Water companies in England could be banned from making a profit under plans for a complete overhaul of the system.
The idea is one of the options being considered by a new commission set up by the Department for Environment, Food and Rural Affairs (Defra) amid public fury over the way firms have prioritised profit over the environment.
Sources at the department said they would consider forcing the sale of water companies in England to firms that would run them as not-for-profits. Unlike under nationalisation, the company would not be run by the government but by a private company, run for public benefit.
The nonprofit model, which is widely used in other European countries, allows staff to be paid substantial salaries and bonuses but any profits on top of that are returned to the company.
Welsh Water, which runs under this model, has no shareholders and any surplus money is reinvested back into the business or into customer services.
Since Welsh Water was bought in 2001 it has reduced its debt substantially; its ratio of debt to equity has dropped from 93% to 58% since not-for-profit Glas Cymru acquired the company with debts of £1.85bn.
The environment secretary, Steve Reed, said: “Our waterways are polluted and our water system urgently needs fixing. That is why today we have launched a water commission to attract the investment we need to clean up our waterways and rebuild our broken water infrastructure. The commission’s findings will help shape new legislation to reform the water sector so it properly serves the interests of customers and the environment.”
The news comes as Ofwat considers how much it will allow companies to raise bills by, with water firms having asked the regulator to let them increase charges by up to 84% over the next five years. All options were on the table to reform the regulators, including abolishing Ofwat, Defra officials said on Tuesday.
Public anger has grown in recent years over the large sums of money made by water bosses in England while water supplies have dwindled and sewage has been spilled into rivers.
There has also been anger at the mismanagement of companies such as Thames Water, which have been loaded with debt and paid shareholders billions in dividends. Since privatisation in 1989, the English and Welsh water companies have collectively paid £78bn in dividends and accumulated £60bn in debt.
Reed said he was not considering nationalisation as part of the review, which would cost “tens of billions of pounds”.
But the commission, chaired by the former deputy governor of the Bank of England Jon Cunliffe, will consider all other options to ensure infrastructure is built and sewage stops spilling into waterways.
Cunliffe’s independent commission will draw upon a panel of experts from across the regulatory, environment, health, engineering, customer, investor and economic sectors. Water company representatives will not be on the panel but will be consulted for their views.
Environmental groups have expressed concern after Defra said the key aim of the commission was to reform the regulators so they encouraged investment and growth. They have said the environment should be prioritised over economic growth, but Defra sources said that without investment, the reservoirs and sewers needed to tackle the climate and nature emergencies could not be built.
James Wallace, the CEO of campaign group River Action, said: “We must not see the environment sacrificed on the altar of economic growth. The water commission must stop vampiric business interests and international investors sucking the lifeblood and money from our waterways and communities. It must deliver a fully funded national action plan to end pollution for profit, enforce laws, and reform regulators.
“Taking a look at our neighbours in Europe shows a range of approaches from wholly nationalised to not-for-profit organisations including a blend of private, public and mutualised models. The key is effective economic and environmental regulation that incentivises operating for public benefit and makes polluters pay.”
Doug Parr, policy director of Greenpeace UK, said: “Too much emphasis on making the sector attractive to big international investors like Macquarie is the exact reason why our waterways are in such an appalling state today. With a natural monopoly on an essential resource like water, we need a regulatory system that forces the industry to provide an acceptable minimum level of service, including an end to the routine discharges of raw sewage.
“If big international investors are unable to make sufficient profit in that environment, then clearly this is not a problem that can be solved by big international investors, and the government will have to do what every other country in the world has done and look at other ownership options.”
Decisions made by the independent commission will not come into force until the 2029 price review. For this year’s price review, which sets water bill levels over the next five years, water companies on Tuesday made requests to increase bills by more than they had at the beginning of the process.
Thames Water is now asking to raise bills by 53% to an average of £667 a year by 2029/30, making them the most expensive water bills in the country. Southern Water is seeking the biggest hike at 84%.
Ofwat will make its final decision for how much water bills can rise on 19 December, but its interim decision made in July said the average bill could rise 21% a year. Government sources confirmed on Tuesday that this number could rise.
The prime minister’s spokesperson said: “Clearly no one wanted to see a situation where water bills are rising, where the water sector has got into the situation that it has, with record levels of sewage spills and ageing infrastructure. From the government’s perspective, our priority is making sure that money goes where it’s needed and ensuring that water companies are putting customers first. If money isn’t spent, it will be returned to customers.”