Climate Change, Environment, Sustainability and Rural Affairs Committee

Good morning. Thank you for the opportunity to talk to you today.

Good morning, everybody. So, as Chris said, over the last few years, we've really strengthened our presence in Wales. We've got an office in Cardiff; we've got a dedicated Wales team and much stronger relationships with Welsh Government, with NRW and other Welsh stakeholders. And that stronger presence means that Welsh priorities, Welsh evidence and Welsh voices are much better reflected in the decisions that we make on a day-to-day basis. Welsh stakeholders helped to shape our latest price review, which provides £6.3 billion, as we said, for investment in Wales over the next five years.

We've strengthened our oversight of Welsh companies' performance, and we work very closely and collaboratively with Welsh partners to hold these companies to account where performance isn't good enough. We've built a much stronger Wales-specific evidence base to inform our work, and we're now entering a really important period of time, as Chris said, in transition for water. And this is a real opportunity to shape those future arrangements around Welsh priorities, around Welsh circumstances. But the really important thing for us is making sure that, in that transition period, performance isn't lost—it can't slip, and we really need to keep our eye on the ball there. Because, ultimately, customers will judge all of us not by regulatory structures that are created, but for the results that they see: so, cleaner rivers, more resilient services and greater trust in the sector.

Okay, thank you very much. Mark.

I'm Mark Squire. I joined Ofwat in February from NRW. My role within Ofwat is to assess the performance of the company, but also to look at the environmental aspects of the PR29 programme—so, building on where we've come from the massive investment in PR24, ensuring that that performance and that investment in the environment is correct for Wales and builds on the previous price reviews.

Okay, thank you very much. That was a really useful introduction for us as a committee. So, obviously, it's a time of great change now with this new regulator being established in Wales, and maybe you could tell us a little bit about your discussions with Welsh Government around that.

Yes, I'd be happy to. We think this is a generational opportunity to shape regulation around Welsh priorities. We have been supporting, and will continue to support, Welsh Government to do that while we continue to regulate effectively.

The report of the Independent Water Commission, which was in July of 2025, recommended a reset of water regulation in Wales, including devolving economic regulation, which Ofwat currently does, as well as national water system planning. The Welsh Government is committed to that—is committed to independent economic regulation for Wales—to reflect Welsh law and Welsh environmental priorities.

The UK Government is expected to introduce a clean water Bill, which will provide the Senedd with new powers. And Welsh Government, we expect to respond to its Green Paper, from February this year, by the end of 2026 to confirm the stages in taking that forward. They were issued to us in the form of a strategic policy steer in February, but we're expecting more detail. And the new Welsh regulator is expected to be operational by 2032. We are working very closely with Welsh Government as well as with the Department for Environment, Food and Rural Affairs to ensure a smooth transition to that Welsh regulator and to ensure that there are no gaps in our regulation in the meantime.

And can I ask you a bit more about how you're ensuring that there is that smooth transition then? Obviously, Ofwat currently has a lot of very experienced staff as well that have so much knowledge of the landscape. Maybe you could talk a little bit about that.

I'd be happy to. Lia has described how we've upped our presence and raised our game in Wales. I know you've had conversations with others around the performance of Welsh water companies and what we are doing to hold them to account.

For Dŵr Cymru in particular, we have investigated it on more than one occasion in the last few years for the misreporting of some data, for example. We fined it £40 million in March of 2024 for doing that. And also, as one of 11 water and waste water companies in England and Wales, as part of our whole sector-wide investigation into whether companies were maintaining their sewage treatment works and their waste water networks as effectively as they should, we fined Welsh Water £44 million for that. And crucially, Dŵr Cymru offered undertakings in lieu of a penalty, so we were able to direct where that money was going to be spent to fix those problems. So, those are two examples of how we continue to hold the company to account, as well as to support it, using the extra presence that we have in Wales.

We are also part of a Welsh forum for regulation, which is unique here. There was a forum for PR24, and we are part of the same forum that is designing what Wales-specific regulation for PR29, which will occur before the establishment, the commencement, of the independent regulator for Wales in 2032, will look like. And I think those are the main ways in which we continue to support and keep a grip on economic regulation in Wales as we ensure a smooth transition to the new regulator.

And just to add to what Chris said there, there's a significant programme of joint working happening at both a UK level and a Welsh level as well. The previous Minister in Wales, Huw Irranca, was very clear, when they launched their Green Paper, that we shouldn't wait for transformation, that change can happen now. We've taken that very seriously. Where we can make changes before legislation, we are and we will. And we talk routinely with DWI, NRW, Welsh Government. We've got a lot of joint working arrangements to look at the areas that can change soon, where we don't need to wait and we don't need to wait for legislation.

Okay, thank you. The Welsh Government is currently doing a lot of work around the planning system. So, what kinds of discussions have you had with them so far about a new water system planning function?

