Water supply and sanitation in England and Wales

Most of the population of London is served by Thames Water, one of 10 private regional water and sewerage companies in England

Within the government the Department of Environment, Food and Rural Affairs (Defra) has the responsibility for policy in the water and sanitation sector. The economic regulator of water companies in England and Wales is the Water Services Regulation Authority, OFWAT. The Environment Agency is responsible for environmental regulation, and the Drinking Water Inspectorate for regulating drinking water quality. Drinking water standards and wastewater discharge standards in the U.K., as in other countries of the European Union, are determined by the EU (see EU water policy).

In England and Wales, water and sewerage services are provided by 10 private regional water and sewerage companies and 16 mostly smaller private "water only" companies.

Before 1973 water and sanitation services were provided by water undertakings and sewerage and sewage disposal authorities respectively. Until the 1950s there existed over a thousand water undertakings, with administrative boundaries similar to those of local government boundaries. By the early 1970s their number had been reduced to 198 by a gradual consolidation process aimed at achieving economies of scale. Out of the 198 water undertakings 64 were run by individual local government authorities, 101 by joint boards comprising several local government authorities, and 33 were statutory privately owned water companies, some of which date back to the Victorian era. At the same time there were over 1,300 sewerage and sewage disposal authorities, most of them run by individual local government authorities. The sector thus was highly fragmented.

Water resources management was entrusted to 29 river authorities created in 1965. Their responsibilities included water conservation, land drainage, fisheries, control of river pollution and, in some cases, navigation.[10]

Through the Water Act 1973 the government established ten regional water authorities in order to achieve even greater economies of scale, especially in sanitation, compared to the prior gradual consolidation of water undertakings. The reform was also aimed at putting in practice the principle of integrated river basin management, especially concerning the planning of investments in wastewater treatment. Given the small size of many river basins in England and Wales, in practice the area covered by each of the regional water authorities typically contained more than one river basin.[10]

The regional water authorities were not only in charge of water supply and sanitation, but also of water resources management, thus opening the possibility of conflicts of interest since the same institution was in charge of abstracting water and discharging wastewater on the one hand, and controlling these same abstractions and discharges on the other hand. The Water Act left open the possibility to contract out water supply and sanitation services to local authorities. However, in practice this did not happen, and substantial assets were transferred from local governments to the new water authorities. Since the transfer was internal to the public sector, no compensation was paid to local authorities. Local authorities also initially held a majority of the board seats of the new organisations. The private statutory water companies, which provided water to 25% of the population, escaped reorganisation and were left to operate as before.[10]

With the election of Margaret Thatcher in 1979 the water and sanitation sector initially remained public, but the government attempted to make the enterprises operate more along commercial lines. As a result, the number of employees in the sector declined from 61,000 in 1976 to 52,000 in 1985, real operating costs declined, tariffs were increased above the inflation rate and the share of self-financing of investments increased. However, government regulators also cut back on investments. While the industry became profitable, the rate of return on assets based on replacement cost values remained low at less than 2%. As part of the attempt to commercialise the service providers, the Water Act 1983 reduced the number of board members of the water authorities. However, it also eliminated the local government representation on the Boards and made all Board members appointed by Ministers, thus further centralising the sector.[10]

In 1989 the government privatised the ten public regional water authorities through divestiture (sale of assets). The authorities' functions related to water resources management were separated and retained by the public sector. At the same time the regulatory agency OFWAT was created, following the model of infrastructure regulatory agency set up in other sectors such as telecommunications and energy.

The Water Industry Act 1999 made several important clarifications and amendments to legislation regarding the power and responsibilities of the privatised water and sewerage companies. These include:

• Removing the right of a water company to disconnect customers on the basis of outstanding unpaid bills.[11]
• Clarifying that water companies can continue to charge customers using rateable value where no water meter has been installed at a property.[11]
• Allowing consumers to request a water meter, and obliging the local water company to install a meter unless the installation is not reasonably practical or would incur an unreasonable expense.[12]

Since 1 April 2017, most businesses and organisations in England have been able to choose which company supplies their retail water services.[13] Deregulation was designed to deliver lower bills, increase water usage efficiency and improve customer satisfaction. As of 2022, the deregulated non-household market includes 1.2 million businesses, charities and other organisations.[14]

The Welsh government decided not to pursue deregulation, except for large industrial users that consume over 50 million litres of water annually.[15]

Tariff level. Water and sanitation tariffs in England and Wales have increased by 44% in real terms between 1989 and 2008–09 and are among the highest in the world. The average household water and sewage bill in England and Wales was £330 in 2008-09.[16] According to a 2006 survey by NUS Consulting Group the average water tariff (price) without sewerage in the U.K. for large consumers was the equivalent of US$1.90 per cubic metre. This was the third-highest tariff among the 14 mostly OECD countries covered by the report.[17] A study commissioned by the German industry association BGW in 2006, compared the average household water and sanitation bill (as opposed to the tariff per cubic metre that the NUS study used as a comparator) in four EU countries. This study showed that water bills in England and Wales were the highest among the four countries. Average water bills (excluding sanitation) were 295 euro per year in England and Wales, higher than in Germany, France (85 euro) or Italy (59 euro).

Comparison of annual water and sanitation bills in four EU countries:

Source: Metropolitan Consulting Group: VEWA - Vergleich europaeischer Wasser- und Abwasserpreise, 2006, p. 7 of the executive summary[18]

Taking into account differences in subsidies and service quality, the cost of supplying water at an equalised service level would be 84 euros in Germany, 106 euro in both France and England/Wales, and 74 euro in Italy.[18] Concerning sanitation, unequalised tariffs are the highest in Germany at 111 euro per year, 93 euro in England and Wales, €90 in France and only €40 in Italy. Equalised costs net of subsidies are, however, highest in England and Wales with €138, followed by France (€122), Germany (119 euro) and Italy (85 euro).

Tariff structure and cross subsidies. Metered connections are charged at a volumetric rate, while unmetered connections are charged at a flat rate based on the rateable value of the property. The rateable value system was intended as a cross subsidy from wealthier to poorer households. However, since rateable values are often outdated, the subsidy is poorly targeted. Since more and more highly rated households opt for metering, flat rates for the remaining unmetered customers are being increased to compensate for the lost revenue. As a result, the already imperfect cross-subsidy system is unwinding. An Independent Report on Charging for Household Water and Sewerage Services published in 2009 by Anna Walker recommended a package of help to ensure that "the transition to metering is not to cause real problems of affordability to those on low incomes".[19]

Tariff review procedures. Water and sanitation tariffs are regulated by OFWAT, which sets caps for tariff changes over five-year asset management plan periods. In the 2000–2005 review period OFWAT mandated an average annual reduction of tariffs of 1.6%. However, in the 2006–2010 review period it has allowed an average annual increase of 4.2%.[2]

Affordability. As a proportion of income, in England and Wales the cost of water and sewerage together works out at less than 1.5% of weekly earnings.[3] More details on tariffs in England and Wales are provided in OFWAT's annual reports on water and sewerage charges.[20]

Average annual investments in water and sewerage in England and Wales were £3.3 billion in 2000–2005 and £3.6bn in 2005–2010, according to OFWAT,[2] which corresponds to £61 per capita per year.[21] According to the industry association Water UK, between 1980 and 2010 the water and wastewater industry in England and Wales will have invested over £88bn.[6]

Investments are financed primarily through self-financing and borrowing in the capital market. In March 2006 overall borrowing stood at £23.5bn for England and Wales. Net returns on this borrowing in 2006 were 6.6%.[6]