Policy paper

Water (Special Measures) Act: policy statement

Updated 24 February 2025

Applies to England and Wales

Why we need the Water (Special Measures) Act

The Water (Special Measures) Act (‘the act’) was introduced into Parliament on 4 September 2024 and received Royal Assent on 24 February 2025. The act significantly strengthens the power of the water industry regulators and delivers on the government’s commitment to put failing water companies under special measures.

There is a lack of public trust in the industry and widespread concerns about underinvestment in infrastructure, levels of pollution, and failures to address illegal spills of sewage. In 2022 to 2023, £9.7 million was paid out in executive bonuses and benefits to water and sewage company executives in England and Wales, despite poor performance. In 2023 Dŵr Cymru Welsh Water executives did forego bonuses.

This act is not the full extent of the government’s ambition, with wider transformative change across the whole water sector to follow. This act delivers on the government’s promises by:   

• blocking bonuses for executives who pollute our waterways
• bringing criminal charges against persistent law breakers
• enabling automatic and severe penalties for wrongdoing
• and ensuring monitoring of every sewage outlet

Collectively, the measures in the act will ensure water companies are better held to account where they have failed to deliver for the environment and customers and begin to restore trust in the industry.

To enable the implementation of the new measures introduced by the act, the strengthened regulators will consult on how they intend to use their new powers provided by the act, as well as on updates to their guidance and policies where required. The government and the regulators will take into consideration the overall impacts of the policies introduced through the act and ensure that the ability of the sector to attract investment and any impact on customer bills are carefully considered and balanced.  

 This policy paper is intended to  set out how the measures in the act deliver on the government’s commitments, and provide an explanation of government’s expectations for how each of the measures will be implemented.

New powers to block bonuses for executives who pollute our waterways

Rules on remuneration and governance  

Water industry performance is lagging. Between 2022 and 2023, the number of serious pollution incidents increased from 44 to 47, with over 90% caused by 4 companies. At the same time, public trust in the industry is low. In a recent survey by Ofwat, only 1 quarter of customers said they think “companies act in the interest of people and the environment”.  Despite this, £9.7 million was paid out in executive bonuses and benefits in 2022 to 2023.

The act will create a new framework for holding companies and chief executives accountable for governance and remuneration, with the aim of improving performance and restoring trust in the sector. The provisions in the act will not set out the rules on remuneration and governance themselves but will provide Ofwat with the power to set rules for water companies.  This delivers on the government’s commitment to give regulators new powers to block the payment of bonuses.

While it is for Ofwat to determine the specific content of the rules following consultation, Ofwat will be required to set rules to ensure:

• water companies stop the payment of performance related pay to directors and chief executives where performance fails to meet specified standards
• to test whether individuals in senior roles meet standards of ‘fitness and propriety’
• ensure customers are represented in company decision-making

When setting rules on performance-related pay, Ofwat must include reference to:

• customer matters
• the environment
• financial resilience
• criminal liability

Ofwat will determine how these areas are incorporated into the rules, and the specific metrics companies must consider. Where rules are breached, companies may be required to recover any payments made. These new rules on performance-related pay can apply to companies from the current financial year (2024 to 2025) onwards. The provisions deliver on the government’s commitment to block bonuses to executives of companies that pollute our waterways.

Rules issued by Ofwat on fitness and propriety will require companies to test whether senior individuals meet specified standards and prevent the appointment of individuals to these roles where standards are not met. Where individuals fail to meet relevant standards, companies will need to show how they will bring themselves back into compliance. This could include training for senior individuals or taking appropriate remedial action. Where breaches are severe, companies may need to reconsider individuals’ suitability for their roles.  

In setting rules regarding ensuring greater customer representation in decision-making, the government expects Ofwat to work with the Consumer Council for Water (CCW) to develop the rules to ensure optimal outcomes for customers. This could include, but is not limited to, a requirement for consumers to be members of a board, committees or panel.  

Ofwat engaged on the detail of the rules on performance-related pay through a policy consultation during the act’s passage through Parliament. As set out in the act, Ofwat is required to consult with the Secretary of State, Welsh Ministers, CCW, water companies and other relevant parties on all rules ahead of implementation.  Ofwat must provide a draft of the rules to the Secretary of State 7 days before the rules are issued.