Those discussions are in their infancy more so than for other areas of reform. Water system planning will need to move to a catchment base across both England and Wales. The natural catchment for Welsh planning is Wales. So, we're proceeding with Welsh Government on the basis that there will be a national system plan separately for Wales. That will be part of the new regulator. In the run-up to PR29, as I described earlier, we are part of a forum that's designing what that looks like for the next price review. That will mean in practice us beefing up our presence in Wales even further to act as almost a unit, a Wales economic regulator, within the overall economic regulator. And they're the steps that we're taking with the Welsh Government at the moment.

In terms of PR29 planning more generally, in order to have a PR29 at the end of 2029, we will need to start scrutinising proposals probably towards the end of 2028, which means companies, including Dŵr Cymru, will need to have submitted their business plans well in advance of that. Planning on that has already started and will need to continue. We will be publishing a methodology about how we're going to approach PR29, including what will be different and Wales-specific for Wales, in spring next year.

Okay. Thank you. Can you tell us, maybe, a little bit about the discussions with Welsh Government around that new national water strategy for Wales as well?

Yes. [Interruption.] Oh, I beg your pardon. Yes, of course. [Interruption.] No problem. Again, the—. Could you repeat the question, please?

Yes. So, your discussions with Welsh Government around the new national water strategy for Wales.

Yes. The national water strategy for Wales is being discussed with Welsh Government through the forum and through other means. It's very early in the process for that, but the next version of the Welsh Government's response to its own Green Paper we expect will have much more detail about that. This is obviously something that's being driven by Welsh Government itself. We are contributing to that, but I think that further detail is probably for the Government more than for the economic regulator.

Okay, thank you. Any questions from Members, then? Niamh.

Yes, I've got a couple. Thank you for coming in today, I really appreciate it. You mentioned this a couple of times, actually, in your opening speech, but one of the main duties of Ofwat is to ensure that we have that good-quality service and that that's provided to customers. Do you think that that duty is being fulfilled fully here in Wales?

I think performance, certainly in the last four or five years, has not been where we wanted it to be. We publish every year for all companies in England and Wales what we call a water company performance report. The most recent report is for 2025. We typically publish it each year, in October, so there will be a report forthcoming. There's information in that that's incredibly commercially sensitive, so you will understand that there is a limit to the preview of forthcoming attractions that I can give.

But if we look at Dŵr Cymru, for example, and its performance over the last five years, it has areas where it has performed well—internal sewer flooding, for example, where it has been top across the sector. It's been above average on a number of measures—customer satisfaction, its response to the customers on the priority services register, unplanned outages, sewer collapses. But, on balance, in more areas than not, improvement is needed, especially on leakage, per capita consumption, which remains stubbornly high, water supply interruptions, water quality, the rates of replacing water mains, its poor performance on pollution, and the compliance of its sewage treatment works with permits. They are significant challenges.

For the water company performance report this year, although I can't tell you what it says, what I can say is that it will report performance in a slightly different way. Instead of simply reporting performance against those dozen commitments that I just read out, there will be more performance commitments in there; there will be 23. It will do more than simply say whether the performance commitment has been met or not met. It will also talk about Dŵr Cymru's performance relative to the sector, and I think you will have heard from Dŵr Cymru themselves that there have been some challenges there. It will report on the trend in Dŵr Cymru's performance over time, and it will attach more weight to some performance commitments that the evidence tells us matter most to customers. I think that is quite a challenging picture for Dŵr Cymru.

For Hafren Dyfrdwy, the situation is not challenging. In the period up to 2025, it is good on eight of the 12 performance commitments that we reported on, and improvements needed only in four—leakage, per capita consumption, water supply interruptions and internal sewer flooding. For a company that is a water-only company, Hafren's performance on the environment is particularly strong, and I hope that that trend will continue.

Thank you. Carrying on with that, in your paper—obviously, we know that one is upcoming, the report, so this is to do with the previous one—touching on Dŵr Cymru, you note that pollution incidents have increased from 25.9 to 36.4 per 10,000 km of sewer over the period. This is worse than the target of 19.5, and worse than where the company started back in 2019. It has also remained in the 'lagging behind' category for 2024-25, where it's been for four consecutive years now. You touched on it earlier with the financial enforcements that you're putting in place, but do you think that it's enough? Because it seems to be not deterring, as it's continued to happen year on year, and we're not really making any significant steps when it comes to getting out of the situation that we're in.

We saw record levels of investment in the last price review, reflecting, in part, exactly the challenges that you're highlighting. That environmental performance is not good enough; there's no hiding from that. We have taken action to hold Dŵr Cymru to account for that. But what's equally important is that we support it to spend this record level of investment in a way that does improve environmental performance. It's very early in the current five-year period to know the impact that's going to have, but we have more control over that money, to ring-fence it for investment, to claw it back and return it to customers if that investment is not delivered.

