Economic regulation of the water industry

In England and Wales, the water industry was privatised in 1989 and water supply is delivered by private water companies. In Scotland and Northern Ireland, publicly owned water companies are responsible for the water supply.

This briefing focuses on economic regulation in England and Wales, although there are references to Scotland and Northern Ireland throughout and in sections 3 and 4.

Reasons for regulation

Most water and sewerage companies are regional monopolies, with dedicated infrastructure in each company’s area. This means that household customers cannot switch their supplier and that competition is limited. To compensate for the lack of competition, the industry is subject to economic regulation to ensure that it delivers value for consumers and the environment.

All parts of the UK are subject to regulation, but in areas where private companies provide water and sewerage services regulation is the main means of government oversight. In England and Wales, Ofwat (the Water Services Regulation Authority) is the economic regulator. National government departments are responsible for setting policy and legislative direction for water industry regulation.

Price review process

In England and Wales, the prices that water companies charge customers in bills are set by Ofwat following a five-yearly process called the price review. During the price review, Ofwat sets wholesale price limits for each water company alongside performance targets, such as for leakage reduction, reducing pollution incidents and lowering personal water consumption. When setting company prices, Ofwat must balance the interests of customers for lower prices with the need to make sure the water company can finance its operations and meet environmental responsibilities.

In Scotland and Northern Ireland, the prices that the water companies charge customers are also set centrally through the Strategic Review of Charges and the Northern Ireland Price Review.

Price review 2024 (PR24)

The most recent price review will conclude in late 2024 (PR24) and set prices for 1 April 2025 to 31 March 2030. Ofwat stated that overall, PR24 would result in an average annual customer bill rise of £19 and £88 billion worth of investment by industry over the five-year period. Ofwat described the price review as its “biggest ever investment package” to “protect our rivers and sea, build new reservoirs, reduce leaks and raise the bar on customer performance.”

Following Ofwat’s draft determinations in July 2024, PR24 has been criticised by Water UK (the industry body for water companies) for not allowing the rise in customer bills many water companies had requested. It said that this would mean less investment in water infrastructure. The Consumer Council for Water welcomed the price review as a good outcome for customers, although criticised bill rises across the sector.

Water company performance

Water company performance has come under increasing scrutiny in the last few years from across the political spectrum. The profits, dividend payments, and debt burden of some companies, alongside continued use of storm overflows to discharge sewage, have raised criticisms that the sector is not adequately serving customers or protecting the environment.

In PR24, Ofwat has raised targets for investment and environmental performance. There are higher expectations around financial reporting, dividend payments and benefit-sharing with customers than in the previous price review.

Average water bills have risen since privatisation (when inflation is accounted for) and have remained relatively stable since 2010, at around £39 per month per household in England. Water bills in all parts of the UK rose between 4.7% and 8.8% for the billing year 2024/25. Water bills vary between different companies and parts of the UK because the costs of infrastructure and services are different in different regions.