The act also requires Ofwat to ensure companies produce an accessible, concise and intelligible overview of their financial position annually on their website. This provision aims to ensure that the public are able to easily find an overview of a water company’s financial position.

Ofwat will determine the precise information requirements of this financial summary and the format of how this should be published. Ofwat may either exercise its appointment powers or issue rules to impose the requirements on companies.

Bring criminal charges against persistent law breakers

Impeding investigations into water companies: sentencing and liability

Provisions already exist to allow the Environment Agency, Natural Resources Wales  and the Drinking Water Inspectorate (DWI) to bring criminal charges against companies and executives, but there is a high evidential bar that must be met. Some regulators have faced issues gathering evidence for prosecutions because of obstruction of investigations. To date, 5 individuals have been prosecuted by the Environment Agency, all for obstruction, 2 of whom were able to successfully appeal their convictions.

Previously, obstructing the regulators was not always punishable by imprisonment, or triable in the Crown Court. There were also no simple and straightforward routes for prosecuting directors or executives, where obstruction was committed with their consent or connivance, or was attributable to their neglect.   

To address this, the act introduces provisions that:

• enable the courts to include imprisonment as a sanction in cases where the regulators’ investigations have been obstructed
• enable this offence to be heard in the Crown Court
• enable executives and directors to be prosecuted for this offence, where it is committed with their consent or connivance, or is attributable to their neglect

The provisions in the act therefore extend the sentencing power of the courts to include imprisonment in all cases where the regulators’ investigations have been obstructed by individuals; and enable obstruction offences to be heard in the Crown Court. As a ‘company’ cannot go to prison, the provisions will ensure directors and officers are held to account. This will ensure consistency of sentencing across obstruction proceedings instigated by the regulators, and bring water regulation in line with other sectors, for example Serious Fraud Office obstruction.  This will deliver on the government’s commitment to bring criminal charges against persistent lawbreakers.

Alongside these new provisions relating to obstruction, the government expects the regulators to consider how they can use their existing powers. In particular, powers already allow for prosecutions against senior management, where offences are committed with their consent and connivance, or are attributable to their neglect. Whilst it is for the regulators to assess the merits of each case, prosecution of executives should be actively considered where appropriate. The Environment Agency will update its enforcement policy, to clarify the circumstances under which prosecutions against executives will be pursued.

Impose automatic and severe fines for wrongdoing 

Lowering the standard of proof  

Previously, the regulators had to be satisfied “beyond reasonable doubt” (the criminal standard of proof) that an offence had been committed to issue fixed and variable monetary penalties. Though this is appropriate for serious offences, the high investigatory burden is not always proportionate for minor to moderate water industry offences which have lower impact.

The government are determined to ensure those committing these offences are held to account.

The act allows these offences to be enforced more quickly, cost effectively and proportionately, by enabling financial penalties to be imposed for certain offences using the civil standard of proof, “on the balance of probabilities”.  

These penalties will be in addition to existing enforcement options that can only be imposed using the criminal standard of proof, including prosecution and unlimited variable monetary penalties. 

To implement this measure, the government will consult on the offences for which the civil standard of proof may be used, and on the cap for variable monetary penalties imposed to the civil standard of proof. This cap will be based on the degree of environmental harm, culpability, and size of the water company. Parliament will then debate the secondary legislation before any changes are made.  

The environmental regulators will also consult on and publish guidance that sets out their methodology for using these penalties, including how they will determine the value of new variable monetary penalties to be issued. This will use the guidelines for environmental offences published by the Sentencing Council to determine an appropriate level of variable monetary penalties. 

Automatic penalties

The current process for the environmental regulators to impose fixed monetary penalties for minor to moderate offending is too resource intensive, taking up time that could be being used for other actions. In addition to the high, criminal, standard of proof, the fixed monetary penalty amount the regulators can currently impose for certain water industry offences to this standard of proof is set at just £300. This means it is generally not cost effective for the regulators to impose fixed monetary penalties for frequent, minor to moderate offending, creating a gap in enforcement capabilities.