We know that customers' bills have gone up, and customers accept those bill rises only when they see what they're getting for their money when they see those improvements. We are scrutinising Dŵr Cymru incredibly closely. We have put it into an enhanced regime of monitoring and support when we meet it on a very regular basis; I'm meeting the chief executive later on today, for example. We have regular meetings—our whole team—with the company. The last one was in June. We do those jointly with the Welsh Government, NRW and DWI. In addition to the money I spoke about earlier being ring-fenced and clawed back if it's not delivered, we have put very stretching performance commitments on Dŵr Cymru, and attached financial incentives that will ensure that customers do get what they're paying for.

I would love to be able to say that this problem will be solved overnight, but it will not be. This is only year 1 of a five-year programme, which is very early to tell if the tide is turning. But you will know the significant changes the company has made at executive and leadership level to address this problem. We are overseeing that closely and supporting the company to the extent that we can.

Can I just add that we're meeting the company regularly, along with the chief executive, to look at and scrutinise the plan that they're putting in place? New ownership, as Chris says, has come in, so there's limited time for them to start to turn things around. That scrutiny is happening at an almost weekly or fortnightly level within Ofwat with Welsh Water, and I know NRW have a similar approach.

Can I just add as well that partnership working is one of Wales's greatest strengths? I think this committee also has a role in helping us to scrutinise the performance of the company and help to hold it to account, and we'd be grateful for your support in that as well.

Can I just ask one more question, Chair? Is that okay? Thank you. I agree with that—we've got a role as a committee as well. Finally, and you mentioned it as well, Chris, can you justify the water bills increasing when the quality of our water is decreasing significantly here in Wales with Dŵr Cymru? Because if it was any other business that you would see in the world, if you saw the quality decreasing and the cost of it going up, you would take a step back and think, 'Hang on, what's going on here? I'm investing more of my money into something and my return value is decreasing significantly.' So, I was just wondering how you guys justify that water bill increase here, specifically when it comes to Dŵr Cymru for many people in Wales.

Dŵr Cymru's bills are amongst the highest in the sector. I think the average bill for 2026-27 is around £683. That's up from £652 last year, which is a significant increase. But that significant increase is to pay for record levels of investment. I know there is nervousness around bills. Part of my job is to talk directly to customers as well as their representatives—you, for example. I hear those concerns first-hand. I do understand them. Our PR24 price review includes more protection and more support for customers than ever before. But the justification for those bill increases can only come from Dŵr Cymru delivering what its customers want to see. In an answer to an earlier question, I described how we're playing our part, along with the Welsh Government, NRW and DWI, holding the company to account to do that, and supporting it to do so.

Diolch.

Thank you, Niamh. I'll bring in Anna now.

Thank you. I've got some questions that are more forward looking, but I'm just struck by—. It's really concerning to hear the situation with Dŵr Cymru, with the bills being some of the highest for consumers, but also the fine on the basis of not just pollution but not being transparent with the data. I find that really concerning, and I hope that that is now something you tackle. So, it's something about, I suppose, why you think we got here with Dŵr Cymru. What do we need to be looking out for, I guess, in the future, to be aware?

I think the question, 'How did we get here?' is not just a question for Dŵr Cymru—it's a question for our economic regulation of the sector as a whole. It was exactly one of the questions that the Independent Water Commission was tasked with looking at. Its report in July of last year pointed out, quite painfully I think, the gaps, overlaps and inconsistencies in the fragmented regulation that we have in Wales and England. It recommended wholesale changes and reform to correct that, including devolution of independent economic regulation to Wales and Wales-specific national system planning. The solution to the problem is tied up in the reform process. But I think the legitimacy of the reform process also depends on the public seeing what they're getting for their money. Improvements have to be delivered alongside the reform so that there is, collectively, public consent for the changes that we need to make. That's our twin approach for the next couple of years.

Thank you. And if I can ask another one. The reform now is really welcome. I guess we've got a role in this committee now in scrutinising that, so I look forward to that. I represent Ceredigion Penfro. I know the committee is for the whole of Wales, but, as an example, what I'm concerned about as well is we've now got a crisis situation, I suppose, that has to be addressed, whilst we also need to be investing in the long term. It's only going to get worse if we don't address the long term. In Ceredigion, for example, in south Ceredigion we've had, I think, the longest hosepipe ban. I'm not sure if it's still on. We had a very long hosepipe ban. We've also had a lot of people without water, sometimes for weeks, some households several times over the summer with no water. There seems to be an issue with the pipes. The type of pipes they're using is not appropriate for this age—especially with climate change, with the hardening ground, and then sudden rain or whatever. They're just not fit for purpose. And also, the pipes don't connect across different areas, unlike other parts—. Well, I don't know about Wales, but definitely other parts of the UK. When there's high demand, they can't shift the water around the pipes, so we've had to have trucks going around across Ceredigion trying to get water to people. Actually, we didn't have a drought; it wasn't that there wasn't water in the reservoirs, it's just that the whole infrastructure is not fit for purpose for the sort of climate we're going into and therefore the demand. So, my question is how do we be careful about this balance between the emergency crisis spend and the real need to—. We really want to see investment in the longer term infrastructure to stop this happening in the future, but balancing that with consumer bills, I suppose.

