Water Industry (Financial Assistance) Bill
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The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Taylor of Holbeach)
My Lords, in December, the water White Paper, Water for Life, set out the many challenges facing the water sector: how much water we have available now and in the future; the impact on our natural environment from water and sewerage management; and the issue that this Bill is designed to address, which is keeping bills affordable.
We have seen in the south-west the long-term impact that investment in sewerage has had on customers’ bills. Ofwat’s price control regime balances the need for such investment with the impact on customers’ bills. However, we should remain alive to the arguments for different approaches when circumstances require, whether to address the exceptional consequences of past decisions, as with the south-west, or a case such as the Thames tunnel, where the sheer scale of such a project dwarfs the ongoing business of a water and sewerage company.
The Water Industry (Financial Assistance) Bill contains two simple spending powers, which will enable the Government to implement two policies that the Chancellor set out in the Autumn Statement, both of which are designed to reduce the costs of infrastructure investment falling on water and sewerage customers. The Bill will allow us to fund South West Water to keep its household customers’ bills down now and to provide contingent financial support for the proposed Thames tunnel in London.
Clause 1 is a general power to enable the Government to give assistance to water companies for the purpose of reducing charges payable by customers. The only purpose for which we currently plan to use the power is to reduce the bills of South West Water’s household customers by £50 a year until the end of the next spending review. We believe that the circumstances that they face are exceptional. For years they have faced the highest water bills in the country as they have paid the costs of the £2 billion invested in infrastructure post-privatisation. The benefits of this investment include improved water quality, reduced leakage, cleaner beaches and better bathing water, but the costs have been borne solely by South West Water customers and their bills have risen as a result. We believe that the Government should help to correct the historical inequity. We do not want another such inequity to arise.
London’s sewerage system is operating close to capacity —and the situation will only get worse with population growth, urbanisation and climate change. Even after construction of the Lee tunnel and improvements to sewage treatment works, around 20 million tonnes of untreated wastewater will still be discharged in a typical year from combined sewer overflows into the Thames. This is unacceptable on environmental and health grounds, and it needs addressing.
The proposed Thames tunnel offers the most timely, comprehensive and cost-effective solution for dealing with sewage discharges into the River Thames in London. Alternatives have been considered, including by the Thames Tunnel Commission, which is chaired by my noble friend Lord Selborne. However, none of the alternatives identified during the extensive studies carried out over the past decade has been found to swiftly and adequately address the environmental and health objectives for the Thames tideway while at the same time complying with our statutory obligations.
This includes alternatives such as a western tunnel combined with sustainable drainage systems. Implementing sustainable drainage on the scale required to address the combined sewer overflows east of a western tunnel would be hugely disruptive, expensive and unlikely to meet the environmental objectives. The existing sewerage system into which a western tunnel would discharge has limited spare capacity, so the western tunnel would spill more often and lead to significant odour problems, due to the amount of time sewage would be stuck in the tunnel. In-river treatment would not prevent untreated sewage from spilling into the Thames. I do not believe that the public want raw sewage to continue to spill into the Thames. Thames Water’s public consultations and complaints to the Environment Agency confirm this. However, we recognise that this is an expensive project.
Clause 2 will allow the Government to provide financial support for exceptionally large or complex works on water or sewerage infrastructure, such as the Thames tunnel. We are willing in principle to provide contingent financial support for exceptional project risks where this offers best value for money for Thames Water customers and taxpayers. However, as a Government, we will want to be assured that, when offering this contingent support, taxpayers’ interests remain a top priority. We are therefore working with Ofwat, Infrastructure UK and Thames Water to make sure that the financial structure for the proposed tunnel includes safeguards to minimise the likelihood of government support being called on. We believe that simply having the power available will help us to maximise private sector investment in the tunnel and keep the cost of its financing down.
I am aware that concerns were raised in another place about the breadth of powers in the Bill, and desire was expressed for greater parliamentary scrutiny ahead of government spending. The powers in this Bill are by no means unusual in their flexibility for future circumstance, nor do they remove the need or opportunity for proper parliamentary scrutiny of government spending plans in the usual way. Tough decisions always need to be made about the use of government money. I am sure that any future financial assistance under these powers would inevitably be the subject of much debate internally in the Government, in Parliament and with the public.
In the case of the south-west, there were years of campaigning and then the independent Walker review, which identified this as a set of exceptional circumstances. Financial assistance would never be given to water companies on a whim. However, exceptional circumstances do and will arise, as we have seen with South West Water and the Thames tunnel. As I said, we will need investment in infrastructure to keep our water supply resilient. We do not know what the future holds and we want future Secretaries of State to be able to use the power where genuinely necessary.
I reassure noble Lords that any public financial support for the Thames tunnel or similar projects will be tightly controlled. In fact, both clauses allow full terms and conditions to be attached to financial assistance. A £50 reduction to South West Water’s charges will be governed by a funding agreement to ensure that it is transparent on customers’ bills and that South West Water will not benefit from administering the payment.