The act addresses this by introducing automatic penalties, where environmental regulators are placed under a duty to impose fixed monetary penalties for certain offences to be specified in secondary legislation. Our intention is for automatic penalties to also rely on the civil standard of proof, as enabled by the act. This will enable the regulators to impose fixed monetary penalties more quickly, without having to direct significant resources to lengthy investigations.  

Before introducing secondary legislation to implement automatic penalties, the government will consult on the specific offences that will be in scope, and on the value of the penalties. The proposed offences will cover information requests and reporting offences; pollution offences; and water resource offences. 

Where necessary, amendments will also be made to water company permit conditions to enable the regulators to issue automatic penalties for certain offences. These changes will be set out in secondary legislation.

Cost recovery for enforcement activities

The Environment Agency and Natural Resources Wales’ regulatory activities are in part funded through environmental permitting and abstraction licensing charges to operators of relevant regulated activities. The act expands the powers available to the Environment Agency and Natural Resources Wales, enabling them to recover their costs for enforcement from water companies.

The Environment Agency and Natural Resources Wales operate separate environmental permitting and abstraction licensing regimes with separate corresponding charging schemes. As with current charging schemes, the provisions will be subject to consultation with customers and require approval from HM Treasury and the Secretary of State for Environment, Food and Rural Affairs prior to their implementation, in England, and by Welsh Ministers prior to implementation in Wales. These are well-established safeguards that regulators use when setting charges to ensure that the charges are proportionate and only cover costs incurred by the regulators in carrying out their relevant regulatory function.

Drinking water cost recovery power

The DWI cannot recover full costs for the work they complete under the Security and Emergency Measures Direction (SEMD). The DWI, on behalf of the Secretary of State and Welsh Ministers, are responsible for the regulation of the SEMD specifically for companies who are wholly or mainly in England and Wales. These regulatory powers were delegated to the DWI under the Carltona principle. The current wording of sections 86 and 86ZA WIA does not permit the making of regulations which would enable DWI to recover its SEMD costs in full.

The act makes amendments to sections 86 and 86ZA WIA. This allows for subsequent amendments to be made to the Water Quality and Supply (Fees) Order 2016 to ensure that the DWI are able to recover their SEMD costs in full. The DWI has committed to collaborating with the industry during the development of amendments to the Fees Order. Furthermore, amendments to the 2016 Order will be made in a statutory instrument made by Ministers, ensuring that Ministers have final approval of the proposals.

The act also allows the DWI to revise its fee collection methods, allowing for the introduction of a fairer fee structure, reducing the financial burden of regulation on new market entrants. DWI will also work with industry prior to a fee restructuring and provide water suppliers with adequate time for implementation.

Enable independent monitoring of every outlet

Monitoring of every sewage outlet

To improve transparency and facilitate better data gathering regarding pollution incidents, there has been a roll-out of automatic event duration monitors at storm overflows over recent years. As of December 2023, these monitors are now in place at 100% of storm overflows. Storm overflows were designed to be used to discharge excess storm water during heavy rainfall to protect properties from flooding and prevent sewage backing up into streets and homes.   

These monitors show when discharges from storm overflows are occurring, and how long the discharges have lasted for. Since 1 January 2025, water companies are required to publish information from these monitors in near real time (within an hour of a discharge) in an accessible format. The introduction of this duty has significantly increased transparency within the sector, enabling the public and regulators to see what is going on and hold water companies to account, in near real time.

However, there are other types of sewage discharge outlets, called emergency overflows, which are currently not fully monitored in England.  There are 7,000 permitted emergency overflows in England.  These outlets are used in emergency circumstances at sewerage pumping stations, such as in the case of electrical power failures, mechanical breakdown, rising main failure or a blockage downstream.

The provisions in the act require water companies in England and Wales to publish information on the frequency and duration of discharges from 100% of emergency overflows in near real time (within an hour of a discharge occurring).  To meet this requirement, water companies will have to install and operate monitors at all emergency overflows.  Water companies will need to ensure that the installation of new monitors at emergency overflows is independently certified to meet the requirements for the Environment Agency’s Monitoring Certification Scheme for equipment, personnel, and organisations. Information on discharges from emergency overflows will be required to be published in an accessible and understandable format. Near real time monitoring of all emergency overflows will be independently scrutinised by the regulators to monitor compliance with relevant obligations more closely and take enforcement action appropriately.  