We have had a drought situation across the country, but the long-term resilience of water supplies is about much more than drought. That's part of the reason we have, across England and Wales, a pipeline of 30 major infrastructure projects, including new reservoirs, which we haven't built for decades, and large-scale water-transfer projects, to get close to building the kind of water network that we see in electricity, for example. There is not a national water network, but there is one for electricity. There are also desalination projects and water reuse so that we can use recycled water—not for drinking water, but for other uses. That will take time to come to fruition. The money to kick that off was provided in PR24, but it will be our job now to monitor the delivery of those projects.

In the meantime, it's crucial that the record levels of investment that Dŵr Cymru and Hafren Dyfrdwy have had in PR24 are used to replace water mains, for the reasons that you outlined, so they can raise their day-to-day performance for customers. In terms of resilience, that will help, as will fixing leaks across both England and Wales. Around a fifth of the water that goes into the distribution system is lost through leaks. The majority of that is what's called customer-side leaks and not company-side leaks, but it's lost one way or another. That's billions of litres a day. Companies need to do more with the record levels of investment that they've been allowed to charge their customers to improve leakage, and we are holding them to stretching targets to do that.

I think the answer is a combination of the short-term measures that are coming out of the price review, that long-term portfolio of projects, and the third limb is changing our relationship with water as people who use it and as people who drink it. That's why, in the summer, you will have seen that we launched a water efficiency campaign called Let's Save Water. The purpose of that is not only to remind people about simple ways of saving water—which we all know, but it's helpful to remind people—but to educate people about the scale of the challenge that we face. For example, what we found through monitoring of the reach of that campaign—which has gone really well; it's exceeded its key performance indicators, and I'm really pleased about that, but especially social media reach—is that the message that we use almost five times as much water individually as we think we do is really starting to hit home.

The evidence suggests that when we ask members of the public, when we ask ourselves, 'How much water do you use?' people think it's about 30 litres a day, which is three buckets of water; the reality is closer to 140 litres. We're using almost five times more water than we think we are. We have to reset our relationship with water, because there is a relationship between the water that comes out of our taps and the water in our natural environment. Environmental improvement will happen only if we change our relationship with water. I think those are the three ways that we're addressing the immediate and the longer term resilience challenges.

Thank you.

Thank you. Before I bring John in, just a question on one of your comments there to Anna. You talked about the fact that a fifth of the water is lost through leaks, but the majority of that is customer side. What role is there for the regulator to help address that, if any?

One of the solutions is the roll-out of smart meters in both Wales and England. Record levels of investment are rolling out around 10 million smart meters—the biggest roll-out of smart meters ever. What the evidence suggests is that when people get smart meters installed, especially when they start being billed on the basis of that smart meter, sometimes people are surprised about how much water they're using. That helps them alter their behaviours, helps them identify the fact that there might be leaks that they didn't know about that are customer side, as I put it, and not company side.

Okay. Thank you. John.

Thank you for all that information, and I've taken on board what was said in that last answer. But my biggest gripe is with regard to Welsh Water being, I think, roughly halfway up the UK table in terms of performance—it being a not-for-profit organisation, compared to companies that are nationally lambasted for the amount of capital that's been taken out each and every year and paid to shareholders. For me, it makes it incredulous that Welsh Water can only be halfway up the table at a not-for-profit situation. Now, for me, that points directly to the quality of the governance, and the biggest problem I have, then, looking at trying to establish what's happening in Welsh Water, is the fact that, with it not being a Government body, we can't have freedom of information, and there's obviously great difficulty in getting the information that's needed to assess what they're doing. All I can see, unless somebody else can tell me otherwise, is there are massive cracks in the pavement and that they're falling down on a continuous basis that aren't being picked by Ofwat. Now, if you're going to analyse the performance of them, you need to analyse not necessarily just the outputs of what's happening and targets, but you need to analyse a lot further in depth. I don't know whether that is currently being done or whether that will be the case for the next body to do, because, without that, there is no point in doing anything.

To begin with, I think Dŵr Cymru is not-for-dividend more so than not-for-profit, so the profits it makes, it retains and spends.

But, as you know, with not-for-profits, it's very easy to hide things. From an accounting perspective, it's just like having a magician there.

