The water regulator has identified six water companies which it says are “falling short” in “too many areas” including sewage discharge.

Ofwat said it was “deeply concerned” that Northumbrian Water, Southern Water, South West Water, Thames Water, Welsh Water and Yorkshire Water were lagging behind expectations.

Its annual assessment of company operational performance and financial resilience singled out industry wide failures in areas including pollution which, Ofwat said, had increased.

The report was released against the backdrop of a backlash against water firms over sewage overflows which forced beaches to be closed in some instances earlier this year.

The six firms called out by the watchdog have to explain their performance and present a clear action plan.

Most had “again failed to clearly explain the link between their dividend decisions and payments with performance delivery for customers”, Ofwat said.

It added: “In particular, both Northumbrian Water and Portsmouth Water fell short of our expectations when considered in the context of the level of dividend they paid, which was significantly higher than our base expectations, and their relative financial resilience.”

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The report said there has been encouraging progress on leakage, which is now at its lowest level since privatisation.

However, the number of serious pollution incidents increased, with Ofwat revealing earlier this week that water firms are failing to invest as much as they promised to fix their networks, including improving sewage treatment and reducing spills into the environment.

Between 2020 and 2022, 14 companies underspent their budget on improving their water network and eight companies underspent their budget for improving their wastewater network.

Affinity Water and Northumbrian Water spent just 47% and 48% of their water enhancement allowance respectively, and Yorkshire Water and South West Water spent just 20% and 39% of their wastewater enhancement allowance respectively.

Ofwat sets allowances for how much companies can charge households to then invest over the price control period, to maintain and improve its water network.

Last month, campaign group Surfers Against Sewage (SAS) claimed that water companies had released raw sewage into UK rivers and seas almost 150 times during dry weather – despite being told to do so only when there is heavy rainfall.

Ofwat chief executive David Black said: “In too many areas, water and wastewater companies are falling short when it comes to looking after customers, the environment and their own financial resilience. We are clear: these companies need to address this unacceptable performance as a matter of urgency.

“For some companies, poor performance has become the norm. This cannot go on. We are requiring the worst performers, including Thames Water and Southern Water, to return around £120 million to customers.

“Separate from today’s reports, we are taking enforcement action on wastewater treatment works compliance, well as consulting on licence changes that will help us drive through the transformation needed across the water industry.”

Industry body Water UK chief executive, Christine McGourty, said: “There are areas of good performance right across the sector, but this report clearly shows there’s more to do for water and wastewater companies to meet the stretching targets of the regulators, as well as the high expectations of the public.”

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