Every 5 years water companies set out their delivery plans and the financial impact on customers.  The determinations for the current price review have now been finalised for the financial years 2025 to 2030, known as Price Review 24 (PR24), with the next price review being conducted in 2029 for 2030 to 2035, known as Price Review 29 (PR29). The government is planning for the duty to publish information on discharges from emergency overflows to be phased in over 2 water industry investment cycles (PR24 and PR29). The government will continue to communicate to water companies that we expect them to achieve monitor installation at 50% coverage by the end of PR24 (31 March 2030) and 100% coverage by the end of PR29 (no later than 1 April 2035). This is an increase in requirements from the previous position (25% coverage by the end of PR24). Water companies will work with the Environment Agency and Natural Resources Wales to agree which emergency overflows should be prioritized for the 50% coverage required by the end of PR24.

By requiring water companies to publish information from monitors on emergency overflow discharges in near real time and enabling the near real time data on their operation to be scrutinised by the independent regulator, this measure will close the gap in monitoring of emergency overflows. This will fulfil the government’s commitment to ensure independent monitoring of every outlet.

Wider work to strengthen regulation

Pollution incident reduction plans

Currently, regional water companies in England that provide sewerage services produce pollution incident reduction plans (PIRPs) on a non-statutory basis. These PIRPs vary in standard and content and are produced to varying timescales. Data from the Environment Agency’s Environmental Performance Assessment shows that the occurrence of pollution incidents (including serious incidents) has not reduced in the last 4 years and remains unacceptably high.

The act introduces a new statutory requirement for all water companies (including water-only companies and smaller water companies, known as new appointments and variations, (NAVs) in England and Wales to publish annual PIRPs. These plans will be publicly available and will increase transparency about the steps water companies are taking to reduce the severity and frequency of pollution incidents relating to both the water supply and sewerage systems. This will enable the public and customers to hold water companies accountable.

These plans will need to set out clear actions and timelines that aim to meaningfully reduce the frequency and seriousness of pollution incidents. As part of the plans, we will require water companies to provide an assessment of the impact the proposed actions will have. Water companies will also be required to produce an annual implementation report to set out the extent they have implemented the actions they intended to complete in the previous year and to provide reasons for any failure to deliver these actions.

To ensure all PIRPs are produced to a high standard, water companies will need to have regard to guidance from the Environment Agency when producing these plans and the accompanying implementation reports. The Secretary of State will also be able to direct water companies on the matters that PIRPs must address in addition to the mandatory list in the clause.

Both the company and the chief executive personally will be liable for ensuring that a compliant plan and report is published each year. This will increase the personal accountability of chief executives and drive increased ambition 

Special administration regimes for the water industry

A special administration regime (SAR) enables a company which provides vital public services (for example water, energy, rail) be put into administration in certain circumstances, to ensure that the public service will continue to be provided pending rescue (via a means such as debt restructuring) or transfer (via a sale) to new owners.   

A SAR is a well-established mechanism and without it, it is likely that the public service provision would cease. However, if ever required, a Water Industry SAR would ensure that there is no disruption to customers’ water or wastewater services.  The bar for entering a SAR is high. As per legislative requirements, evidence that a company is insolvent or is in (or likely to be in) serious breach of any principal statutory duty or an enforcement order is required for an application to court to be made.  

Government funding may be required to cover the costs of special administration and sections 14 and 15 of the Water (Special Measures) Act introduce new powers for the Secretary of State and Welsh Ministers respectively to modify water company licences to recover any shortfall that it does not expect to otherwise recover. In the first instance, government would seek to recoup the funds spent on financing the SAR through the arrangements for the sale of the company in administration or through its rescue (through a means such as debt restructuring).

This new power would only be utilised if it was not possible to recover what government spent funding the administration. The shortfall recovery mechanism means that Ministers would have the power to decide the fairest and most appropriate way to allocate costs – subject to consultation – if they chose to do so.  This brings the Water Industry special administration regime in line with special administration regimes in other essential service sectors such as energy. 

