s serious incidents more than doubled from 14 to 33.
Ofwat declined to comment.