Yes. Each year, in addition to the performance report that I went through earlier, I wouldn't say Dŵr Cymru is in the middle, I'd say it's towards the bottom. We publish a report on monitoring financial resilience, and that gives more insight into the finances behind Dŵr Cymru. But, ultimately, that's a matter for Glas Cymru and, as the economic regulator, our job is to hold the company to account. We're starting to do that on performance and on financial resilience in the meetings that both Lia and Mark spoke about earlier, where we're meeting the company much more regularly, alongside the Welsh Government, alongside NRW and alongside the Drinking Water Inspectorate to better hold it to account.

I do accept the point that there are financial challenges for a company that is not for dividend and is not able to raise equity, because record levels of investment can only be funded through retained earnings and debt. If PR29 results in another step change in investment for Dŵr Cymru, like we saw in PR24, I think that will be a challenge for the company.

Okay. Thank you.

I'll bring Paul in now.

So, you said earlier you're an economic regulator, and I'm just trying to understand, you have this price review every five years, and how do—? Obviously, in my mind, that price review is about reviewing value for money for customers. How do the environmental objectives that you also have a responsibility for fit into that?

The scrutiny that we do is of value for money, it is of value for customers. It is of proposals for investment and expenditure and performance that Dŵr Cymru and other companies are required to do by the economic regulators: NRW here, its English equivalent, the Environment Agency, and also by the Drinking Water Inspectorate. It's not the economic regulator's job to second guess what expert bodies like NRW, EA and DWI say is required for the health of our environment and our drinking water. To the extent we have environmental responsibilities in some areas, they do not overlap with those. Our responsibilities extend to saying, 'Once the price review has concluded what should be invested, what should be spent, and how performance should go, our environmental responsibilities are restricted to holding companies to account for those promises.'

Okay, I understand. So, in my constituency, companies like Dŵr Cymru Welsh Water make an investment in a piece of infrastructure, and I can think of a particular investment they've been making in my constituency that has gone quite badly in terms of technical problems and so on. Views vary on whether that was well done or not well done. But do you make any judgments on whether the investments are well spent, whether they're good value for money, and whether money is wasted as part of those investments?

We do now. In the past, our economic regulation was quite arm's length, so we said, 'We scrutinise your proposals. Here's what we think is a fair value for customers to pay for those', and then we monitor the outcomes. But what we didn't do in the past was monitor the investments themselves: 'Are you building the stuff you said you'd build, when you said you'd build it, where you said you'd build it?' For PR24, we have much more grip over that, through a regime that we call 'price control deliverables'. So, for the great majority of what is being spent and invested, companies are required to report to us on a regular basis that they're getting on with the things that they promised they're getting on with. The money that customers are paying through bills for that is ring-fenced for that investment, and it will be clawed back and returned to customers in the form of lower bills if that's not delivered. Now, we would all like the investment to go in the ground to make the improvements, but, nonetheless, those price control deliverables act as a safety net to protect customers, and, later this year, we will be producing our first report of how companies are performing against those promises. So, that's the extra grip we now have. It used to be just the inputs, the money, and the outcomes, and now we have the outputs as well.

So, if a particular project costs many, many times what was predicted and becomes a money pit, essentially, do you have a way of seeing that?

Yes.

Okay.

And the revenue for the five-year period is set. We have some mechanisms to reopen that, but only if there is compelling evidence that that is a new demand. So, if more is being spent on an investment that's been previously agreed than was agreed at the time, that doesn't fall to customers; that's the company's job.

So, I think that there are some implications for water companies that are not always entirely fair, perhaps—or some feel that way—around outline planning permissions and local development plans, where, basically, they are faced with a situation where they just have to create infrastructure, which, if there was perhaps a different approach to some of those things, it would be easier to plan for. Do you take a view on that sort of thing?

Well, that is redolent of and echoes, I think, a number of the recommendations in the Independent Water Commission report of July last year. That said that long-term planning for waste water and water infrastructure investment should be done on a more integrated basis and at a catchment level, and it is the UK Government's responsibility, DEFRA's responsibility, and the Welsh Government's responsibility to articulate, with our input, what that's going to look like for the future.

Okay. Thank you. Finally—and this relates a little bit to what John talked about—I know that Dŵr Cymru, in particular, borrow money on the basis of, I understand, inflation-proofed bonds quite often, and that sort of thing. Again, do you take a view on how cost-effective that is for them? Because that's the other way they raise money, apart from customer bills, isn't it?

Customer bills contain four components. They contain expenditure and what the company needs to spend on maintaining its networks and running itself; a share of the investment, which is spread out over a longer period—about 15 years; a mechanism that links performance to bills; and, crucially, financing costs. But those financing costs are set on a sector-wide basis by benchmarking a company's requests against the situation in the financial markets. Any financial risk above and below that is for the company itself to manage. So, we set an allowed rate of return for the sector by benchmarking requests against what we see in the financial markets.

Okay. Thank you.