Currently, in the event that a water company becomes insolvent, its directors or creditors could make a ‘winding-up petition’ (a legal tool used by creditors asking a company to be declared insolvent) without notifying government or Ofwat. In the subsequent court proceedings, there is no legal requirement for government or Ofwat to be heard. This creates a risk that government and Ofwat would not be able to make their views heard in court. In such a scenario, this could lead to a poorly managed entry into a SAR, or one in which public interests safeguarded by the government and Ofwat would not be reflected at the appropriate time.

New provisions in the act safeguard against this risk by requiring that government and Ofwat are notified of any winding-up petition presented to the court and give both parties guaranteed representation rights at the subsequent court hearings. The provisions explicitly prevent a court from exercising its powers before the winding-up hearing or from making a special administration order until notice has been given to government and Ofwat, and at least 14 days have passed. It also establishes a legal entitlement for government and Ofwat to be heard at the hearing of a winding-up petition for a water company.

The act introduces similar SAR provisions for Wales and provides the Welsh Ministers with powers equivalent to those of the Secretary of State in respect of a recovery mechanism and in relation to winding-up for a water company operating wholly or mainly in Wales.

Requirement for Ofwat to have regard to climate change

The government has a number of environmental targets it is required to meet, including targets under the Climate Change Act 2008 and the Environment Act 2021. Water companies will have a part to play in meeting these environmental targets. The act requires Ofwat to consider, where relevant, how the water industry can contribute towards meeting these environmental targets. This will be implemented through amending section 2 of the Water Industry Act 1991.

As with Ofwat’s other duties, it will be for them as the independent regulator to determine the appropriate balance of duties and this will not take precedence over other duties.

Nature-based solutions and Drainage and Sewerage Management Plans (DSMPs)

Sewerage undertakers in England are required to prepare, publish and maintain a drainage and sewerage management plan (DSMP). DSMPs are also known as drainage and wastewater management plans, (DWMPs).

The DSMP is a strategic plan detailing the actions the undertaker proposes to take or continue to take to meet, and continue to be able to meet, their statutory obligations under Part IV of the Water Industry Act 1991. The DSMP must address some key matters as per section 94A(3)(a-f) of the Water Industry Act 1991 – these include the capacity of the drainage and sewerage network, the resilience of the network, an assessment of the current and future demand on the network, the actions the undertaker proposes to take or continue, the sequence and timing of those actions, and relevant environmental risks and how those risks are to be mitigated.

The government is committed to supporting greater exploration and development of nature-based solutions within the drainage and sewerage network. Nature-based solutions, such as sustainable drainage systems (SuDS), are considered a key mechanism to deliver improvements to drainage and sewerage systems whilst also improving our natural environment, helping decarbonise the economy and restoring ecosystems and biodiversity.

The act introduces a new requirement for sewerage undertakers to address within their DSMP the use of nature-based solutions, technologies and facilities within their drainage and sewerage network. Requiring sewerage undertakers to specifically address the use of nature-based solutions within their DSMP will help ensure nature-based solutions are properly considered as a solution to current and future drainage and sewerage issues. This measure will also help support further development, and potential future delivery, of nature-based solutions. This measure will apply to sewerage undertakers in both England and Wales.

Support for customers

Special Provision in Charges Schemes

Current company-led affordability support varies between companies, which use different eligibility criteria and provide varying levels of support to vulnerable households across the country. In addition, prior to the changes made by this act, the costs of providing special provision under section 143A of the Water Industry Act 1991 (WIA 1991) could not be shared across companies. This sees the costs of any such support impacting more significantly on some companies (and their customers) than others, depending on the number of households eligible for support in their area.

The act inserts a new section 143AA into the WIA 1991 to allow costs associated with making special provision in charges schemes to be shared across companies. This could enable government to design new affordability schemes with more equitable outcomes. The provisions aim to ensure companies are not prevented from passing on to customers the net costs of complying with the requirements of any new scheme.

Additionally, the act amends relevant provisions of the Digital Economy Act 2017 to make them available to those eligible for special provision in charges schemes. This change, along with the amendment to section 143A(3)(b) WIA 1991, is designed to enable potential auto-enrolment of eligible customers onto future water support schemes.

Any regulations brought forward under sections 143A or 143AA WIA 1991 will require a consultation (save where minor amendments are being made to earlier regulations), and the act sets out the stakeholders who must be consulted.