A group of influential MPs are urging the government to create a "low risk, low return" water sector and called for stronger regulatory powers in light of concerns about excessive dividends and opaque corporate structures.
The Public Accounts Committee (PAC) has issued a comprehensive report highlighting the "financial fragility" of several large utilities, which has led to dwindling investor confidence in both the regulatory system and the water sector as a whole.
According to the PAC, 10 companies failed to earn sufficient income in 2023/24 to service their debt interest, with three now requiring Ofwat's approval before issuing any dividends.
Geoffrey Clifton-Brown, chair of the committee, pressed the government to "act now" to bolster regulators that are currently overwhelmed and have been ineffective at preventing companies from breaking the law.
The scrutiny on the water industry has intensified following a surge in pollution incidents and bill increases intended to fund a 300% rise in infrastructure investment over the coming five years, as reported by .
The PAC has raised alarms about eroding customer trust, which is at its lowest in over a decade, driven by water companies' poor performance especially regarding environmental issues. It also criticised º£½ÇÊÓƵ utilities for not being transparent about how they will use the additional funds from billpayers.
This report emerges amidst a crisis at Thames Water, which covers a large area of London and the Thames Valley as well as Oxfordshire, Berkshire, Wiltshire and Gloucestershire. The utilities firm is fighting to avoid temporary nationalisation as it grapples with debts surpassing £16bn.
The PAC has criticised Ofwat and the Department for Environment, Food and Rural Affairs (Defra) for their lack of clarity regarding the potential implications of a so-called special administration regime (SAR), including the possible financial impact on millions of customers.
Earlier this week, Thames Water's executives were subjected to intense questioning by the environment committee following allegations that the utility's chair, Sir Adrian Montaguge, had misled MPs about bonus payments from a £3bn emergency loan. The crisis engulfing the company escalated last month when US private equity firm KKR withdrew its plans for a rescue bid.
The complexity of the water sector's finances, described as 'farcical' by some, has not only been a point of contention for Thames Water.
Last year, Severn Trent Water was accused in a BBC Panorama investigation of using an accounting manoeuvre to artificially boost its balance sheet by over £1.68bn, an allegation the company refutes.
Mr Clifton-Brown argued: "It is past time that we had a low risk, low return water sector, from its current farcical state of overly complex, sometimes unregulated companies, and a culture of excessive dividends and borrowing."
He added: "There is also a lot to be done in the regulatory sphere, with a pressing need to improve and streamline the existing regulatory regime."
Regarding pollution incidents, he stressed that "more must be done" due to the "serious risk to human health" and ongoing deterioration of "the quality of our lakes and rivers."