Thank you. Before I go back to Anna, I'll just pick up on one of the points there that Paul raised. Obviously, this is an example of the new territory you're going into now, where you are monitoring the investments that companies are making and looking at the price control deliverables there. I just wanted to ask, really, in your discussions with the Welsh Government on the new economic regulator, if this is the kind of thing that you're showcasing as best practice that we would like to see a new regulator continue.

Yes, very much so. The Welsh Government is very interested in performance reporting and we are liaising, through Lia and her team, very closely with the Welsh Government. I don't know if there's any more you can say about what's happening, anything that's been happening recently on that.

We just haven't got to that stage of the transition yet in terms of the design of what that will look like. It's just far too early days. So, yes, nothing more detailed, but, obviously, we won't be looking to throw the baby out with the bathwater, in that sense.

That's a very good water-based analogy there. [Laughter.]

I'm full of them. [Laughter.]

I think members of the public would be surprised, really, that that type of scrutiny wasn't embedded for a long time. The fact that it is there now, I'm sure that our audience of thousands who are watching would not like that to be something that would be lost.

Okay, I've got a number of people who've indicated they'd like to speak, so I'll go to Anna first.

Thank you. That was just making me think that, I suppose, this Government puts a lot of emphasis on prevention, and I suppose there's something there, with the way you're monitoring, to be able to see not just at the end of stages, but see over time where things are starting to go wrong and, perhaps, to intervene. But my main question was going to be on AI and data centres. This is something where we're looking, potentially, at more of this infrastructure in Wales, and I understand there can be water guzzlers, et cetera. So, there's something, I suppose—. Who's paying for the infrastructure needs around water for that, and, I suppose, for me, it's making sure it isn't consumers, general citizens, who will use water, versus the big companies who might be taking the profit from that as well. So, I don't know if you're doing anything around that.

Policy on data centres and how they use water is, obviously, a matter for the Welsh Government and for the UK Government. In our price review, the last price review, we introduced some mechanisms to reopen allowances to support economic growth. Companies have come forward with some suggestions, which we scrutinised with exactly the same rigour as we did for PR24, to allow a small number of companies to increase investment to support housing growth in particular.

We have not yet seen a pipeline of demands coming through for data centres. There are various rules, depending on what water is used for, as to who should pay for it. So, customers are required to pay for investment for water that's going to be used domestically. The situation for paying for water that's used non-domestically is much more complicated. It will ultimately depend on where policy ends up on who pays for water that's needed for data centres. But we have not yet seen that pipeline of demand coming through. I imagine we will do, but we just haven't yet.

I'd also say there's the uncertainty around data centres—obviously, where they're put—and I think that national picture for water, not just water supply for customers, is one we're working on with the Welsh Government to highlight that data centres need greater thought.

And just quickly on that, there's quite an interesting emerging discussion about whether data centres should be using potable or non-potable water. Is that something, as a regulator, that you'd be involved in discussions with the Welsh Government on?

I imagine we'd be consulted. I described earlier the pipeline of 30 major projects worth £50 billion over the next 15 to 25 years. A number of those are water desalination and water reuse. And those proposals that were put to us I think had one eye on using non-potable water, for example, for data centres. But our job was to scrutinise those proposals, rather than design them. But, yes, I expect that we would be part of a conversation about how data centres could be cooled, potentially using non-potable water in the future. The UK, as I understand it, is one of the few countries that has a regime that is permissive towards using potable water for cooling data centres. But this is very far from my area of expertise.

Thank you. Niamh.

Diolch. I'm sorry, I'm going back a couple of steps again. It's again to do with the Dŵr Cymru service. I'm listening to the responses that you guys have given and I'm just thinking of my constituents. Where I live in Blaenau Gwent Caerffili Rhymni, if they heard the responses that we're getting, they're still going to be really unsatisfied, because these are the people who are having to live with the quality of their water decreasing significantly, and their bills going up significantly, and these are people who are also living in quite deep poverty and hardship as well. So, that frustration is really building for them. And you've said the same sentence again, where you're holding Dŵr Cymru to account, and obviously I'm always going to support that, but I just feel like—and I'm sure a lot of people in Wales feel like this—you're holding them to account, but nothing is changing significantly. And also I'm thinking, 'Have you not been doing this year on year, holding them to account?' I'm sure that you have, but from the statistics I read earlier, nothing has been changing, even though you are holding them to account as you say you are.

So, again, I'm just going back to what I said earlier. What's going wrong on your guys' end as well? Because as the regulators, I'm sure you must have evaluated how you're holding them to account. I'm quite nervous about seeing—. Obviously, we can't say anything yet about this report that's coming out, because obviously I'm not going to predetermine, but I've got a feeling that things are probably still not looking great for Dŵr Cymru and we're still probably lagging behind. So, I'm just thinking, for the people who are watching or who look back on this, who are seeing their water quality get so much worse and their bills get so much higher: how are you holding them to account significantly? What improvements are you making? What has gone wrong on your end as well, and how are you learning from that?