Some noble Lords may be disappointed that we have only today—tonight—to scrutinise the Bill, although it is a small and, dare I say, perfectly formed Bill. The scope of the Bill is limited to financial assistance and, consequently, it has been certified as a money Bill. However, the department’s plans for a wider water Bill are well known and we aim to publish that bigger, more substantial draft Bill for Parliament to get its teeth into in the coming months. That Bill will contain the other legislative reforms promised in the water White Paper. I beg to move.
Lord Taylor of Holbeach
My Lords, I thank all noble Lords who are here and who have contributed to this debate at an unsociable hour, although that has not affected the quality of the contributions, nor the vigour with which they have been presented. I just say to the noble Lord, Lord Knight, that there seemed to be a bit of an inconsistency between the case that he presented and the case where he was listening to the judgment of the noble and absent Lord, Lord Berkeley, on this issue. I welcome his broad support for the Bill. Clearly, he recognises that the Government have to act. We are under pressure from the Commission to clean up our act, as were the previous Government. If that is time-sensitive, then the Government have done the right thing by bringing the Bill forward to enable this project to go ahead at the first available opportunity.
The quality of the debate has not been affected by the lateness of the hour. It reflects well on this House that it is capable of scrutinising legislation at any hour. I have here a fistful of sheaves from the Bill team and I shall do my best to answer all the points that have been raised. The noble Lord, Lord Grantchester, was in a particularly interrogative mood, as he often is. If I miss out any points, I hope that noble Lords will forgive me, and I shall certainly ask the Bill team to write to noble Lords on particular issues if I fail to address them.
The noble Lord, Lord Grantchester, mentioned the water White Paper and said that there was a missing chapter on water efficiency. I would not like him to think that that was the case because water conservation is covered in every chapter of the water White Paper. In particular, chapter 6 covers our plans for water efficiencies in homes and businesses. It is a very important part of our strategy for dealing with the ever increasing demands for water in this country. He asked questions about whether there could be some abuse of these financial powers in, say, an election year. Any financial assistance would inevitably be the cause of much debate. There can be no disposition of government money without Parliament being very much on the alert. We know in the case of the particular move to fund the south-west that there had been years of campaigning and an independent water review to address this matter. We consulted publicly and made an announcement in the Budget specifying who could benefit from financial assistance, the duration and the reason why the Government were making the payment.
Noble Lords have asked why there is no sunset clause. We made it clear that we should leave it open for the Government to have the flexibility to offer similar support to future projects, should the case be strong, but such support could not be given without proper scrutiny in Parliament. I can give that commitment. What about the rest of the commitments to legislate that the Government made in the water White Paper? We intend to publish a draft Bill, as I said in my opening remarks. We have made considerable progress in drafting the Bill. It is important to get the legislation right. The advantage of a draft Bill is that we have an opportunity for further scrutiny before the Bill comes before the House. This will be a strategic shift in the water industry, in which I think Parliament will want to be fully engaged. I make no apology for what has been suggested that there has been an unnecessary delay in the implementation of the water White Paper.
I turn to particular points that have been made about South West Water and the welcome by my noble friend Lady Miller of Chilthorne Domer and my noble friend and namesake Lord Taylor of Goss Moor. The independent Walker review examined the situation in the south-west and suggested a number of different models by which government should address the issue. We sought advice from Ofwat on the most effective way of dealing with it and considered all the other options in detail. The particular method has been chosen because it will be the most effective in dealing with the inequity that the whole measure is designed to address. My noble friend Lord Taylor asked again about how the funding might continue, which came up in a number of speeches. The Treasury has agreed that Defra can, if necessary, make a call on reserve to fund this policy through the current spending round. Defra will then need to bid for funding for the next spending review in the usual way.
Several noble Lords called on us to review social tariffs. As noble Lords will know, the matter is in the hands of individual water companies. The reasoning behind this is that companies know the most effective way to deliver a social tariff policy in their area. The noble Lord, Lord Grantchester, asked about this, and there were questions from my noble friend Lord Taylor on the same subject.
I turn to the question of the Thames tunnel, which is the second part of the issue. The noble Lord, Lord Grantchester, asked whether CLG or Defra would take the decision on planning. CLG is the planning authority under the Planning Act, but decisions on development consent for wastewater infrastructure of national significance may be taken jointly by the Secretaries of State for CLG and Defra, based on Planning Inspectorate recommendations. In this case that would seem the most likely process, but I cannot give a categorical assurance.
Questions were asked about state aid. Contingent financial support will need to be state aid compliant—and it is contingent finance to support investment that we are offering. Investors will want to know this before they invest. Our initial analysis of state aid rules is that this contingent support may require us to notify the European Commission. If appropriate, we will make the necessary state aid notification this summer.
