The Water (Special Measures) Act 2025: the key changes and requirements for water regulators and companies

The Water (Special Measures) Act 2025 creates 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 water industry.

The act provides the Water Services Regulation Authority (Ofwat) with the power to set rules for water companies. Although it's 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.
• Individuals in senior roles meet standards of ‘fitness and propriety’.
• Customers are represented in company decision-making.

In setting rules on performance-related pay, Ofwat must include reference to customer matters, the environment, financial resilience and 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 (FY24/25) onwards.

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 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, Consumer Council for Water, water companies and other relevant parties on all rules ahead of implementation.  

The Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate (DWI) can already 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, five individuals have been prosecuted by the Environment Agency, all for obstruction, two 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 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 act extends 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 corporate body 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 a Serious Fraud Office obstruction.  

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 Water (Special Measures) Act 2025 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. 

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.

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. 

The Water (Special Measures) Act 2025 introduces automatic penalties, where environmental regulators are placed under a duty to impose fixed monetary penalties for certain offences to be specified in secondary legislation. The intention is for automatic penalties to also rely on the civil standard of proof. This will enable the regulators to impose fixed monetary penalties more quickly, without having to direct significant resources to lengthy investigations.  

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.

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 Water (Special Measures) Act 2025 expands the powers available to the Environment Agency and Natural Resources Wales, enabling them to recover their costs for enforcement from water companies.

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. 

The Water (Special Measures) Act 2025 requires 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.  

Water companies in England that provide sewerage services are currently required 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 four years and remains unacceptably high.

The Water (Special Measures) Act 2025 introduces a new statutory requirement for all water companies, including water-only companies and smaller water companies, known as new appointments and variations, 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. 

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.

A special administration regime (SAR) enables a company which provides vital public services, for example water, energy, and rail, be put into administration in certain circumstances. This will 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's 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 2025 introduce new powers for the secretary of state and Welsh ministers respectively to modify water company licences to recover any shortfall that it doesn't expect to otherwise recover. 

This new power would only be utilised if it wasn't 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 SAR in line with special administration regimes in other essential service sectors such as energy. 

The Water (Special Measures) Act 2025 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.

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

The Water (Special Measures) Act 2025 introduces a new requirement for sewerage undertakers to address within their drainage and sewerage management plan the use of nature-based solutions, technologies and facilities within their drainage and sewerage network. 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.

Finally, the government has launched an Independent Commission into the water sector and its regulation, in what is expected to form the largest review of the industry since privatisation. A set of recommendations will be delivered to government and these will form the basis of further legislation to attract long-term investment and improve water quality.