What's gone wrong on our end was set out in the final report of the Independent Water Commission—quite painfully, as I described it before—that Ofwat's part of a system that was too fragmented, and as an economic regulator, we were at too great an arm's length.

So, going a long way back to 2012, there was a UK Government report on economic regulation across different sectors that was part of what you might remember as the bonfire of the quangos, as it was called, of the UK Government back then, when economic regulation was steered away from being more intrusive towards something that was more arm's length. The final report of the Independent Water Commission, to my mind, swings the pendulum back the other way.

In advance of that, we recognised that we need to have more grip on this, which is why we introduced the controls that we did in PR24. But I'm not going to sit here and say that in the period before then, our arm's-length economic regulation was as much a success as it should have been, because the Independent Water Commission report sets out that it was not.

What we have done is hold Dŵr Cymru to account through enforcement activity. I think that's a very poor substitute. Fixing a problem afterwards is a poor substitute for fixing it first. I wish that were not the case, but we have held the company to account, and in ensuring the investment, the record levels of investment that it's now charging its customers for, does deliver improvements, we have much more of a grip than we had in the past. I recognise I'm giving a ‘jam tomorrow’ answer, but within the framework that we had, we've done what we could. The Independent Water Commission report set out that that was not the right framework, and we were at too great an arm's length from this. We accept that, and that's why we're working with Welsh Government for a reform, which is a generational opportunity to improve economic regulation in Wales.

What are you going to be doing until then? Because obviously that's 2032, is it? Am I right in thinking that's the year that, obviously, Ofwat’s going to be—I don't know if ‘dismantled’ is the right word, but we've got the new regulator set up. Obviously, there are quite a few years until then, so from that report that highlighted all these issues that came with Ofwat, what are you doing until then? Because obviously we know, hopefully with the set-up of the new one, that's where the biggest significant change can happen, but that's still six years away. So, what's going to happen then, so that year on year we're not in this same situation again until we can see that new regulator set up?

What's new for 2025 and 2026 is this increased monitoring and oversight, and much more regular engagement, not just with the economic regulator, but also with Welsh Government, Natural Resources Wales and the Drinking Water Inspectorate, with Dŵr Cymru Welsh Water, to ensure that it delivers on its promises. What's also the case is that we have set it stretching requirements on performance and put a financial regime in place to strongly incentivise it to do that.

We are also making changes. We have been asked to make changes by the UK Parliament's Public Accounts Committee to the support that all companies, including Dŵr Cymru, give to their customers. So, part of the challenge is companies and the regulators not having communicated clearly enough about what's going to change and when it's going to change, so that people can see what they're getting for their money. The Public Accounts Committee made five recommendations to us about improving how water companies communicate with their customers. We will have six months to describe how we're going to implement those.

In addition to that, in February of 2024 we introduced a new condition in companies' licences, which we call the customer focus licence condition, requiring them to support and communicate better with customers than ever before. In a different context, we've taken our first enforcement action under that licence—again, that wasn't in Wales; that was against South East Water in England for supply outages around Tunbridge Wells at the start of the year, which were very well publicised. We found that South East Water's communication with its customers wasn't where it should be. So, we've already established how we're going to implement that customer focused licence condition in practice, and that applies to all companies, including Dŵr Cymru Welsh Water.

So, this time next—

Thank you. [Interruption.] You'll have to be really quick, because I've got three Members left and less than 10 minutes.

Thank you, Chair. So, this time next year, will we see Dŵr Cymru's figures improve from this new enforcement that you've put in place?

Our experience is that turnaround of companies takes time. I think it's impossible to guarantee at the end of the second year that everything's fixed, but we are doing everything that we can to ensure that there is progress and improvement. You will know, from having spoken to the company itself, the significant internal changes that they've made, and I'm confident, but I can't guarantee, that we will see improvements.

Diolch. I've got Gareth and Andrew, and if there's time, we'll go back to John as well and hope to get all the questions in before we close at 10:30. Gareth.

Thanks for coming down. Is Ofwat in danger—it might be a good thing or a bad thing—of actually running the management of Dŵr Cymru Welsh Water, as a sort of mission creep, if you like? I've got another question as well.

I think it's crucial that economic regulation stays independent of influence, so the right decisions are made. There is a danger, as we move towards something that looks closer to performance management, that we become too sympathetic to what we're being told—

And it just becomes another layer of management.

—or, indeed, it just becomes another layer of management.

The recommendations in the Independent Water Commission report that the UK Government and the Welsh Government have committed to implementing has a taxonomy for how that sort of supervisory regulation works in practice, which is based on the taxonomy that's used in financial services. It will be the responsibility of the new regulator to implement that supervisory regulation in a way that results in it, firstly, staying independent and not being captured and, secondly, not running the company itself.