There was much talk of the infraction risk, and of how much any fines were likely to be. The noble Lord, Lord Knight, speaking the words of the noble and absent Lord, Lord Berkeley, was very exercised about this. I understand that it is a serious matter, and that there is a case that we must be able to answer. We are working with the Commission. It is in our interest and that of the Commission to make sure that by building the Thames tunnel we will ensure that London’s river is clean and pollution-free. That is the purpose of the exercise. We are working with the Commission to make sure that it is aware of our commitment to achieve that.
The noble Lord, Lord Wigley, rightly wanted assurances about the devolved position of Wales. There have been no discussions about the construction or enlargement of any reservoirs in Wales. Indeed, none of the water companies, which all produce a 25-year outlook, includes any construction programme for a new reservoir in Wales. I do not suppose that the noble Lord is volunteering their construction; his questioning was not along those lines. However, I assure him that no English company at this stage anticipates this construction—and clearly any such arrangement would have to be approved by the Welsh devolved authorities. I hope that devolution will make these matters better between the two Governments, and between water companies and the Welsh Government.
I would hope that that is the future, and it must be one of the benefits of devolution which can protect the interests of the Welsh and the English in their relationships on this matter.
My noble friend Lord Jenkin talked about the transport of supplies for the construction of the Thames tunnel. I know that the noble Lord, Lord Berkeley, asked me a Question on this matter, so I know that he is also interested. This House may have been one of the instruments that has reinforced this view on Thames Water because it is considering how it can limit the impact of construction traffic. The company intends to use the river wherever practical. We should remember that not all the construction sites are on the river, but quite a large number of them are. Barges can be very efficient. It is certainly the Government’s view that the river should be used. My noble friend referred to Blackfriars Bridge. That is entirely a riverside construction. It is not just the 406 million tonnes of excavated material that have to be moved; it is also the construction materials that need to be brought on to site. The Thames tunnel briefing, which I hope my noble friend has had a chance to see, makes Thames Water’s intentions about the transport of freight quite clear.
My noble friend Lord Fowler expressed particular concern about the Carnwath Road site and the change from the Barn Elms site to Carnwath Road. It is a planning matter. As he will know, planning prefers brownfield sites, such as Carnwath Road, as opposed to Barn Elms, which is not a brownfield site, but it will be considered by the Planning Inspectorate. Thames Water will need to justify this choice of site and the route of the tunnel as part of its application. It will need to submit an environmental statement describing aspects of the environment significantly affected. I hope that helps my noble friend, although it does not give him a reversal of the decision.
My noble friend Lord Selborne has considerable experience on this matter and expressed a number of concerns. I would like to address particularly his concern about costs, which was echoed in what the noble Lord, Lord Knight, had to say. Inevitably, there will be some variation in cost. It is rare for projects to come in on price and on time. This is a complex and extremely large project. Ernst & Young is currently employed by the department to provide financial advice on the most suitable and appropriate financing mechanism to deliver the proposed Thames tunnel that is fair to customers of Thames Water and to UK taxpayers. Ernst & Young is advising on structuring incentives into the financial mechanisms that will help drive desirable behaviours by those delivering the project to help ensure the effective management of project costs.
My noble friend Lord Selborne asked how the Environment Agency decided which combined sewer overflows were unsatisfactory. The EA assessed all 57 CSOs that discharge into the River Thames to identify which were having an adverse environmental effect. It looked at the frequency and volume of discharges, whether they were close to recreational areas, the number of complaints and the reports from other organisations operating on the Thames. Thirty-six were classed as unsatisfactory and therefore need to be addressed, and 34 discharge directly into the middle and upper reaches of the Thames in London.
My noble friend Lord Selborne and the noble Lord, Lord Grantchester, asked what a tunnel would deliver. It would reduce the number of these spills from about 50 to 60 times a year to just three or four times a year, and the estimated volume of discharges from about 18 million cubic metres to just over 2 million cubic metres, improving water quality, with benefits for wildlife and river users. It would also ensure that we continue to meet the UK’s obligations under the urban waste water directive.
The noble Lord, Lord Smith of Finsbury—I nearly called him my noble friend—welcomed this project. The Environment Agency, with which he is very much engaged, is part and parcel of the team that is hoping to bring about the Thames tunnel project. I am very grateful for his support this evening, and for the contribution of my noble friend Lord Selsdon, whose experience in this matter I had not been aware of until he made his contribution to this debate.
There was some concern about the money getting to the right customers. South West Water is very much aware of the need to take account where metering and use are not necessarily directly connected because of multiple occupation or other situations. The money is designed to be per household and South West Water is intending to do that.
I have done my best to run through the questions asked. I hope noble Lords will understand if I did not pick them all up. I will do my best to address those that I have failed to do so by letter. Meanwhile, this may be an appropriate moment to thank all the staff and the Bill team for their support in seeing this debate through. We expect to have to work all hours. We have to share that expectation with a great many other people, and I am very grateful to them and I am sure the House will share in that regard.