And the second question is on the £44 million fine. You say it's not paid by customers, but the customers finance the company, don't they? So, how is the £40 million fine actually not paid for by the customers when the customers provide all the finance?

It's financed out of retained earnings. There are rules in our price review that prevent a company putting that in its costs when it submits its costs to us for scrutiny. There are rules that mean that customers don't pay. And just to be clear, Dŵr Cymru offered us undertakings in lieu of a fine. It's probably fairer to call it a penalty. That's an important distinction, because if we fine a company, as we've done with one company in our waste water investigation, that money goes to the consolidated fund at the Treasury, which is then returned to DEFRA and dispersed.

And it just becomes a cost of doing business then, doesn't it?

We don't have a locus over that. When it's undertakings in lieu of a fine, we are able to direct that investment to fix the problem that resulted in the enforcement, and also encourage companies to provide redress to customers.

Thank you, Chair.

Thank you, Gareth. Andrew.

Thank you, Chair. Apologies for being late and thank you for coming in today. When I was reading my papers last night—and I think it's been touched on in some of the responses—this statement jumped out at me, regarding Ofwat:

'Its main duties are to ensure good quality services are provided to customers, ensuring that water companies have the finances in place to deliver their services properly. It also encourages competition where this benefits consumers.'

You've failed, haven't you?

The Independent Water Commission concludes that we were part of a system that hasn't delivered what the sector needs. That's why the gaps, overlaps and inconsistencies between the regulators are going to be ironed out. We have this generational opportunity with Welsh Government to establish an economic regulator that does it better.

But you failed.

Ofwat was at the tip of the spear I've just described. So, our job continues to be to scrutinise proposals that are made to us. The system that gets us to that point is fragmented. So, we are an important part of a systemic failure. I think I would accept that, yes. But I had no choice but to accept that: you can read the Independent Water Commission report, which comes to exactly the same conclusion.

One of the biggest failures that I seem to find is the transition of staff out of Ofwat into the water companies. They seem to build up their CV in Ofwat and then get headhunted, which is reasonable employment practice. Do you offer any golden handcuffs to make sure that you keep the capacity in the regulator? In response to Gareth, you said there's not that capture. It is important that the regulator has distinct capacity, outside of any perception that might be created that there is an unfavourable influence going on.

We are civil servants, so we are bound by civil service rules around who we can go and work for afterwards. Very, very, very few senior staff at Ofwat, which is an organisation at the moment of around 500 people, have worked in positions of influence at water companies. At a more junior level in the organisation, I think there is a case that having people who have worked company side and worked regulator side is actually quite a good thing, because it helps demystify the regulator to the company and demystify the company to the regulator. But I don't think it's appropriate for people who have been in strategic decision-making positions in companies to have strategic decision-making positions in regulators, or vice versa. And Government rules around that prevent that happening. On the issue of golden handcuffs, we are subject to civil service rules over pay, which don't have provisions like that. They have provisions for very small performance-related bonuses, but we don't have a regime where we could golden handcuff someone to the regulator to prevent them leaving.

Okay, thank you. Thank you, Chair.

Thank you. We'll finish with John, then.

Thank you. It's good to hear that projects are being analysed and how effectively. In business, it's always good for accountability. I find it incredible that somebody could get paid £890,000 in 2001, four and a half times more than even the UK Prime Minister, for an organisation that was dysfunctional. What is happening now to ensure that those sorts of salaries—which is approximately somewhere in the region of £75,000 a month, which taxpayers are paying, water payers are paying, we're all paying—aren't replicated and people are held to account and responsible for how well the company is being run?

Ultimately, executive remuneration is a matter for the remuneration committees of company boards, Glas Cymru in Dŵr Cymru's case, for example. Since 2025, Ofwat has had the powers to prevent the payment of bonuses that are unjustified by company performance, financially and operationally. Since then, we've banned over £4 million of unwarranted bonuses. You will have seen, despite that, that other payments have been made. Yesterday, we heard in the Prime Minister's speech at the Labour Party conference an intention to include in the forthcoming clean water Bill a provision to tighten those restrictions even further. So far, we can only work within the restrictions that we have, the rules that we have. We wrote to companies earlier this year to remind them of our very strong expectation that they would stick to not just the letter of the law, but the spirit of the law. But you will have seen reports since then that I think resulted in the comments that we heard yesterday from the Prime Minister about tightening, as it was put yesterday, those loopholes.

The cracks will remain in the pavement, I'm sure, unfortunately. So, it's Glas Cymru that we should be holding accountable for any changes and payments over and above what would be normal.

For any company, the remuneration decisions for its executives are a matter for the remuneration committee of its board. In this case, that would be Glas Cymru, yes.

Thank you.

Thank you, Members, and thank you Chris, Lia and Mark for your contributions this morning in committee. We really appreciate your time. A draft transcript will be sent to you to check for accuracy. Thank you very much indeed.